Welcome to Lennar’s Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Alex Lumpkin for the reading of the forward-looking statement..

Thank you, and good morning. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described in this morning's press release and our SEC filings, including those under the caption Risk Factors contained in Lennar's Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements..

I would now like to introduce your host, Mr. Stuart Miller, Executive Chairman. Sir, you may begin..

Number one; working traditionally by visiting a Welcome Home Center and interacting with one of our professional new home consultants; or number two, working with our new home consultants to a re-imagined, fully digital experience that has been designed for the current environment; or number three, interacting digitally and viewing product on their computer at home using three dimensional pictorial tours of models that are complete; or soon, a Modsy three dimensional tour of homes that are designed, but not yet built for models; or number four, they can take a do-it-yourself, self guided tour of our existing models, all alone and on their own.

We rewired every one of our model homes across the country, over a two-week period to enable our customers to get a code, to access digital entry of our models on their own for self guided tour, no contacts, no risk and all alone they can interact with Lennar digitally or through phone or face to face -- or face time, review products, visit models, sign a contract, and send a deposit, all digitally.

Our digital experience is getting better and better and will continue to improve quickly, now that we have our associates and our customers accustomed to these tools. Customers are finding new ways to purchase and we're finding new ways to joyfully engage with our customers.

As our digital experience is constantly refined and improved more of our customers will choose and enjoy a more independent and frictionless experience as they engage with Lennar. In fact, just looking at self guided tours for the first two weeks of June over May, we have seen an increase of 20% in self guided tours alone.

As an example of our digital engagement, take a look at our, lennar.com today, we are seeing more and more that our customers want to find a home with a home office, not just a repurposed bedroom, but they want an office that's at home, but feels separate and quiet.

It's apart from the barking dogs and the daily activities of the household, but it is at home. We've redesigned our next-gen home products, home within a home concept that we are now offering as a home office within a home. It's part of the home, but separate. It's attached, but insulated for soundproofing.

We don't have a model yet to show, but we have a Modsy three dimensional design to explore. Modsy is one of our portfolio investment companies that we believe is best-of-breed in creating three dimensional renderings that look and feel real when we don't have the real thing to show.

We are working with Modsy to improve our ability to demonstrate the dreams that we have not yet been able to build. We are, we can, and we will ramp up our digital abilities and help our customers dream with us as we create the home of their future. Applying for a mortgage and closing a home has never been easier at Lennar also.

We have accelerated our digital platform to accommodate customers’ desires to close on their new home, but to close without health risk or social contacts. Our mortgage application and approval process has never been easier or more digital.

With our Blend enabled application, another portfolio company, and many detailed digital improvements designed in-house in loan officer engagement and loan processing, our customer experience is improving every quarter. The forms are simpler, the information is entered once and the updates to information are automated.

Our customers are happier, our associates are more effective, and our costs are coming down. In title and escrow, we are now closing homes with little or no contact as well with an increased focus on the health and safety of both our associates and our customers.

We have increased the number of digital closings with digital documents signing and where possible digital notarization. We are also implementing a virtual new home orientation process, so our homebuyers can walk and view their completed home via FaceTime.

We can even give keys to the front door digitally with a code for self access, while we leave the sanitized keys in the kitchen. Where we must physically notarize documents, which is still required in some states, we created an express drive-thru closing program.

All paperwork is signed digitally before arrival and our customers can finalize closing their home with a notarization from their car in just 15 minutes. Lennar Financial Services just keeps getting better with faster, more frictionless service for our customers, easier engagement for our associates and more profitability for the Company.

This quarter, LFS contributed $151 million to the Company, while $61 million of that related to a deferred profit attributable to the deconsolidation to deconsolidating the sale of our retail title business over a year ago, approximately $90 million of the contribution is attributable to efficient operations and market conditions.

This is a record quarter for LFS as they continue to lead the way for the Company on innovation and enhanced customer experience. We are also building homes differently and Jon will give some more color here as well.

Construction is finally turning digital as we have turned our sites to using technology to centrally schedule construction at the division level. Over the past month, we've been rolling out a technology oriented scheduling program to create efficiencies across our production platform.

This will enhance an even flow execution, give greater predictability to our trade partners relative to scheduling and logistics, and it will ultimately reduce construction costs as well.

The need for effective and efficient communication over the past month has enabled us to advance the education and rewiring of our field operation as we and our trade partners struggle to keep job sites open and jobs filled.

Most of our construction sites have been -- have continued to be active and fully functional to date, and we have not yet seen a significant impact on our trades or our supply chain. We are very-focused on the health and safety of our trades and have established clear protocols with this in mind.

We have been in constant communication with our trade partners to help them implement their own safety standards and understand the steps we are taking.

We have begun using FaceTime and other technologies to facilitate inspections, and we suspended all non-emergency customer care to protect our associates, customers and trade partners and use a DIY, do-it-yourself model to help customers help themselves where possible.

Although it's awkward and difficult to talk about operational and financial results and successes, in the wake of a quarter that has been defined by health fears, economic shutdown, job loss, personal struggles, and social injustice, we are proud to say that we have managed with a steady hand with a constructive and measured leadership and with focus on how we can be a constructive force at a difficult time.

On reflection, I can say with conviction that we have done well while we have also done good. While the second quarter has been a quarter of tremendous success for Lennar, sadly, as the quarter ended and health crisis began to subside, social justice became a dominant and critical concern, both nationally and at Lennar.

Our leadership team and our associates locked arms across the Company and stood tall to lean in and enhance and expand our already central focus on inclusion and diversity across the country.

Like many across the country, we focused on the senseless killing of George Floyd as a call to action to be better than this and to commit to be an ever better version of ourselves.

While our Lennar Charitable Foundation gave generously, notably in honor of our fallen associate, Pete Anderson for homelessness, our Chief Human Resources Officer, Andrew Davis, led focused discussion and engagement to match strategies to improve. This work and vow continues.

As we look ahead, we remain proud of Lennar's continued and consistent commitment to do well and to do good as we lead with a people first focus. With a strong balance sheet and a strong social and moral commitment, we are confident that we will emerge from today's distress even better and stronger than before.

Accordingly, while the somewhat unpredictable environment in our country will evolve over time, we believe that we will be very well positioned through hard work, focused leadership and innovative technologies to offset future headwinds and drive our business to new heights.

And by the way, remember Susan Pernice who I mentioned and quoted in the beginning. While Governor Wolf was one of the very few who did not lift restrictions on homebuilding during the stay-at-home order, we were able with the assistance from the borough or municipality, to complete Ms. Pernice’s home.

She and her family of six moved into their home on April 29th. She and her family were able to delay the closing of their home once we gave them an updated completion date. Today, she and her family are part of the Lennar family, and we're proud that we were able to assess.

And with affection and appreciation for the Lennar associates, who answered her plea, she sends her regards to them and everyone listening today. We're very proud of the quick actions that we've taken to carefully manage our business through these difficult times.

I would like to personally thank all Lennar associates across our platform for their commitment, for their trust, and for their dedication during this very difficult time. I also want to thank our trade partners who have worked collaboratively with us to ensure not only a safe and healthy home, but a quality and affordable home.

And finally, I want to thank Ms. Pernice and all of our customers for understanding that we are working hard for them to adjust, to learn and to evolve so that we can safely deliver the home of their dreams. So, with that, let me turn it over to Rick..

One, markets not really impacted by the pandemic; two, markets that were impacted but have recovered or where the recovery is well underway; and three, markets that were impacted but where the recovery is still lagging.

Notwithstanding these categories, in all of our markets, we saw a sequential increase in sales activity from April to May and continued strength during the first two weeks of June. During our second quarter, we had eight markets that had little to no impact from the pandemic.

These include Jacksonville, Coastal Carolinas, Indianapolis, Maryland, Nashville, Dallas, San Antonio and Utah. While most of these markets had stay-at-home ordinance in place, we picked up considerable market share through better execution as many of the builders in these markets shut down their operations.

Many of these markets also benefited from low COVID-19 infection rates, so business activity was less impacted. In addition, each of these markets benefited from low inventory levels. And while traffic was down, conversion rates were extremely high as buyers were highly motivated to purchase a safe new home.

In Dallas and San Antonio, two of our larger markets, we continued to benefit from our move down the price curve and by having quick move-in homes. Category two includes 18 markets that were impacted by the pandemic, but have either recovered or are well on their way to the recovery.

Starting in the East, these markets include New Jersey, North Carolina, Southeast and Southwest Florida, Tampa, Orlando, Chicago, Minnesota, Houston and Austin, Colorado, Arizona, the Inland Empire, San Diego, Central Valley, California, Sacramento, Reno and the Pacific Northwest.

While we continued to sell homes and offered limited incentives in each of these markets, municipality shutdowns and lower consumer confidence caused a significant decline in both traffic and sales from mid-March through April.

However, across the board, all of these markets started to recover beginning the last week of April and have continued to improve through May and into June. In our larger Florida markets, demand in May and the first part of June rebounded strongly.

Southeast Florida and Tampa saw increased demand from renters and customers wanting to move from densely populated areas to purchase detached single-family homes.

Southwest Florida, which is a big second home active adult market, saw increased demand from customers fleeing the COVID-impacted areas in the Northeast to the more safe, South Florida market. Raleigh, Charlotte and Atlanta were hit hard initially. However, all of these markets bounced back as business activity resumed in May.

In each of these markets, we benefited from the return of the cultural buyer who wanted the safety of a new COVID-free home. These markets also experienced increased demand from buyers looking to relocate from the Northeast. The Houston market has been the biggest surprise.

While hit hard between mid-March and mid-April, our sales bounced back in May and June, as demand for entry-level products outpaced the fall in oil price. While unemployment is still high due to reduced oil and gas investment, we’re extremely well positioned with almost 50% of our communities priced below $300,000.

The activity in Houston reflects the incredible diversification that happened in the Houston economy away from oil and gas. Austin was the slowest market in Texas to recover. This was in large part due to a stricter shutdown ordinance imposed by the city. However, sales started to recover in May and have increased in the first part of June.

The Austin economy is strong with over 7,200 technology companies spurring job growth and demand. Moving to Colorado. Colorado is on the road to recovery. And while not fully recovered, the local economy is strong and diverse with limited new home inventory and low resale listings.

In May, our traffic increased and sales rebounded from April lows, June has seen a more significant increase in both sales and pricing power. The Phoenix market entered the pandemic as one of the strongest markets in the country, and while impacted, it has bounced back strongly.

Our sales steadily improved through May and were really strong in the first part of June. We continue to benefit from a broad product offering with many lower priced communities. The Pacific Northwest has recovered nicely. In spite of the state shutdown and Washington temporarily shutting down construction, we continued to sell and close homes.

Demand has improved significantly in May and has continued into June. In California, the Inland Empire is the strongest market. While the market took a hit in April, it came back strong in both May and June. The Inland Empire has always been the affordable alternative to the more coastal areas.

With low mortgage rates, buyers had flocked back to the market. Most of these have been renters or frontline workers fighting the pandemic. Category three includes four markets that were significantly impacted by the pandemic and where the recovery is lagging the rest of the U.S.

These markets include the Bay Area, Orange County, California, Las Vegas and Orlando. The Bay Area market was one of the first markets impacted by COVID-19, and with aggressive government shutdowns, the market just shut down. Consumer confidence lost, demand significantly slowed.

While lower pricing -- while the lower priced single-family market has recovered, the higher density, higher priced attached market still needs to gain some traction. Orange County, California was one of the weakest markets going into the pandemic and is still lagging the other markets on the way out.

The combination of reduced demand from Chinese buyers and government shutdowns really chilled the market. While sales more than doubled sequentially from April to May, the market still needs to stabilize further. Las Vegas was really impacted by a closedown of the casinos and a huge decline in tourism. Unemployment peaked at 30%.

While most of this is furloughed and temporary job loss, the casinos, which just reopened, need to rebuild their businesses before things get back to normal. Despite this, we’ve seen a rebound in both traffic and sales in May and the first part of June. Orlando is starting to come back.

With the shutdown of international travel, reduced domestic flights and the closure of theme parks, the local economy really slowed down. Sales declined sharply in April, but we saw a bounce back in May and June.

With the recent and planned reopening of the theme parks, we’re optimistic that this will -- this market will pick up in demand very quickly. I hope this gives you a sense of how we’re positioned in our local markets. While we have a few markets that are lagging, most have rebounded.

From a macro standpoint, the market is strong with limited inventory, pent-up demand, aided by low mortgage rates. In this environment, we’ve been very-focused on balancing pace and price. And while we’ve increased our sales pace for community, we’ve been vigilant in raising prices, lowering incentives and reducing our brokerage spend.

With low mortgage rates, the impact of our price increases has had a minimal impact on affordability, and this should give us a decent runway to improve gross margins in the coming quarters. And now, I’d like to turn it over to Jon..

Thank you, Rick. Today, I’ll start with a discussion of our land and balance sheet strategies, beginning with a look at the actions we took during the second quarter in response to the COVID-19 pandemic. As Stuart mentioned, we paused our land purchases, land development activity and home starts.

We used our daily management call to quickly implement this strategy across all of our divisions. We were able to pause all of the land acquisitions that we wanted to. And due to the strength of relationships with our land sellers, we did not walk away from any deposits or lose any deals.

What we did was to pause takedowns for 60 to 90 days in order to give us time to understand the impact of the pandemic and the associated government shutdown. At the same time, we also slowed our land development spend.

This was done on a community-by-community basis by determining in real-time the market demand for each community and the economic logic associated with stopping and restarting.

We also looked at our planned starts, again, evaluating each community’s market demand if the particular home was in backlog and the mortgage status, if it was sold or if the home was unsold. We paused about 4,100 starts in the quarter or 27% of what was planned.

Given this pause in land spend and fewer starts in our second quarter, results for our land and cash positions were temporarily altered by the actions we took. We ended the quarter with 3.9 years of land owned compared to 4.5 years in Q2 of 2019 and with an increased percentage of homesites option of 32%, up from 25% last year.

The combination of slowing our land spend in the quarter, strong closings and executing on our strategy of building strategic relationships to option homesites resulted in significant cash flow generation, as we ended the quarter with $1.4 billion of cash on the balance sheet and zero borrowed against our revolver.

Additionally, we repaid $300 million of senior notes and ended the quarter with total debt to capitalization of 31.2% versus 38.3% the prior year.

Despite the daily intensity it took to manage through the challenges of the pandemic, we still maintained our focus on becoming a land-light company and are on track to be migrating both our supply of land owned down to 3 years from the current 3.9 years and to control 50% of our homesites through options as compared to the current 32% by the end of fiscal 2021.

We continue to work on and develop additional strategic relationships that are designed to facilitate our reaching these goals. Just as effectively as we paused, as we saw markets recover, we have recommenced land acquisition, land development and home starts.

We are confident we will have the homesites necessary to start and deliver the homes we are projecting in our guidance. Now, I’ll turn to our direct construction costs and the value of our Builder of Choice program with our trade partners.

Simply put, our approach has been to understand what drives efficiencies from our trade partners’ perspective that we can work openly with them to lower costs without hurting their margins. But, let me be clear, this work is anything but simple. It’s beyond the rolling up of our sleeves to do the hard work required. It’s about building trust.

It’s all about our trade partners trusting that we will change the way we manage our business for their benefit, and we will do what we say we’re going to do. This takes commitment from them and us, and it takes time. Once this trust is established, it allows us to work together with our trade partners to remove cost from the supply chain.

A good example of this is our intense focus on even-flow production. Using technology, our field is connected in real-time with our office and in turn, our office with our trade partners. This connectivity enables construction to be on schedule and for schedules to be reliable.

The predictability this provides our trade partners allows them to eliminate overtime, which can save as much as $500 per home. This focus produced the fifth straight quarter where direct construction cost as a percent of revenues fell.

In Q2, costs were at 44.5% of revenues, 50 and 200 basis-point improvement sequentially and year-over-year respectively.

This 200 basis-point improvement in cost as a percent of revenue resulted from the combination of pricing power and lower cost was the driver of our gross margin improvement of 150 basis points, which more than offset the increased cost of land and fees.

In our second quarter, our cost per square foot was down 130 basis points sequentially and 240 basis points year-over-year.

The cumulative effect of our strategic trade partner collaborations on removing cost from the supply chain, ongoing value engineering workshops which are now done virtually and a strong purchasing organization led by Paul Dodge and Kemp Gillis have led us to continuous -- have led to continuously lower costs which we believe will be sustainable given the buy-in from our trade partners and our Builder of Choice model.

I would like to highlight that these cost efficiencies have been achieved in an environment of increased labor costs due to the labor shortage combined and at the same time with the shift in product to smaller-lower priced homes.

The math of smaller square footage and lower average sales price normally increases both costs as a percentage of revenues and cost per square foot. However, with our focus of working collaboratively with our trade partners to remove costs from the supply chain, we've accomplished lowering both of these cost metrics.

With respect to labor shortage, I want to note that the homebuilding industry, through the leading builders of America is initiating a program to attract those who have been displaced by the pandemic. The program will offer training for positions with the trade, presents the opportunity for an easing of the labor constraint.

Accordingly, as this occurs, the cost of labor should ease as well. As all these efforts take costs out of the supply chain, are critical to be able to build homes that consumers can afford. With respect to the impact of the pandemic, what happened throughout the quarter demonstrated the strength of our trade partner relationships.

There are four areas where this working relationship is evident. First is the work we did to help our trade partners navigate the CARES Act. The act pay revisions for Paycheck Protection Program loans that have the potential of keeping many of our trade partners and their associates afloat.

Unfortunately, the language in the legislation was very confusing, and nobody really knew what to do. So, Lennar took action. Led by our Vice President of Tax, Mike Petrolino along with the help of senior partners at Deloitte, we quickly put together an overview of the act for the benefit of trade partners.

And on Sunday, March 29, just one and a half days after the act was signed into law, we held two conference calls with over 5,000 of our trade partners in attendance. We spent the day walking them through the act and answering their questions. Next, with our commitment to the safety of our associates, customers and trade partners on our communities.

We paused our warranty work as it was not safe to be sending workers into our homes. We then repositioned our customer care associates to be COVID-19 safety officers on all of our job sites. Working with our Chief Medical Officer, Dr. Pascal, we produced safety guidelines and checklists to ensure everyone's safety while construction continues.

This was critical to ensure the treatment of housing as essential. In fact, we surveyed our trade and found that statistically they contracted the COVID-19 virus at a much lower rate than the general population. We provided this information to various state and local agencies as they evaluated the issue allowing home construction to continue.

Through these efforts and more, we fulfilled our commitment to keep our associates, customers and trade partners safe while continuing to deliver homes to eagerly awaiting families.

Thirdly, we worked closely with our trade partners to help us where they could to temporarily reduce costs to make sure we could continue to sell homes as the pandemic took hold and the economy went into shutdown mode. Our trade partners stepped up allowing us to aggressively buy down interest rates, which helps jumpstart our sales.

Finally, with the help of our trade partners and the focus work of our national purchasing team, we navigated the various pandemic related supply chain disruptions, both in China and then in Mexico.

For each manufacturer, we classified the risk level, regularly monitored their current inventories, developed plan Bs and plan Cs and provided home and community level forecasting to give detailed view of our needs. The primary disruptions occurred in Mexican factory impacting cabinets, door hardware, appliances and interiors.

We successfully managed through all these disruptions to avoid any delays. As of today, all of our manufacturers are open and with improving capacity. I want to take this opportunity to personally thank all of our trade partners and the Lennar team for working so effectively through this crisis.

Together, we’re able to navigate this unprecedented time and deliver homes, essential homes to families across America. Now, I'd like to turn it over to Diane..

Thank you, Jon, and good morning to everyone. I'd like to spend just a few minutes reviewing the highlights from our second quarter. For many decades, we have operated with a balance sheet first philosophy and a strong focus on liquidity. And so for today, that's where I'd like to start.

As noted, with our laser focus on generating cash and preserving cash, we ended the quarter with $1.4 billion of cash and no borrowings outstanding on our $2.45 billion revolving credit facility, thereby providing total liquidity of $3.85 billion. At quarter end, our homebuilding debt to total capital ratio was 31.2% versus 38.3% in the prior year.

This is the lowest debt to total capital ratio since Q1 of 2007. As we look at the balance of the year, we have a very manageable level of debt maturities with only $300 million due in November after having repaid $300 million in May. In the last two years, we have repaid $2.5 billion of senior notes from cash flow generated from operations.

Our stockholders' equity increased to $17 billion and our book value per share was $52.98. And so, with those balance sheet highlights, let me briefly review our operating performance. Stuart, Rick and Jon provided most of the details. So, here's a quick summary of the highlights. The new orders, we ended the quarter down 10%.

Our sales pace was 3.5% for the quarter compared to 3.7% in the prior year. Our cancellation rate was 19% compared to 15% in the prior year. For the quarter, deliveries were relatively flat year-over-year as we remained intensely focused on cash generation.

Our gross margin was 21.6%, as Jon mentioned, primarily as a result of our focus on construction costs, and our SG&A was 8.3% as a result of creating an efficient platform. And the 8.3% is the lowest second quarter SG&A percentage we've ever achieved. And our financial services team also executed at high levels.

Mortgage operating earnings increased to $81 million compared to $43 million in the prior year. During the quarter, we sold our legacy servicing portfolio for a gain of $5 million and eliminated potential future liabilities.

Additionally, mortgage earnings primarily benefited from a higher capture rate, 82% versus 75% last year, a lower percentage of cash buyers during the quarter, a higher percentage of locks on deliveries that will occur in Q3 as a result of record low interest rates and a continued decrease in loan origination costs.

Title operating earnings were $17 million compared to $15 million in the prior year. Title earnings increased due to an increase in profit per closed order, which was driven by cost reductions.

LMF Commercial had an operating loss of $6 million compared to operating earnings of $6 million the prior year, primarily as a result of the COVID-19 effects on the capital market. However, during the quarter, we were pleased to be part of one securitization though at a lower than normal margins, but still positive.

Additionally, during the quarter, we deconsolidated stage title, the process required us to perform a fair market value analysis of our interest, which resulted in a $61 million gain. And two other final items.

In the category of land sales, we recorded a $23 million write-off of costs related to the Concord naval base located northeast of San Francisco since we are not moving forward with this development. In the category of Lennar Other, we recorded a $25 million charge, which was our share of a valuation adjustment related to the Rialto legacy funds.

This adjustment was primarily a result of the disruption in the capital markets as a result of the COVID-19 environment. So with that quick summary, let me provide you with detailed guidance for Q3 and high-level guidance for our core operations in Q4. So, starting with Q3 and homebuilding. We expect new orders between 12,800 and 13,000.

We expect to deliver between 13,200 and 13,400 homes. Our average sales price should be in the range of $380,000 to $385,000 as we continue to move down the price curve. We expect to continue to maintain our gross margins in the range of 21.5% to 21.75%, and our SG&A should be in the range of 8.3% to 8.5%.

And for the combined homebuilding joint ventures, land sales and other categories, we expect a loss of approximately $20 million to $30 million due to the current delay of land sales activities. Turning to our ancillary businesses.

We believe our financial services earnings will be approximately $70 million, based on more normalized metrics in the third quarter. For our multifamily segment, we expect a loss of approximately $5 million. And for the Lennar Other category, we expect to be about breakeven. We expect corporate G&A to be about $90 million for the quarter.

We expect our tax rate to be approximately 23.1%, and the average share count should be approximately 309 million shares. This guidance should produce an EPS range of $1.46 to $1.59. And now, let me provide a few high-level estimates for Q4 for homebuilding and financial services. For homebuilding, we expect new orders between 12,000 and 12,250.

We expect to deliver between 14,300 and 14,600 homes. Our Q4 volume will be impacted, as we mentioned, by the slowdown in starts during our second quarter. Our average sales price should be in the range of $380,000, and we expect our gross margin to be in the range of 21.75% to 22% and our SG&A around 8%.

And for financial services, we believe we will have operating earnings of about $60 million. We hope you find this guidance helpful. And with that, let's turn it over to the operator..

[Operator Instructions] Our first question is from Stephen Kim from Evercore ISI. Your line is open..

Yes. Thanks very much, guys. Strong results, and thanks for the additional disclosure and getting everything to us so quickly, in particular. My first question relates to the margin. Well, actually you gave really good strong margin guidance. But, I guess one surprising issue was your orders looking in 3Q and 4Q to be down year-over-year.

I know you sort of addressed it a little bit and said that -- you made some comments about the second wave concerns. You also talked about lower community count.

And I guess, I'm just trying to get a sense for how much of the second wave concerns are baked into your outlook? If these second wave concerns, let's say, were not to materialize, could you actually see order growth remain up double digits like it's running in June, or would do you actually think that the supply constrain issues that you've got and community count shortfall would continue to keep pressure on your order growth and that you would just simply raise price more aggressively in the face of that?.

So, thanks Steve. And first of all, let me say, I know that we packed a lot of information into our opening remarks. And so, we're going to take Q&A for a little bit longer. But thanks for the question. Rick daylighted that our sales, as we came into June, are up over 20%.

And we're not giving exact numbers because we really don't want to get carried away with it, but the market is strong. And just the discussions with our divisions really across the country is that they're seeing really strong activity.

It's hard to tell what portion of that is a push forward or push into the third quarter -- the second quarter traditional selling season, and what represents a rethinking of where people live and how they want to live and what -- how sticky that's going to be. So what you're seeing in our guidance is a clear understanding that the market is strong.

And yes, it can remain strong as we go forward. There is a supply constraint. Interest rates are low and are likely to stay low for a period of time. The economy is certainly looking for ways to recover, and with recovery and reduced unemployment rates, there is cause for optimism.

I would think that the housing market and its strength will contribute to job creation, absorbing some of the people who might have lost their jobs more permanently. So there are reasons for optimism, and we do think that sales can be stronger. We are going to balance between pricing and pace as we move through the third quarter and into the fourth.

On the other side, we inject some conservatism in our projections or in our guidance because we're still learning. We're still looking at how the economy will actually resolve the disruption that it's gone through, how jobs will come back. There is certainly the cloud of social unrest right now. So, there are questions out there and moderating factors.

There is upside in our numbers, particularly on sales. There is also caution. And we're trying to do with that balance and be straight as we look at giving guidance for going forward..

And Steve, it's Jon. Let's remember, as I said, we intentionally pulled back on about 4,100 starts, and we're going to manage carefully not to be selling too far forward into the future.

And so, we’re going to control the sales pace, even though the market might allow us to sell at a faster pace, we're going to make sure that we match to our production pace..

Yes, particularly, when you have a rising price environment, selling too far upfront doesn't make a lot of sense. So yeah, that conservatism is welcome and understood. Second question relates to what some of the things you touched on.

There are a lot of societal factors that have been changing more rapidly than I think we've ever seen, and a lot of those are really positive it seems like for your business and for homebuilding in general, the suburban versus urban living preference, so many things, home offices, recreation space, outdoor living, etc., etc.

I'm interested in your perspective about the drivers to these changes and their permanence, or at least their likelihood -- the likelihood that some of these drivers will last long enough for you to make investments that will pay off over a period of years, not months.

I'm thinking like things like the social distancing thing that we've all gotten used to, how long you think that's going to drive some changes in the kind of housing that people want? Maybe increased urban safety concerns that you've touched on. These are -- increased work from home.

Which of these things do you think are going to be temporary? Which do you think are going to be lasting and give you the opportunity to actually invest to capitalize on them? And are you doing that yet, making those investments?.

So let me just give a quick response and ask Rick to chime in, in a second. But look, there is no way in the middle of crisis to figure out what's going to be short term and what's going to be long term, and we're going to feel our way through this.

There are certain elements that are clearly going to be with us for a very long period of time, and that is the migration to technologies that we are all learning to use, that are enhancing the customer experience that I detailed in my portion.

But relative to the trends of migrating from cities to suburban, mobility and that having been put on pause and some of the other questions out there, how long term they're going to be, we're going to have to wait and see. Some of the elements like work-from-home and having an office at home, we think that these are going to have some stickiness.

So, Rick, why don't you weigh in on that?.

Yes. I agree with Stuart. We're going to have to see how things evolve. But we do have some trends that are really positive. Going into this, we had the millennial population that was going through wanting to move to the suburbs, having babies and things like that.

On top of this, we've seen a mass flight from highly populated areas where people just really don't want to be confined in small spaces. So we are really positioned well and have been investing in opportunities and contracting for land to take advantage of this.

One of the most interesting dynamics that we're looking at is, with the dramatic fall in oil prices, people have the ability, if they need to commute, to commute at much more affordable levels. But many times now, since you can work at home, you don't need to drive anywhere.

So, that really opens up a vast amount of opportunities for us as we look down the road..

Yes. Great, thanks very much guys..

Okay.

Next?.

Next we have Ivy Zelman from Zelman & Associates. Your line is open..

Good morning. And I apologize, but I did unfortunately get kicked off the call, so I missed much of the opening comments. But first, I just want to recognize and congratulate all of you for navigating such incredibly challenging times and having such a spectacular financial performance. It really was remarkable.

So I'm not just saying it to say it, but it really is something we should all acknowledge, so first and foremost. It's difficult to ask the questions that I have with not repeating a lot of what you've already commented on, but you guys have a very unique perspective, having a multi-family business.

And we hear a lot from the publicly traded REITs that they are not seeing flight from the urban core to the suburbs. Their turnover numbers are actually only up marginally but still at extremely depressed levels.

So it's very difficult to triangulate a lot of what we're hearing about with people wanting and your quote in the press release about people leaving the urban dense areas for space, safety, all the things that we've talked about and taking advantage of record low mortgage rates and wanting to be in a home where they have the ability to have all of those factors today that are socially important for living in safety for the families, technology.

So maybe you can give us some data around some of the things that you've noted. I promise I'll stop talking a minute, but when you look at -- you hear builders -- we ask them, where is all this demand coming from? It's crazy strong. It's everything against what we would have expected in a massive unemployment environment we're in.

And their answer is, well, really nothing has changed. It's the same reasons people have been buying is just accelerating. But there is no question, more renters are converting to homeowners. So maybe try to triangulate a little bit for us what you're seeing from maybe entry level versus move-up.

Are people leaving New York City and buying move-up homes? Are you seeing maybe some delineation between product categories? You mentioned entry level being really strong. I'll stop because I can keep going, and I'm sure I'm confusing you with too much at once. So I'll just stop there..

I know that we set the stage with long-winded introductions and you certainly carried it forward. So, your next question is going to have to be shorter. But -- so, let me say that there is no story. There are many stories, and many of the stories are playing out.

Just to give you some data, I was talking this morning to our Southeast Florida division, Carlos Gonzalez, and Carlos enthusiastically said that 31% of his sales most recently have come from the City of Miami to the suburban areas of Miami, migrating to the suburban areas.

So, we are hearing that kind of empirical data that is just starting to percolate up where we're starting to see that some of these stories are really playing out, the migration from rental communities to single-family homes or even single-family for rent. These are all stories that are just starting to play out. We don't have enough data around it.

We will over time. But with that said, we don't know the permanence, how long-lasting it's going to be, and we want to moderate with that, but there a myriad of stories. And maybe Jon and Rick will chime in and share some of their thoughts..

I would add that I think we're seeing more people move out of apartments into new homes versus existing homes. So I think it makes sense to me that, on the multi-family side, they are not seeing a rapid spike in their turnover.

But it doesn't take many basis points of market shift from existing to new to really impact the demand for us, and I think we're definitely seeing that because in all our divisions, as Stuart noted, with Southeast Florida, we're seeing a pickup in sales of people coming directly out of apartments..

And Ivy, one other point, and you've seen it in how you're tracking the better run in higher Class A REITs, is in our multi-family business, our occupancy really hasn't changed much. We have people paying rent and really didn't have a big dip in any of that.

And what we've seen as we've really drilled down is it's coming from the non-Class A lower-quality apartments, or people don't want to live there anymore. In the higher Class A that have good amenities, there's people that want to live there. But we're seeing a mass exodus from the lower-quality non-amenitized apartments across the U.S..

And from the perspective of affordability, as builders are right now taking advantage of the strength, they're raising prices and mortgage rates have obviously ticked considerably lower compared to last year, but is there a level that concerns you that that favorable affordability for those Class B tenants that might be driving this exodus -- what does it do to rents and what is it going to do to demand if homebuilders keep pushing price? And thank you, guys.

I'm done..

I think we're just going to have to monitor how things change in the economy. We're seeing a lot of double -- dual income folks coming to our communities where with mortgage rates as low as they are, small price changes, even incremental within a couple of months, really don't move the needle that much. But it's an interesting phenomenon right now..

Yes. I think an additional point is, we're going to have to see how employment data starts to shake out; when we think about long term, how the market is actually going to be receptive to the way -- to the migrations that are out there. It seems and feels that employment is going to snap back to some extent. It's not going to be back at 3.5%.

There are going to be some disruptions out there, but at the same time, there are a number of people who are finding that they have affordability. And remember, one of the most difficult things to accumulate is the down payments.

And with people having stayed at home for so long, not having restaurants and movie theaters and other activities open, the ability to save has actually increased the amount of deposit money available to customers. So all of these things are working together. We'll see how they play out over time.

It's part of the reason that we've conservatized some of our numbers because we recognize that we're going to have to wait and see on some of these items.

So, next question?.

Next, we have Truman Patterson from Wells Fargo. Your line is open..

Hi, good morning, everyone, and thank you for all the detail. Really appreciate it. Let me also throw on great results. So, following up on Ivy's question, one of the big questions in the market clearly is how sustainable the demand is and whether this rebound is being driven by that pent-up demand potentially, which could trail off.

So a couple of questions that I'm hoping you can give us a little bit of color on.

One, what portion of your sales today are being driven by, we'll call it, pre-COVID traffic from the first half of March and before? And then, the second part, for sustainability, any idea of what portion of your entry-level purchasers are using government stimulus checks as down payments? A family of four essentially just got a $3,400 check from the government, which can usually go a long way toward a down payment.

Any idea or any way you can help us with either of those questions, I'd appreciate it..

Jon, Rick?.

I think with respect to your last question, Truman, as you think about qualification requirements to purchase a home, the people that we're seeing buying our homes today for the most part are not relying on the government assistance checks. They are employed for someone to purchase and close. They we've got job security.

So, we're really not seeing that.

Stuart said a moment ago, it's -- we really -- and Rick said, we really have to wait and see how things unfold with how sustainable some of these trends are and how much of it is a pullback from what was missed in second half of March and beginning of April, which was in the middle of a very strong spring selling season.

How much of these are trends of a strengthening of the millennials moving to the suburbs, people looking for a better way to have a home office, all the factors that we know are playing out right now, we're going to have to see how sustainable they are..

I would just add to that, Jon, and say let's remember that what was disrupted by the pandemic was an already very strong housing market, and we were just entering the selling season in a market that was already revealing itself as being fairly robust.

When we announced our first quarter earnings, while it took a backseat to the discussion about what was happening to the broader economy, our earnings picture was very strong, our sales were very strong.

And so, it makes sense that with a basically two to three-month hiatus or slowdown in the middle, the traffic that was already embedded is somewhat coming forward, but it's added to by the number of narratives that are playing out at the same time. Deciphering which is which is a little bit complicated.

And the other thing I want to highlight and remind people is, we have talked for the past years about a production deficit. We have been underproducing homes dwellings from multi-family, rental, all the way through to single-family, suburban.

Across the board, the country has been underproducing homes for a very long time, for certainly the past 10 years. And that underproduction means we have short supply against strong demand, pent-up demand, stalled demand, and this is likely to be with us for some period of time. We do not have an overstated inventory to absorb that demand.

So we're likely to see an under-supply meeting with a strong demand for some period of time..

Okay, thank you for that.

If I could just parse the data a little bit further, really kind of micro near-term trends, what was the back half of May's year-over-year growth rate? And with June trending up over 20% year-over-year, could you maybe discuss the gross order improvement? Is this to an extent being driven by a massive decline in the cancellation rate?.

So the cancellation rate really has come down, as I highlighted. And we also pointed out that through the month of May, each week got picked up in activity. So the last week of May was stronger than the first week of May.

And then, really going back over the last six weeks, in each of those weeks, we sold north of 1,000 homes, increasing during that time period. So we did see the market solidify. That continued into June. And the market has got a good solid footing right now..

Okay.

Is there any way to parse out the back half of May's growth rate and that can rate versus how June's can rate is trending?.

We really haven't talked about June can rate, but that has come down. And I just want to be very careful to not give too many micro statistics associated with the business. The trend line was consistent throughout the month, increasing week-to-week and continuing into June..

Okay. Thank you, all..

Next question? And we'll probably cut it at that point. Two more questions. Okay, go ahead..

Thank you. Our next question is from Michael Rehaut from J.P. Morgan. Your line is open..

Great. Thanks very much guys, and appreciate all the detail and the thoughtfulness in your remarks. The first thing, I just wanted to circle back, for my first question, on the order guidance.

And you kind of talked about, Stuart, that there is an element of conservatism here, which is understandable, as well as concern -- not concern, but a trajectory around community count being impacted by some of the land spend and other constraints out there.

Hoping to get a sense for what you're thinking about in particular with regards to community count, trying to decouple those drivers and get a sense for how you're thinking of the community count trajectory that ended quarter at 1,245, where that could be by year-end.

And from that, is there kind of a margin of error that you're injecting? From a conservative standpoint, are you kind of taking a 10% haircut, let's say, if there is any type of quantification of what that conservatism might be?.

Well, before I let Rick answer that question, let me just say that community count, we have all learned together, is one of the most difficult numbers to project. It moves around a lot.

And in the context of the environment that we've been working in with municipality offices shutting down, being less available, getting fewer of permits out of them for land development, it becomes even more difficult. So I'll let Rick take it from there..

So, I'll take the question that we really don't know the great answer to, which is, we expect our community count to dip slightly in Q3, stabilize in Q4, and we're optimistic as we enter 2021, through the balance of 2021 that we'll see probably a 5% increase in community count in 2021.

Just really can't underestimate the -- the difficulty it has been getting communities out of the ground as towns and municipalities reopen up and do permitting..

Okay. Appreciate that. And I assume you mean -- when you say dip slightly, you mean from 2Q levels.

The second question I had was also just kind of circling back to the various initiatives that you've had in place for quite some time around efficiency measures, both on the construction side and on the SG&A, and recognizing that there are probably dozens of initiatives on both of those line items, maybe a little hard to quantify, but I was hoping for any type of thought around what this means over the next couple of years from a margin benefit standpoint, both on the growth side with the various construction initiatives that you've done, as well as the SG&A cost reducing efforts.

If there's any way to kind of think about this, or some type of guidance that may be not a formal guidance but just directional guidance, how we should think about, all else equal obviously, what this means for those metrics, the growth side and the SG&A side?.

So, look Mike, we have daylighted that our focus has been on all ranges of technology across our platform because there is a direct translation to bringing the cost side of our world down.

It's everything from construction costs to labor costs, to internal efficiencies and the way that we internally transmit and report our numbers, and all the way through to our customer experience and the way that we interact with our customers. A part of our initiative is designed to make sure that we're able to produce affordable housing.

So it's not going to all flow through to margin. It's going to help us keep our home prices affordable as we go forward. And so, there's not a direct relationship to our margin because some of these initiatives are going to flow through to the benefit of our customers. But with that said, we think that our margins will improve.

You're already seeing some of that improvement injected going forward. Some of that derives from things like pricing power. Some of it derives from things like reduced incentives or reduced realtor cooperation. But it's -- all parts of our business are bringing our cost structure down.

With that said, and to directly answer your question, we look over the next couple of years at the 100 basis points, maybe a couple of hundred basis points that flow through. And these are our objectives. As we think about it, it's more of an internal number than part of our guidance right now.

But you're definitely seeing improvement in the way that our cost structure is configured..

Great, thank you..

You're welcome. Last question..

Thank you. And our last question is from Mike Dahl from RBC Capital Markets. Your line is open..

All right. Thanks for squeezing me in. Stuart, actually just a couple of follow-ups on some of the internal initiatives, I guess specifically, first on the virtual sales shift, and in addition to an enhanced customer experience, it sounds like some nice financial benefits.

But within those comments around the margin, can you help us understand what percentage or any metrics around what portion of your sales force has effectively shifted to more of the virtual new home coordinators versus in-community salespeople?.

The shift today has been fairly mild. People are still learning to properly use and engage the digital technologies, and that learning curve, it takes some time to implement and to perfect.

But as we perfect that, we're going to see a greater number of both our customers enjoying the digital engagement and the autonomy, as well as our new home consultants and what we call our Internet new home consultants, or ISCs, really being able to work with those tools and be far more effective and efficient.

This is a migration that's going to take place over the next quarters and years. And I think we'll be better equipped to answer as we develop additional experience.

But I will say that the way I think about this is, we've had probably a year or two of change management get incorporated over just the past three months as we've reeducated or educated our new home consultants and our customer base that these tools exist and are quite beneficial to a better experience..

And I would just add that I agree with Stuart, but really 100% of our new home consultants and Internet sales consultants are using our virtual tools today. It's really a question of them becoming experts at it really comfortable with it.

We've launched a series of training programs that we take our associates through to how to sell virtually, and it's rapidly accelerating. But it is change management and it will continue to improve..

Okay, thanks for that. And then a follow-up for me is then another internal initiatives question just around build cycles. You talked about some of the centralized scheduling.

And I was wondering if you could just quantify -- clearly, there are some moving pieces with some of the shutdowns, but maybe at the trough of the issues in March or April, how much had your build cycle widened out or lengthened? And then, do you have any sort of metric you're tracking against with some of these initiatives in terms of how many days you think you can shave off the build cycle by some of these -- with some of these efficiency and digital tools?.

What we are seeing is a steady decline as we look year-over-year and sequentially the quarter is a decline in our build cycle time. And so, we've seen -- as an example, this quarter compared to a year ago, about a 15-day decline in our cycle time.

So all elements of efficiency from the coordination with our trade, even flow focus, the benefits of everything is included in today's world. I think, just our total Builder of Choice program has attracted trades to us, making sure that we have the trade power that we need on the job as we need them.

And we're there to facilitate things flowing more smoothly for them. So, I think that's another trend that I expect to see continue for us as a continued contraction of that..

Rick, do you want to weigh in on that?.

Going down..

Going down..

Great. Thank you..

So, I think with that succinct answer, we'll end it there. I want to thank everybody for joining us and for enduring some rather long and windy opening remarks. I know it starts with me, but we felt that we wanted to share more information at what can be a confusing time and look forward to reporting in a more condensed way.

Our third quarter is a few months from now. Thank you for joining..

Thank you all for participating in today's conference. You may disconnect your line and enjoy the rest of your day..