Lennar Q2 2026 Earnings Call | Sequentially Higher 6.4% Net Margins Limit Impact From Home Sales Dip

Very good. Good morning, everybody, and thanks for joining today in this interesting day with the SpaceX IPO at the same time. So, I'm in Miami today together with Diane Bet, our chief financial officer, David Collins, who you just heard from, our controller and vice president. Katherine Martin, our chief legal officer, and Jim Parker, our newly promoted and appointed chief operating officer. Congratulations, Jim. And David Grove, our newly promoted and appointed executive vice president for own building. Congratulations, David. Jim and David jointly oversee our operations across the country. And while they will not be giving opening remarks today, they will participate in our question and answer period. And as usual, I'm going to give a macro and strategic overview of the company, although abbreviated, and Diane will give a detailed financial overview and guidance for the third quarter of 2026. Then we'll open it up for questions. And as always, please limit yourself to one question and one follow-up. Before we begin, I'd also like to reiterate so that all of you know that we have now posted our new investor deck on our website today at investors.lenard.com in conjunction with this earnings release. This deck was created in an effort to give investors, analysts, and interested parties a clear view of the LENR transformation and strategy that we've described consistently on these calls over the past years. From our volume-based operating strategy to our asset light manufacturing model and from our technology platform and initiatives to our path to margin recovery and long-term value creation, we've tried to tie it all together for your review and comment. We believe it provides important context for understanding where we are, where we're going, and why. With that said, let me begin by saying that we're pleased to report LAR second quarter 2026 results that we believe represent strong operational execution even as the macro backdrop has grown more complicated and sometimes erratic since our last earnings report. In the second quarter, we delivered 20,519 homes around the midpoint of our guidance, and we generated 21,749 homes or new orders near the high end of our guidance. Our gross margin improved sequentially to 15.6%. Our net margin increased to 6.44% and our earnings per share came in at $131 excluding mark-to-market items. Notably, our sales incentive rate on deliveries was 12.9% this quarter, down from 14.1% in quarter 1 and down from 14.5% in Q4 25. After three years of incentive levels that have been generally increasing, we're starting to see the first real and potentially sustainable decline. While this decline may be a leading indicator of margin recovery, the overall market remains choppy as economic and geopolitical crosscurrents mark the way forward. Against this backdrop, let me briefly discuss the overall housing market. The macroeconomy has grown more complex since the first quarter earnings call and I want to spend a few minutes reviewing the specific dynamics shaping the market right now. First, mortgage interest rates have remained stubbornly elevated in the mid to upper 6% range throughout our second quarter. The 30-year fixed rate sits between 6.44 and 6.5% today, modestly better than a year ago where rates were closer to 7%, but still at a level that keeps affordability challenged. At 6.5%, the buyer at the median family income is spending above 30% of gross income on their housing needs. Buyers are stretching and our incentives are enabling purchase. The fact that incentives are declining, although slowly, is an encouraging signal, even though the math has not yet changed meaningfully yet for the buyer. The inflation picture has also become more complicated. The May CPI report released recently showed headline inflation at 4.2% year-over-year, up from 3.8% in April, and the highest reading since early 2023. The primary driver was energy as gasoline prices increased 7% in May and are up over 40% year-over-year driven by disruptions to oil supply tied to the Iran conflict. Well, this is possibly just an energy-driven spike as core CPI came in at 2.9% and actually decelerated on a monthly basis. Higher energy prices touch every part of the American household budget and tend to depress consumer confidence. When families see gasoline at the pump and electricity bills climb, their willingness to make major financial commitments, including purchasing a home, moderates, even when their underlying desire to own has not changed. This inflation backdrop most likely has taken the Federal Reserve off the table as a near-term source of relief. The federal funds rate remains at 3.5 to 3.75 and there's little probability of a cut in the immediate future. Rate cuts when they eventually do come meaningfully can be meaningful tailwinds for our business. But we are not waiting for them. We are building and executing the market as it currently exists. On the employment side, the economy remains solid on the surface, but consumer psychology is being affected by anxieties about the long-term security of jobs at a time of rapid technology change. The advance of artificial intelligence is raising questions about the future of employment across a wide range of the workforce. We see this in buyer behavior. Traffic is inconsistent. Intent is high, but urgency to close is still measured and deliberate rather than confident and energized. We continue to make home ownership achievable and attractive through value-oriented pricing, compelling financing, and the speed and quality of our customer engagement. While currently urgency is lacking, we continue to build the platform to serve buyers even better in a normalized market. On the cost side of our world, a broad range of commodities and building products continue to create headwinds across the industry. We have managed these pressures effectively as construction costs per square foot improved to $81 this quarter, down 7% from a year ago, but the cost environment remains fluid and bears close attention. Additionally, labor costs require oversight as well. Labor availability has improved modestly in some markets as multifamily construction has slowed, providing some relief. Although immigration policy and enthusiastic data center construction continues to create tightness in other geographies, our record cycle time of 121 days is evidence that we're managing these dynamics effectively. Also, on a positive note, the federal government's engagement with the national housing crisis continues to deepen. While the legislative vehicles moving through Congress are likely to have little impact on supply and demand components, housing affordability is still a focal point of both the administration and the legislature. The level of attention being paid at the highest levels of government to housing affordability is genuinely unprecedented in my experience and I remain confident that meaningful federal action is closer than the market currently believes. If and when government action does come and depending on its content, it can be a significant tailwind for the industry. One component of our attention on this matter we continue to watch closely is the legislative and regulatory effort at both state and federal levels to contain or constrain institutional and investor purchases of single family homes. Several states have passed or are advancing restrictions on large-scale investor acquisitions and federal attention is growing to this issue as well. We view this initiative as a concerning long-term development for housing as it is recalibrating demand dynamics in a number of local markets and might have the effect of reducing production of housing and reducing much needed supply. So in summary, rates remain elevated, a fresh inflation spike is complicating the consumer picture, and the Fed is on hold. But underlying demand is real and growing. Supply is structurally short. Our own incentives are slowly declining for the first time in three years. And the government is focused on affordability. Crosscurrents yes but on balance optimistic. Against this backdrop let me briefly turn to our operating strategy. Our strategy has not changed and consistency of strategy especially through a difficult cycle is what builds confidence through our company and we believe an enduring competitive edge in the market. We remain focused on two strategic priorities. First, driving consistent even flow production and volume. And second, continuously refining our asset light land-light balance sheet model to generate strong and growing cash flow and returns. As for the first, across the LAR platform, we have clarity that we price to market and maintain volume in order to meet demand at affordability. We offer the incentives that our customers need to achieve the value they can afford and we maintain consistent volume even as the market adjusts. We have remained steadfast in our execution and our results reflect that conviction. We continue to believe that our focus strategy has built consistency through the LAR platform which is creating a real competitive edge in the market. This focus has enabled us to drive down construction costs per square foot to $81 as I said down 13% from two years ago. And cycle time is down 221 days which is a record low. A direct driver of inventory turn improvement to 2.5 times from 1.8 times a year ago. On the asset light side, we continue to make excellent progress on an ever more seamless and sustainable asset light model. Less than 5% of our land is on balance sheet. Total home building inventory has declined to 10.9 billion this quarter from 11.4 billion a year ago. Our land banking partnerships continue to function extremely well and are getting increasingly more efficient while providing just-in-time homesite delivery at an 86% delivery rate. In addition, we inject modern technology in every aspect of our land-light execution. And we expect that by year end, we will have an extremely efficient land operating system and process that will reduce cost structure while enhancing our land acquisition, diligence, and review. Simply put, our land-light model will enable us to be significantly more efficient and effective as a land buyer, as a land developer and land administrator at a significantly lower overall cost of capital. By strategically focusing on volume and asset light, we are becoming a materially better and singularly focused homebuilder/manufacturer. This enables us to spend more time and attention to drive quality and value in our homebuilding operations. Quality always comes first at LAR. We remain continuously focused on improving the quality of every home we build with a world-class customer experience for our customers and with safety first for our building partners. Sonora's excellent but always improving customer experience program starts at the time we first meet our customers through our digital marketing funnel and never stops through the signing of the contract to the closing of the contract to the engagements with our customers after they close. We are focused on embracing and engaging our technology platform to enrich and expand Lenar's customer experience as we build a customer for life. Additionally, we continuously improve the Lenar value proposition. We are using our market share, land access, and cost advantages to enhance the value proposition embedded in each home offering to our customers. Our everything's included platform and program continues to serve as an important competitive differentiator and affordability lever. By standardizing features at scale, and offering more for less, we capture purchasing efficiencies, offset cost pressures, protect margin, and deliver meaningful value to buyers. All while keeping the buying process simple and transparent. Additionally, our targeted financing programs, rate buy downs, and closing cost assistance allow us to solve to an affordable monthly payment for buyers who are qualifying on payment rather than price, which describes a large share of our buying population in the current rate environment. Now, let me turn briefly to our Q2 2026 results. In the second quarter, we delivered 20,519 homes and generated 21,749 new orders. Both reflect the continued underlying demand for new homes and the effectiveness of our pricing strategy. Our average sales price came in at 371,500 and our sales incentives rate on delivery trended down to 2.9%. As I said, compared to 14.1 in Q1 and 14.5 in the fourth quarter of 25, I would reiterate that this is starting to look like a trend. Our gross margin was 15.6% while SG&A was 9.2% reflecting continued investment in our digital marketing and technology platforms. Net margin was 6.44% producing net income of 305 million and earnings per share of $124 on a GAAP basis or $131 excluding mark-to-market losses and tech on technology. We are currently expecting to continue the trend of margin improvement relative to our balance sheet. We ended the quarter with 1.8 billion in cash as our home building debt to total capital ratio was 15.8%. Our inventory turn of 2 and a half times and return on inventory of 15.3% reflect efficiency gains in our manufacturing model. We continue to focus on cash generation and improving returns. I will leave it here for now as Diane will cover our guidance and our third quarter expectations. So let me conclude by returning to where I started at the opening of the call. The new investor deck that we have now posted at investors.lenard.com. We have spent some time putting together a presentation that we believe gives investors a clear view of our consistently articulated strategy, the mechanics of our asset light model, the technology investments we're making, and the path to margin recovery. And we expect to continue to add to and refresh this presentation as we continue to advance our program. But overall, we've made the hard decisions, built the right platform, and we believe that we will continue to see that work mature into real bottom line results. Over over 3 years of navigating a rather difficult and complicated housing market, we believe that we are well positioned for market conditions as they unfold. In the current market, incentives are declining, margins are starting to improve, and our sales and marketing machine is generating stronger leads, faster engagement, and better conversion. Our operational platform, cost, cycle time, inventory turn continues to improve on every dimension. And our market position is very strong in the vast majority of our markets which gives us the scale and influence to drive that recovery intentionally rather than waiting for it. We are building towards that with clarity, discipline and confidence. We simply could not be prouder of the extraordinary work driven by Lenor Associates across this company. They are all aligned in mission and strategy as they have executed through this extended period of difficulty, building new capabilities, driving down costs, shortening cycle times, and never losing sight of our mission to provide affordable, high-quality homes to families across America. With that, let me turn over to Diane.

Core product to talk about core product is that what you meant the impact?

Yeah. I think I'll turn it to David and Jim, but I think there's an increasing percent of our deliveries that are trending towards core product. It's very efficient. I think the real impact is the returns that we get on that because they're smaller products, easier to build, lower cost. So while I think there's cash benefit, I think the real benefit is on the return side. Jim,

So, let me start with that and say that our savings are going to come from a number of items. As I just noted, cycle time is one and cost per square foot is another. But as we continue to improve our foundational technologies, they're basically the engine for efficiencies, we're going to start to see our SG&A start to go down together with our corporate G&A. The efficiencies are coming through basically a system that has required an awful lot of updating. Our technology systems at the foundation level have required a lot of work. And we've had some missteps along the way in that regard. This is going, as we really get our new systems entrenched, it's going to enable us to bring cost down. And of course the efficiencies that we'll see through our operating systems we think can be very strong. So I don't know that we can quantify either the amount or the timing, but we know that the cost reductions are going to be quite substantial as we go forward, particularly in some of our corporate and SG&A costs.

Go ahead, David.

Yeah, I'll say it differently, Alan. It is the total amount outstanding. So it's the total amount of capital deployed by our land banks at that point in time. So that would be acquisition dollars that they paid as well as development dollars that they have incurred. And so you're right, it's not the finished price. And it relates just to the land bank population. So you were right to read the label a little bit.

Okay. So then of that 18.5 billion, should we think of all of that being relevant to your ACOR? Meaning if you're assuming a 10% cost of capital on 18.5, should we think about 1.8 billion being kind of the check you're writing every year to maintain those land banking partnerships or are some of those structured more on PIKs on the back end? I'm just trying to figure out the cash flow of that cost of capital.

Well, the way we think about it, Alan, and it moves around a little bit. So what you have here is kind of a static moment. But what you have is as land is coming on either on one platform or another you're adding to and with each home delivered you're relieving from. So you've got an input and an output on a regular basis. Now remember that while we're catching up to the starting point, we have more going on land bank than coming off through deliveries. But I think that when you get down to it, I don't know what the percentages are of current pay versus deferred, but the majority are current pay.

Okay, perfect. Thank you guys.

So the answer, Mike, is that we're dealing right now with a constantly changing macro environment and this past quarter has been particularly awkward. You have geopolitical uncertainty driving elements of interest rate expectations or certainly inflation expectations. And we just felt that as we manage sales and starts pace and as we are managing carefully our inventory levels, what we didn't want to do is kind of go headstrong into a clearly uncertain environment with a market that's just moving around too much. So we felt that the prudent thing to do in managing our business is to focus on the absorption rate that we felt was comfortable for the system so that we can manage inventory levels. And you've seen the critical part of our narrative here is that our inventory has come down from 3 homes per community to 2.1 homes per community, which is kind of our comfort zone. We articulated last quarter that we had built up inventory looking forward to a more robust selling season. That didn't really materialize in force. And at the same time the uncertainties in the geopolitical world just said let's err on the side of prudence. That's where the calculus came from.

We're not really guiding to nor are we injecting a projection as to where incentives might decline. This is more our increase in margin is more an expectation relative to inclusion of more core product, continuous improvement in our cost structure, and some of the more operational sides of our business. So we really don't have an expectation right now for where incentives are going to migrate to. That could potentially be additional upside. But remember in my remarks I was clear to say that incentives are coming down but I said it a couple times though slowly. Which is a positive thing because they're not going up, but that migration down is slow and looking to present itself as somewhat of a trend. So we're going to see and we're not projecting something, but embedded in our margin improvement are expectations from the operational execution that we're seeing and able to look forward to.

Okay, you bet.

Say the question one more time. I want to make sure I'm answering the right question.

Well John, that's a good question. I want to make sure that I was understanding it right. So what you've seen and what you are seeing is as we have stood up our asset light strategy, remember that you are recovering one year's worth of home sites and you are starting an ACOR accumulation or capitalization of the option maintenance fees for a broader range of land assets that are covering two, three, four years maybe five years in some instances of land accumulating on the platform. So for a period of time there will be that imbalance and that is a natural ebb and flow of capital. It's why we've been more conservative on things like cash and stock buyback over time because we knew that there would be this imbalance for an extended period of time. It will ultimately equalize and so the answer is no. That's not an overstatement of earnings or anything else. It's a natural migration from an on-book balance sheet with land embedded, or the way we think about it, a land company that happens to build homes to an off-balance sheet asset light approach where we become a manufacturing platform and that migration will have that imbalance for some period of time.

Go ahead.

Yeah.

Pick up. Yeah. It's a function of a few other items, John. And I guess the one thing I'd say is generally if you think about incentives it does get a little convoluted because sometimes you change your base price on a community for example and because it's the whole community it's not an individual home price reduction. So it does get a little confusing as to what you're measuring against when you're looking at your base price versus your net price.

Okay, you bet.

Nah.

I don't know, David. What? Why don't you take that? Go ahead.

Yeah. I think right now we're sitting at about that same 12.5 on sales from Q2 that feed into Q3 closings.

Go ahead.

Yeah, I think this is one of the big opportunities for the company going forward. It's a laser focus of ours right now making the migration, the transformation, which is a financial transformation from on-book to asset light took a lot of work, a lot of focus and we had to bring capital to a market that really didn't exist. Now that we are established, every day within the company we're looking at cost of capital, cost of execution and refining the model so that costs come down. It's another area of big and sizable opportunity within the company and I think you'll see movement here over the next two quarters.

So, I think that all of the builders have seen and been engaged in various discussions in DC. And while it would be inappropriate and probably not meaningful to talk about those conversations with specificity because you don't know where they're going to end up and I don't mean to create false optimism or anything like that, but the focus and attention has been something that I haven't seen in my career. That's meaningful. It indicates that the affordability question in and around housing is something that is significant and something that has the attention of this administration. Now, if you look over the past quarter, they might have been distracted on some other things. And so things that might be on the agenda are maybe overshadowed by other parts of the attention of the administration, but I can say that the attention has been consistent. And I think that the affordability question is front and center and housing is an important part of that. Where the discussions will end up and what kind of programs the administration might choose to pursue is something that we'll all have to wait and see on. I bring it up only because many think that there was a flash in the pan and an interest and that it's subsided. I just think that other things have taken the place of current thinking, but it's going to come back. It feels to me like it's going to come back as a front and center consideration. Affordability matters.

Okay. That's a good place to end. I want to thank everyone for joining and we'll get back with you in a quarter. Have a nice day.