Lennar Corporation (LEN) Q1 2022 Earnings Call Transcript

Lennar Corporation (NYSE: LEN) Q1 2022 earnings call dated Mar. 17, 2022

Corporate Participants:

Alexandra Lumpkin — Deputy General Counsel

Stuart Miller — Executive Chairman

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Jon Jaffe — Co-President and Co-Chief Executive Officer

Diane Bessette — Chief Financial Officer

Analysts:

Truman Patterson — Wolfe Research — Analyst

Mike Rehaut — JPMorgan — Analyst

Stephen Kim — Evercore ISI — Analyst

John Lovallo — UBS — Analyst

Alan Ratner — Zelman & Associates — Analyst

Presentation:

Operator

Welcome to Lennar’s first 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. [Operator instructions].

I will now turn the call over to Alexandra Lumpkin for the reading of the forward-looking statement.

Alexandra Lumpkin — Deputy General Counsel

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 yesterday’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.

Operator

I would like to introduce your host, Mr. Stuart Miller, executive chairman. Sir, you may begin.

Stuart Miller — Executive Chairman

Great. Good morning. Thank you and thank you all for joining this morning. I’m here in Miami joined by Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Bruce Gross, CEO of Lennar Financial Services and of course Alex who you just heard from and we also have Rick Beckwitt Co-CEO and President on the line with us and he is joining us from Colorado. As usual, I’m going to give a macro and strategic Lennar overview after my introductory remarks. Rick is going to talk about market strength and land community count. John will update on supply chain production construction costs. And then as usual Diane will give detailed financial highlights and additional guidance and then we’ll answer as many questions as we can and will limit to one question and one follow-up, please.

So let me begin and start by saying that we’re quite pleased to announce another hard-fought and well-executed quarterly performance by the associates of Lennar. Our operating results reflect both the extraordinary focus and determination of Lennar’s management and operating teams as well as the general strength in the housing market. As questions abound given geopolitical turmoil, inflationary pressures building both around the globe and domestically, and interest rates are rising the housing market remains very strong in all of our major markets. Demand trends remain strong as family formation continues to rise. As our team from around the country reviewed our weekly sales starts and closings on Monday for our regions and our divisions the unanimous view was that our sales pace ranged in each market from strong to very strong.

Buyers are seeking shelter and they are seeking shelter from inflationary pressures as scarce rentals see rents escalating and escalating housing costs can be controlled with an owned home with a fixed rate mortgage. While wages are going up so to are housing costs so with — so with employment strong and home price as the price is rising it is best to fix these costs. Additionally, the home is ever more the control center or hub of our customers’ lives and frankly geopolitical stress makes the security of home all that much more comforting. While demand is strong, supply is short and constrained.

The ability to actually build and deliver homes has been slowed by the supply chain that is all but broken by the workforce that is short in supply and the intense competition for scarce and title land assets. Therefore, the supply of homes has remained quite limited and is not prone to overbuilding. Accordingly, we’re pleased to report operating performance that reflects the general strength in the housing market. Setting aside for the moment are non-cash mark-to-market gains last year and losses this year. Our operating performance is consistent and very strong. While deliveries increased 2% year-over-year to 12,538 homes. Our gross margin improved 190 basis points to 26.9% and our SG&A improved 90 basis points to 7.5%, which drove net margin to 19.4% and drove net earnings from operations to just over $800 million and almost 20% bottom line improvement from operations.

Although deliveries have been constrained by the supply chain disruption efficiency in our operations continues to drive strong bottom line improvement and very strong cash flow. Additionally, our Financial Services Group continues to perform exceptionally for the company adding $90 million of earnings, while supporting the closings of every possible home and making the closing process as Joyful as possible in the current very difficult environment. Our strong cash flow has been constructively deployed as our operations have been our primary focus.

First, with the lengthening of our cycle times by six to eight weeks over the past year, driven by supply chain disruption we have more capital invested in our inventory, as we are increasing starts and taking longer to deliver homes even as we are significantly reducing the amount of land held on our books. We are deploying more cash into shorter-term assets while generating cash from longer-term assets. Next, we’re continuing to pay down debt as it comes due with the next tranche available for pay down in August, and that’s $575 million that we expect to pay down from cash flow and of course, we have continued to repurchase stock with another 5.3 million shares purchased in the past quarter and another $2 billion authorized by our Board just yesterday.

With strong performance and cash flow, we have fortified our balance sheet with $1.4 billion of cash on book nothing drawn on our revolver and an 18.3 debt to total cap ratio as compared to 24% last year. We expect our results to continue to strengthen throughout the year as our already increased start pace results in more deliveries and as we use our size and scale and our Builder of Choice relationships to alleviate and resolve some of the supply chain friction. To that end, last quarter, I noted that, Jon. And Rick, our Co-CEOs have not chosen to sit idly in difficult times, but instead they went to the problem and visited each of our 38 divisions over six-week period.

Well, that was last quarter. Monitoring Jon and Rick came [Phonetic] this quarter I noted that on top of rig of regular in the field operations reviews a division offices they have jointly with Kemp Gillis our esteemed Head of offering[Phonetic] supply chain going to the problem and visited approximately 10 of our most strategic manufacturers at their offices to engage directly the problem solving process. This is just the beginning as many more trips or plan and the supply chain problem will find its way to becoming a supply chain opportunity. I’m betting on them time, focus, and attention problems are being solved and that is simply the Lennar way. Leadership matters.

So let me quickly turn back to the mark-to-market volatility that I mentioned earlier. Our total first quarter earnings in the first quarter were $503.6 million or $1.69 per diluted share, compared to first quarter 2021 earnings of $1 billion or $3.20 per diluted share. These numbers include our mark-to-market loss this quarter and gain last year at this time. Let’s avoid confusion. We have made significant strategic investments in various new technology companies that are working to reshape various parts of our company and our industry. Some are disruptors and some are enhancers. All of them are core to the future of as well as the present of our core operating platform.

They have been informed change in the core that have reduced SG&A and production costs. These cost reductions have made the investment in the companies and LENX strategy extremely valuable in creating long-term shareholder value. These investments are also the tip of the spear in identifying and engaging our substantial industry-leading sustainability initiatives from solar on the rooftop to micro-grid technology across a community from water conservation to sustainable cement our LENX strategy is setting the course from Lennar’s sustainable future. A number of our LENX investments have matured and become public companies and their short-term market price movements are volatile and that volatility runs through our earnings.

On the one hand this causes some confusion on both the upside and the downside. For example, in Q1 ’21, we reported a $470 million mark to market profit and in Q1 of ’22 this quarter, we reported $395 million mark-to-market loss. On the other hand, these investments have been stepping stones to our higher gross margins, as well as our never been lower SG&A at 7.5% in the first quarter which is now the lowest we have ever seen in the first quarter. These are non-monetary and non-operational, profits and losses and they really do not reflect the state of the housing market or the operating performance of the company within that market.

With that said, we choose not to sell the ownership in these companies just because they go public instead we are strategically engaged in the businesses, because in the businesses of these companies and because we are very enthusiastic about the future of these businesses and our LENX strategy and of course you can expect to hear a lot more about this part of our business in the future. Now, finally, let me talk briefly an update our progress on SpinCo and our focus on becoming a pure-play homebuilding company.

As noted last quarter, we filed our private letter ruling with the IRS. Since then we’ve taken the next step with SpinCo and filed our confidential Form 10 filing in February, so we can control the timing of the spin. We have received, since then our first round of comments from the SEC. We have also initiated the process with the NYSE, to have the shares of SpinCo listed. Nevertheless, given the choppiness of the capital markets and the work that is still being completed we’re pushing our expectations for the actual execution to the third or fourth quarter of this year. We have noted before that Spin Company we’ll be an asset-light asset management business that will have a limited balance sheet. Many of the assets targeted for SpinCo will be either part of the limited balance sheet of SpinCo or are currently being monetized in the form of assets under management that will be housed within the private equity verticals of SpinCo or they’re being resolved and monetized in other ways.

Additionally, while we — while we are taking more time to execute the spin, we continue to migrate assets from the Lennar balance sheet into the assets under management that will comprise SpinCo. Therefore, we are growing the management fees and returns that will define the value of the spin company. This monetization has been and will be completed over the next year or so and the cash proceeds will be deployed in Lennar to fortify the balance sheet and/or to continue to buy-back stock on an opportunistic basis. As a reminder, our three core verticals of SpinCo have been identified and business plan and are already growing AUM and fee generation.

They are multifamily, single family for rent, and land strategies. Each of these verticals already have raised and are continuing to grow third-party capital and our active asset managers. LMC, our multifamily platform had almost $10 billion of AUM at the end of 2021 and as of the end of our first quarter had approximately $10.7 billion of gross capital under management and is very close to our first closing for our third fund. LSFR our single-family for rent platform has grown from approximately $1.2 billion of assets deployed at the end of ’21 to approximately $1.9 billion deployed as of the end of our first quarter and our land strategies platform, which is still being refined for SpinCo expects to have $4 to $5 billion of assets under management at the time of the spin.

As I’ve noted in the past, the remaining Lennar Corporation will drive higher returns on our assets and equity base and the spend will not result in the material reduction of either our bottom line or our earnings per share. So let me wrap up and conclude by saying that we are extremely well-positioned financially, organizationally, and technologically to thrive and grow in this evolving housing market. As I said earlier, we expect our results to strengthen throughout 2022. We are picking up steam and we are picking up confidence. We recognize that interest rates are rising and inflation is a legitimate threat. We also know the difficulties in the supply chain present challenges for Lennar and for the industry and that land and labor are in short supply. But we also recognize that the economy remains strong with wages rising and the housing — and housing is in short supply across the country. Strategically, we remain focused on orderly targeted growth with our sales pace tightly matched with our pace of production.

We focus on gross margin by selling in step with production while controlling costs and reducing our SG&A and therefore maximizing our net — our net margin. As we look to the remainder of 2022 we expect continued strength in the market and double-digit growth for the — for the company. As noted in our press release, we are projecting — projecting 16,000 to 16,300 deliveries in the second quarter at 28% to 28.25% margin and we are now projecting 68,000 deliveries for year-end at 27.25% to 28% margin for the year. At this pace, we will have a very strong bottom line and a very strong cash flow with the projected spin-off in the second half of the year and Lennar we’ll have another record year.

So with that let me turn it over to Rick.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Thanks, Stuart. As you can tell from Stuart’s opening comments, the housing market is very strong. Our team is extremely well-coordinated and our financial results continue to benefit from a solid execution of our core operating strategies. Key to that has been rent in running a finely-tuned homebuilding machine where we’re carefully match homebuilding production with sales on a community-by-community basis. We have continued to strategically sell our homes later in the construction cycle to maximize sales prices and offset potential cost increases.

To that end, we have slowed sales. Rather than writing sales contracts when customers visit our website or welcome home centers we are putting people on waiting list to contact them later when we released the homes for sale. This shift in the sales process is driving higher sales prices and stronger margins. Our first quarter results prove out the success of this strategy as we achieve gross margin increases of 190 basis points year-over-year. During the first quarter, we started 4.7 homes per community, sold 4.3 homes per community and we ended the quarter with less than 180 completed unsold homes across our entire footprint.

This production margin driven and sales focus program will continue to improve margin and lead to increased deliveries and profits in fiscal 2022. In the first quarter, new orders, deliveries, gross margins were solid in each of our operating regions. We continue to achieve price increases and saw strength in all product categories from entry-level to move up and in our active adult communities. Let me give you some color on our markets. As Stuart said in his opening remarks all of our markets are strong right now. But here are some color. Florida continues to benefit from core local demand as well as in-migration from the Northeast, Midwest, and West Coast, which is driving both sales pace and price.

Inventory is extremely limited. The State is experiencing tremendous job growth with employment exceeding pre-pandemic levels. The hottest markets in Florida are Naples and Sarasota in the Southwest, Miami-Dade and Broward in the Southeast and Tampa. Orlando is also a robust market benefiting from a significant rebound in tourism. All of these markets — in all of these markets, we are the leading builders with the best land positions. Atlanta continues to see strong and steady growth driven by limited inventory, relative affordability, and strong — and strong job creation. During the first quarter, we entered the Huntsville, Alabama and Florida Alabama coast markets.

Both markets are experiencing strong demand driven by limited inventory and the quality of life. Huntsville is especially thriving due to significant employment growth fueled by an influx of many diverse industries attracted by a world-class airport, a supply of educated workers and a relatively affordable home price. The Gulf Coast is also experiencing outsized employment growth while providing a healthy outdoor lifestyle of favorable weather and the beauty of the Gulf of Mexico. In the Carolinas, Raleigh, Charlotte, and Charleston are extremely strong markets. Inventory is very limited, and the combination of core local demand and in-migration continues to push both sales pace and price.

We are also the top builder in all of these markets. Texas continues to be the strongest state in the country with in-migration from the East and West. The state’s pro-business employer-friendly economy is driving corporate relocations and exceptional job growth, especially in the technology sector. The state is also benefiting from a surge in oil and gas prices. The strongest market in the country continues to be Austin. The Colorado market continues to gain momentum benefiting from strong in migration and solid job growth. Inventory is very limited and we are seeing great pricing power.

Phoenix and Las Vegas, continue to be two of the hottest markets in the country. Both are benefiting from business-friendly environments, real job growth, and in-migration from California. Nevada continues to lead the nation in new jobs with employment significantly exceeding pre-pandemic levels. Phoenix is driving due to real affordability, inventory is extremely limited, and demand continues to accelerate. The Pacific Northwest continues to be a strong market as significant land use and development restrictions limit production to meet growing demand. Notwithstanding these restrictions, we have an excellent land position with great growth opportunities.

Portland [Phonetic] and Seattle are experiencing outstanding job growth with both markets ranking in the top 10 in the country. With strong demand and limited supply we continue to see strong price increases. The California market remains very strong driven by the states severe housing shortage, there is more demand and supply, even with much of the outmigration from the state. The Inland Empire, Sacramento, and East Bay Area have remained some of the strongest markets with home buyers looking for affordability. During the quarter, we also saw a resurgence in the core markets of the Bay Area as employees are returning to work.

As such both our core and inland markets are firing on all cylinders. As I said and Stuart said, these are some of the strongest markets, but there is broad strength across the country. Now I’d like to spend a few moments talking about growth in community count. During the first quarter, our community count increased 4% year-over-year as we focused on growth in our existing and new markets. We expect our community count to build throughout the year and are still projecting to end 2022 with a low double-digit increase in community count, year-over-year. While supply chain issues and inspection delays are impacting the timing of some of our community openings we are in excellent position for strong growth in 2022 and 2023.

Our land pipeline remains robust with plenty of land in the queue to meet our growth goals over the next several years. We continue to see great buying opportunities in all of our markets and are confident this pipeline will produce strong community count growth for the next several years as we pursue deals to backfill beyond the near-term deals that are already under control. We are also pleased with the excellent progress we’re making on our land-light strategy as evidenced by our controlled homesites percentage increasing to 58% at the end of the first quarter from 45% last year. We believe we can increase this to 65% by the end of the fiscal year.

Our extreme focus on a land lighter model saves us a significant amount of cash spend on land acquisitions during the quarter. We ended the quarter with $1.4 billion in cash, no borrowings on our $2.5 billion revolver, and a homebuilding debt to capital of 18.3%. As Stuart said we repurchased 5.3 million shares of our common stock for $526 million. These repurchases combined with our significant earnings contributed to a return on equity of 19.5% which was 180 basis point improvement from the first quarter of last year. Now I’d like to turn it over to Jon.

Jon Jaffe — Co-President and Co-Chief Executive Officer

Thanks, Rick. This morning, I’ll discuss our first quarter was impacted due to supply chain disruptions, inflationary impacts on construction costs, and cycle fund increases as well as our team’s ability to manage through these challenges. At Lennar, we continue to deal with our fair share of disruptions. Some of the supply chain disruptions like the ones we faced in our fourth quarter where we experienced intermittent disruptions affecting different trades at different times and at different geographies.

The first quarter was also different and that the Omicron spike in January dramatically impacted everything. A significant amount of labor at manufacturers, suppliers, local trade partners, and our own associates was out from work. This was most severe in January in then eased rapidly in February. At times in January, it seemed as though as much as one half of our workforce across the industry was quarantined at home. This challenged our management purchasing and construction teams to be extremely nimble in finding work around solutions to the unique challenges that the Omicron spike created.

Labor returned in February to the manufacturing plants and at our communities as manufacturers and trades are now hard at work to make up for lost time. Many manufacturers have stabilized our lead times and there are currently fewer situations of late deliveries. However, some manufacturers still have meaningful challenges ahead. The following categories are continuing to deal with significant constraints. These are electrical equipment, garage stores, HVAC condensers, flex duct, and cabinets. The response to the ongoing disruptions and future unknown rest of new disruptions our divisions are more closely managing the inventory of local trades and adding additional labor by on boarding new trade partners.

While our regional and national teams stay in constant communication with manufacturers and suppliers in support of our divisions. The supply chain challenges in the first quarter resulted in an increase in cycle time and contributed to an increase in direct construction costs. Our average cycle time increased approximately two weeks sequentially over Q4 and about two months year-over-year. Given the severity of the challenges created by the sudden Omicron spike I want to take this opportunity to recognize and thank our associates for their leadership, creativity, and tenacity in overcoming the situation.

Their extraordinary efforts enabled Lennar to deliver over 24,500 homes to eagerly awaiting homeowners in our first quarter. As we look at the balance of the year and our guidance to deliver 68,000 homes we are strategically focused on accelerating starts to give us more inventory under construction. This will provide a cushion against expanding cycle times, allowing our management teams more opportunities to complete homes in line with our plans. Turning to cost now our direct construction costs were up 3% sequentially from Q4 and 23% year-over-year. Lumber was relatively flat sequentially but accounted for about 60% of the year-over-year increase.

As you are aware lumbers dramatically increased again up almost 100% since December 1, $1,400 per thousand board feet. This increase in lumber will cause about a $5 per square foot increase by August of this year. Further increases are anticipated as lumber futures indicate short term inflation to the spring cycle or into early summer. Then based on our analysis and on feedback from key lumber industry participants, we believe a deflation in lumber prices will follow. This pattern looks to mirror what took place last year with dramatic with lumbers dramatic rise and fall.

Despite operating in this cost inflationary environment our first quarter direct construction costs, as a percent of revenue were stable at 43% which is basically flat compared to 42% both sequentially and year-over-year. Simply put, our pricing powers offsetting these cost increases. As Rick noted, we’re achieving this through the disciplined matching of sales pace to construction pace. Our divisions have been and remain laser-focused on being a production first operation. Our execution is an ongoing refinement and improvement of our dynamic pricing FIFO sales approach allowing effective control of which homes are released for sale, and at what price.

In conclusion, it bears repeating that we remain disciplined and focused about our everything’s included strategy and I’m being the builder of choice for our trade partners a program which is now entering its seventh year. This program has successfully created close-knit relationships with our strategic building partners allowing both parties to make adjustments in these unprecedented times. These strategic relationships, enables us to be better at solving problems in 2022 than we previously were.

Additionally, as Stuart aptly noted Kemp Gillis, Rick, and I are currently traveling the country meeting with senior management of key supply chain relationships to explore how to solve issues that need immediate attention and how to think differently about the supply chain going forward. We have meaningful exchanges of thoughts and ideas and another alter the current configuration of the supply chain to reduce and or remove future disruptions. We believe these results — the result of these efforts will provide for the fastest path to stabilization of the supply chain for Lennar. We also expect to achieve meaningfully improved efficiencies throughout the supply chain providing for better control of both cost and cycle times.

Thank you. And I’ll turn it over to Diane.

Diane Bessette — Chief Financial Officer

Thank you, Jon, and good morning, everyone. So Stuart, Rick and Jon have provided a great deal of color regarding our homebuilding performance. So, therefore, I’m going to spend a few minutes on the results of our other business segments and our balance sheet and then provide detailed guidance for Q2 2022 and updated high-level guidance for fiscal year 2022. So starting with Financial Services. For the first quarter, our Financial Services team produced $91 million of operating earnings, slightly above the high end of our guidance. And then, when you look at the details between mortgage and title, our mortgage operating earnings were $67 million compared to $100 million in the prior year. As we’ve indicated for several quarters, the mortgage market has become increasingly competitive for purchase business, as refinance volumes and resale inventory has declined.

As a result, secondary margins have been decreasing. This was the primary driver of our first quarter, lower secondary margins as compared to the prior year. Title operating earnings were $21 million compared to $30 million in the prior year. The prior year included a one-time $11 million gain related to the early paydown of a note receivable. Excluding this gain, earnings increased this year, primarily as a result of higher premiums driven by an increase in average sales price per transaction. And then looking at our Lennar other segment, as Stuart indicated, for the first quarter, our Lennar other segment had an operating loss of $403 million.

This loss was primarily the result of our non-cash mark-to-market losses in our strategic technology investments which, as we indicated, totaled $395 million. As we’ve mentioned before, we are required to mark-to-market many of our technology investments that are publicly traded, and that valuation will fluctuate from quarter-to-quarter. And then turning to our balance sheet. We ended the quarter with $1.4 billion of cash and no borrowings on our $2.5 billion revolving credit facility, for a total of $3.9 billion of homebuilding liquidity. During the quarter, we continued to focus on becoming land lighter.

As a result, at quarter end, we owned 202,000 homesites and controlled 279,000 homesites for a total of 481,000 homesites. This portfolio of home sites provides us with a strong competitive position for continued growth. As Rick mentioned, our homesites controlled increased to 58% from 45% in the prior year, while our years owned stayed flat from the prior year at 3.4 years. Land transactions may fluctuate quarter-to-quarter, but progress is made year-over-year. And so, we are still on track to reach our goal of 2.75 years owned and 65% homesites controlled by year-end. And we remain committed to our focus on increasing shareholder returns.

During the quarter, we repurchased 5.3 million shares, totaling $526 million. Additionally, we paid dividends totaling $110 million during the quarter, which was the result of a 50% increase of our annual dividend to $1.50 per share that took place in January of this year. Our next senior note maturity is $575 million, which we will pay in August of this year, and we have no maturities due in fiscal 2023. The result of all these transactions with homebuilding debt to total capital of 8.3%, which improved from 24% in the prior year. And then just a few final points on our balance sheet, our stockholders’ equity increased to $21 billion.

Our book value per share increased to $69.98 and our return on inventory was 27.5%. In summary, we have a solid balance sheet that positions us well for the future. And so with that brief overview, I’d like to provide some guidance details. As we look forward to the second quarter, we’re assuming that market conditions remain similar to what we see today, strong demand and limited inventory driven by continued supply chain challenges. So with that backdrop, we expect Q2 new orders to be in the range of 17,800 to 18,200 homes, as we continue to moderate sales pace to match production cycle changing.

Community count is always challenging to estimate as it’s difficult to precisely predict when communities will open and when they will close out. However, we do expect our Q2 ending community count to be slightly up as compared to Q2 of last year. Taking into consideration the continued supply chain challenges, we anticipate our Q2 deliveries will be in the range of 16,000 to 16,300, and our Q2 average sales price should be about 470,000. We expect to continue to produce strong gross margins in the range of 28% to 28.25%, and we expect our SG&A to be between 6.8% and 7%, as we continue to focus on simplification, efficiencies, and leveraging our overhead. And for the combined homebuilding joint venture, land sale and other categories, we expect a loss of about $10 million.

And then looking at our other businesses, we anticipate that Financial Services earnings for Q2 will be in the range of $90 million to $100 million as market competition for purchased business continues to increase. We expect a loss of about $10 million to $15 million for our multifamily business. And for the Lennar other category, we expect a loss of about $10 million. This guidance does not include any potential mark-to-market adjustments to our technology investments. That adjustment will be determined by their stock prices at the end of our quarter.

We expect our Q2 corporate G&A to be about 1.5% of total revenue and our charitable foundation contribution will be based on $1,000 per home delivered. And we expect our tax rate to be approximately 25%. The weighted average share count for the quarter should be approximately 292 million shares. And so when you pull all this together, this guidance should produce an EPS range of $3.80 to $4 per share for the second quarter. And then turning to full year guidance, we are increasing as mentioned our guidance for the year, we now expect to deliver approximately 68,000 homes more or less, which is an increase from our previous guidance of 67,000 homes.

We believe our average sales price for the year will be in the range of $470,000 to $475,000. This would result in about $32 billion of homebuilding revenue, which would be an increase of more than 25% from fiscal 2021. We are also increasing our gross margin guidance for the year, as we mentioned. We now expect our margins to be in the range of 27.25% to 28%, which is an increase from our previous guidance of 27% to 27.5%. We’ve provided somewhat of a wide range to take into consideration some of the potential uncertainties as we look ahead. And with our continued focus on technology and efficiency and an increase in volume, we expect our full year SG&A to be in the range of 6.6% to 6.8%.

And for Financial Services, we’re affirming our annual guidance of $440 million to $450 million. And finally, our tax rate should be approximately 25% and so as we continue to execute our core operating strategies, maintain a strong balance sheet, and remain focused on cash flow generation and returns, we are in an excellent position to have a strong fiscal year 2022.

With that, let me turn it over to the operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Truman Patterson with Wolfe Research, you may go ahead.

Truman Patterson — Wolfe Research — Analyst

Hey, good morning everyone. Thanks for taking my questions. So, first you mentioned that cycle-time extended a couple of weeks, but you increased your closings guidance and starts to remain relatively healthy. So, two-part question for me on the supply chain. Just first, you all mentioned visiting manufacturers. I’m hoping you can elaborate on some of your internal initiatives that might be giving you better access to materials, labor. And whether some of the materials that you mentioned, if there’s any kind of relief in sight going forward? And then the second part, you made an interesting comment about enhancing your market position. You all gained quite a bit of share last quarter. I’m hoping you can give us kind of the lay of the land in 2022 for smaller private peers in a pretty constrained environment and your ability to continue taking share.

Stuart Miller — Executive Chairman

So let me start, and I’ll hand it over to Jon in a second and say that — as I noted, Truman, we are not just picking up steam, but we’re picking up confidence and a lot of that derives from the focus on starts. It’s not that the supply chain is quickly getting resolved, it’s that we are putting more homes in the ground. We recognize that cycle-time is extended and with additional homes under production that are farther along, we have a larger pool to draw from as we look at closings. So, we’re picking up steam and picking up confidence and being able to, in the current environment, kind of, see some visibility to what we’re able to deliver. And let me just say it is — this is not an easy migration. It is taking a lot of focus, time and attention. And I just want to say that what we’re finding is that size and scale matter quite a lot. That means the way that we engage with our building partners and that builder of choice kind of mentality that we brought to the table is critical and the day-to-day engagement directly with the participants in the supply chain is becoming more and more important. When you put those pieces together, you find — we find that we’re able to have greater visibility as to how our business is migrating forward. So Jon, maybe, you’d like to indulge on that.

Jon Jaffe — Co-President and Co-Chief Executive Officer

Yes, I think you hit a lot of the key points, Stuart. Starting with size and scale, as you mentioned, really gives us a seat at the table and the prioritization. But Truman, as you can imagine, if you sit down with CEOs and key executives of manufacturers, distributors for four to six hours, really opening up the thought process, how do we have a different approach to the products we buy, to the way that they’re distributed, to joining together manufacturers and distributors to think through from the origin of the supply chain, all the way to the installation of our home. You’re going to come up with a lot of interesting thoughts and ideas. And we’re in the process right now of really vetting those, we’ll be beta testing them and are very confident that we already see opportunities for significant improvement. And as I mentioned, it’s going to give us better cost control for both us and for our trade partners and give us much more clarity as to the delivery process. And it begins a lot with our technology and our ability to give forecasting information with real clarity to our vendors, which is critically important for them as they plan how to strategically supply us.

Stuart Miller — Executive Chairman

And Rick, why don’t you weigh in on market share and where we think the current supply chain programming brings us on ability to capture even greater market share.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yes. So, there’s no question we continue to gain market share on the private builders and many of the larger or mid-market public builders. This is going to continue to happen. A lot of this is driven by really access to land. Because when we have 20% to 40% market shares, the land market needs to work with us. So those land relationships are driving a lot of the gain. And then just the efficiency of our product, our Everything’s Included program allows us to work much more efficiently with the supply chain and as a result of that, we’re capturing more product.

Truman Patterson — Wolfe Research — Analyst

Okay. Thanks for that. And you all are acknowledging the risks, but you mentioned that demand should remain strong for the foreseeable future. My question is more on the land side and higher rates outlook, et cetera. Have you seen any shifts in landowner’s willingness to option or changes in land banking terms that might push out your ability to hit that 65% option target by the end of 2022?

Stuart Miller — Executive Chairman

The short answer to that is no, there haven’t been shifts in appetite or ability to option. And remember that we’re focused on building a structured approach to that the option program and have been working through land structures to do that. I think, that we’ll be able — we are certainly migrating in that direction with a greater portion of our land asset option versus owned and I think it will continue in that direction.

Truman Patterson — Wolfe Research — Analyst

Okay. Thank you.

Operator

Thank you. Our next caller is Mike Rehaut from JPMorgan. You may go ahead, sir.

Mike Rehaut — JPMorgan — Analyst

Thanks. Good morning, everyone. Thanks for taking my question. First, I just wanted to kind of go back to some of the comments you made on demand, and you very much appreciate the fact that you kind of stated in a couple of different instances in the prepared remarks about how demand remains so strong. I think, obviously, everyone is very, very much focused on any type of graduated difference. In other words, maybe, still remaining very, very strong, very robust. But any kind of changes on the edges? And what I’m referring to is, obviously, yesterday, we had an AHP survey where future sales component was down 10 points. Obviously, that’s a national number and might be just truly more sentiment-driven. We also had a private builder call yesterday that we hosted where, on the margin, very, very minor and still, characterizing the market as strong as you did. The builder kind of pointed to maybe the first-time or entry-level buyer taking a little bit longer to make a decision, maybe, a very slight pickup in cancellations and even taking a slightly smaller home or a home further out to adjust to the new interest rate backdrop. So in that context, I was just curious again, on the margin, if you’ve seen anything across that entry-level, lower price point, if any markets stand out in that regard as well.

Stuart Miller — Executive Chairman

So Mike, I try to be very clear in my comments. I noted that our — earlier this week, management call, we surveyed almost exactly that question across our geographic footprint. And the answer is where that sales were ranging anywhere from strong to very strong. And I think that, that’s the — that’s been the consistent answer by our divisions and our regional presidents. So that’s what we’ve been seeing. Now, with that said, I also try to daylight in my comments that there are definitely elements in the economy that give rise to questions, and I know that some will kind of look for any evidence of kind of a change in the environment. We haven’t seen it yet, and yet, we’re very cognizant of inflation and inflationary pressures.

Interest rates and the upward movement that is — I can never predict interest rates, but it’s seemingly all but certainly moving up, and we recognize that there are potential cross currency here. But those very cross currents can be arguments both for sustainable strength in the market as well as fissure in the market. In the current environment, as I noted, wages are going up, but so too are housing costs, the inflationary pressures on rental rates. This is really important as we look at first-time buyers and people coming into our welcome home centers, they’re seeing significant increases in their rental rates and looking for a defense mechanism as stability measure that they can inject in their finances to at least hold steady one component of their cost structure. They can’t really do much for gas prices and food, but their housing cost, they can fix with a 30-year fixed-rate mortgage. So there are cross currents out there, we have not seen to date any change in the demand patterns except towards strength, and we’re watching it very carefully as you are. And we’re just giving you a straight shot as we can. Across the country, it’s been pretty strong.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

And the only thing I’d add to that, Stuart, is sequentially, our cancellation rates actually went down. And what we’re finding is that if something cancels, that home is gobbled up very quickly at a higher price than what it was put under contract. So the markets are strong and just continue to feel healthy.

Jon Jaffe — Co-President and Co-Chief Executive Officer

And Mike, I would also add that, as we mentioned, we’re very carefully controlling what we released for sale. There’s clearly demand across all our markets, where if we released more homes that they would sell. And people are waiting for us to release more homes. And I’d also point out one data point, which I think just supports the current state of what we’re seeing, is that our web sessions online are up over 20% year-over-year and the conversion of those to leads is up almost 50%. I’m just indicating the significant interest that’s out there in homeownership.

Mike Rehaut — JPMorgan — Analyst

No, no. Those comments are really helpful, and I appreciate Rick and Jon, your added comments as well. It’s very, very helpful. Maybe, a second question, kind of shifting to SpinCo. A lot of focus there, obviously. Just trying to get a sense, you mentioned — kind of a two-parter here. You mentioned the land strategies component of the SpinCo that would have $4 billion to $5 billion of assets under management. Just trying to confirm if — when you think about the SpinCo in totality, how should we think about the total amount of assets that will be taken off of Lennar’s balance sheet? I assume the $4 billion to $5 billion is a part of that, but perhaps, there’s incremental parts as well. And secondly, in terms of the fees that are made because, obviously, there’s going to be an asset management business effectively. When you think about the fees on the multifamily, on the single-family for rent on the land strategies, how should we think about percent fees as a percent of assets under management in terms of an income stream?

Stuart Miller — Executive Chairman

So, decidedly, Mike, we haven’t given enough detail for you to make those translations and we’re not prepared to give that detail. In terms of the assets that are flowing from Lennar towards SpinCo, I think that it’s still good math to think in terms of $5 billion to $6 billion. Some of it has already gone, migrated into assets under management that will ultimately be verticals of SpinCo. And — but we don’t have a clear translator for you at this point. But order of magnitude, from the assets that will actually be spun on the day of the spin to the assets that are being put into the SpinCo, it’s in that order of magnitude. If you look at, for example — if you look, for example, at the multifamily component. The multifamily component, year-over-year or from the end of the fourth quarter to the end of this quarter, we’ve gone from about $10 billion of assets under management to about $10.7 billion. I can’t give you a percentage, but a sizable percentage of that increase in assets under management with actually, land and construction for multifamily that migrated into an asset — an AUM asset management program. Relative to land, some of the land that will be in land strategies is coming from book. Some of it is coming from assets that we’re purchasing that are never coming on to book. So there isn’t a perfect translator. I still think that order of magnitude, we’re looking in that $5 billion to $6 billion range of assets that will have migrated into that form of ownership, and you’re seeing cash flow into Lennar reflective of some of that as we make the migration towards a spin-off day. In terms of the fee stream, we haven’t laid out how those fee streams work, and we haven’t built for the stream, yet the model of how those fees will work. But there will be that clarity as we get closer to a spin-off day.

Mike Rehaut — JPMorgan — Analyst

Great. Thank you.

Stuart Miller — Executive Chairman

Thank you.

Operator

Thank you. Stephen Kim with Evercore ISI. You may go ahead.

Stephen Kim — Evercore ISI — Analyst

Yeah. Thanks a lot guys. I wanted to ask you a couple of questions about the land situation. It was interesting to me that your lots owned increased pretty noticeably this quarter, sequentially. I was just curious if you could talk about that because that number had been flat for quite a while. And just, if you could put it in the context of your broader overall outlook, which would seem to be calling for a downward trajectory from the 202 you own today. And then secondly, we did an analysis where we looked at where — how much land you either owned or controlled right before the pandemic hit, and we assume that you didn’t walk away from many of your options. And if you sort of do that and sort of work that down from whatever closings you’ve done since then, I mean, you wind up with a very, very significant number of lots that I would think, are probably reflecting pre-pandemic pricing. Something on the order of prior to this quarter, 180,000 lots, and then you only delivered another 12,000 or whatever this quarter. So a very, very significant percentage of the land you have still has pre-pandemic pricing embedded in. I was curious if you could comment on whether you think that, that’s an accurate statement.

Stuart Miller — Executive Chairman

Okay. So I’m going to ask Diane to lead with an answer on this one because she spends all of her time focusing and assessing over the — and Rick to follow-up. So go ahead.

Diane Bessette — Chief Financial Officer

Yeah. I guess I’d say, Steve, yeah, you’re right. I mean, our — look, as I said in my comments, land purchases are — they fluctuate quarter-to-quarter. You often see a pickup in the first quarter because our land sellers are very motivated often to transact before the calendar year is over. But I wouldn’t extrapolate that. It’s just lumpy, and we’re really focused on just making progress year-over-year. So you are right, a little heavier this quarter, but it’s just lumpy and it fluctuates.

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yeah. Diane is exactly right. A lot of that was just timing. Some of it was driven — a lot of it was driven by potential fear of tax rate changes, given some of the talk that was going on earlier in the election cycle. People wanted to avoid paying a higher tax and transacting in 2022. It’s really just timing. We’re very focused on bringing that down. And with regard to your question about pre-pandemic pricing and land opportunities, you’re right, and I think that’s why you’re seeing our margins continue to improve. And the level of land embedded on a cost percentage to be very attractive. So we’re really pleased with what our land teams have done.

Stephen Kim — Evercore ISI — Analyst

Yes, it would seem to suggest quite a bit of hang time here in terms of the margin opportunity, particularly with the fact that home prices are still going up. And that sort of segues to my next question. You — we know that when you look at your average price and backlog, for instance, that that can be influenced by more shorter cycle-times for cheaper homes and longer cycle times for more expensive homes and that sort of thing. But if I look at your order price, the average price you took in orders this quarter, I would generally think that those mix shift effects should be very muted. And we noticed that your average order price was something on the order of $495,000 which was, I think it was up like 6% or something like that sequentially, which is a very, very strong number. And I was curious as to whether or not you believe that, that’s a reasonable level that we could expect your closings in some quarter in the not-too-distant future could reach. I know that your guidance for closings was $472,000. It seems like it’s baking in a fair amount of conservatism when you contrast it with the $495,000 you did this quarter. So, I was hoping you could comment on that?

Stuart Miller — Executive Chairman

Rick, why don’t you take it?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Well, so we’re not guiding for a $495,000 ASP for the 2022. A lot of this is just mix and timing of sale and which communities we’ve released product from. There’s no question we are seeing a very healthy sales price. We’ll continue to execute on a strategy of leasing sales and small releases to maximize that price. And there is tremendous pricing power out there. But given the overall mix of communities that we have for the balance of the year going in and the product that we’ve started, some of those are smaller homes that we just haven’t released for sale yet, that are you going to blend that price.

Jon Jaffe — Co-President and Co-Chief Executive Officer

And Steve, just to add some color to what Rick said. We are very focused on accelerated growth in Texas. So, let me refer into that community-driven mix, it’s not a timing thing. It’s strategic and it’s going to be ongoing as compared to the growth rate in California. The California is still growing and has a higher ASP, but Texas is growing about twice as fast, strategically, for us at a lower ASP.

Stephen Kim — Evercore ISI — Analyst

Yes. Sounds good. We’ll take it. Okay, thanks a lot guys.

Stuart Miller — Executive Chairman

Thank you.

Operator

Thank you. John Lovallo with UBS, you may go ahead sir.

John Lovallo — UBS — Analyst

Good afternoon guys. Thanks for taking my questions. The first one is on the delivery outlook being raised, which is obviously encouraging. Just curious, though, what the impact from the Breland acquisition would be and if there is any sort of back half gross margin, negative impact from purchase accounting that we should consider? And maybe, that’s why there’s not that second half kind of move up in margins that some would have expected.

Diane Bessette — Chief Financial Officer

Yes, John, very, very small. Happy to have positioned ourselves into a new market, as Rick indicated, but it’s very small. The Breland will add only about 1% to our delivery count for the year. So, pleased to have a new market that’s very small relative to total delivery.

John Lovallo — UBS — Analyst

Got it. And then so the purchase accounting would also be very small, I’d imagine that.

Diane Bessette — Chief Financial Officer

Yes, that’s right. Very little gross margin, as you can imagine, but again, not very impactful to total gross margin given the small volume.

John Lovallo — UBS — Analyst

Got it. Okay. And then on the SpinCo, the land strategy, it seems like you guys are leaning towards spinning it and optioning back rather than, I think, at one time, there was some talk about possibly selling it and optioning the land back. Is that sort of the final decision, do you think? And what’s driving that decision to sort of spin it?

Stuart Miller — Executive Chairman

I’m not sure I’m following the question. It’s spinning versus selling an optioning back? Help me out with that.

John Lovallo — UBS — Analyst

Yes, sure. So I’ll try to be more clear. I thought, and correct me if I’m wrong, that there was talk at some time of potentially not spinning the land, but actually selling it where there would be cash proceeds that would be received and they could be used for various things like funding working capital, buying back stock, things of that nature. Maybe, I’m misunderstanding, but that was impression.

Stuart Miller — Executive Chairman

That is exactly what’s happening is, look, we basically, in all of these areas, stood up asset management verticals. And ultimately, they will be pulled together as SpinCo. Those verticals are — they are currently using third-party capital to acquire assets and assets that in some instances, we have on our book. In some instances, we are buying from third-parties are going into those asset management verticals currently. As the assets started on our book, that is generating cash for Lennar and being redeployed into the business as stock buyback, debt retirement or whatever the strategy is. But the SpinCo process is already in progress right now and the migration of assets to the asset management verticals is happening both for Lennar multifamily, for SFR and for land strategies. And as we pull that together, I think it will be clear that some of the assets are coming from our book and generating cash to the core and some of them are just avoiding cash that would otherwise be spent. On the side of each of those verticals and that is happening currently as we prepare for the actual spin-off.

Diane Bessette — Chief Financial Officer

And maybe, John, I’ll just jump in because you and I have talked about this. I think — remember, you’re absolutely right, there was going to be a contribution of land. But as Stuart mentioned, as we refined the thinking and thought that having a land lighter balance sheet, a land-light balance sheet or asset-light balance sheet for SpinCo is the better way to go. That was the migration into assets under management for all of the components, not just the multifamily and the single-family rental, which were always going to be assets under management. So, you might remember that we made that transition in the best interest of SpinCo.

Stuart Miller — Executive Chairman

Yes. And not only in the best interest of amount of time that has been taking to get SpinCo stood up, not to simply wait and then contribute and then reconfigure, we’ve just been doing it as we’re going. Matt Zames as we’ve noted, has been working with us on this and has been an advocate for, let’s not waste time. Let’s get this going right now. If you know Matt, he’s that kind of person. And so we have energized the program of converting assets into cash, turning cash into stock, buyback into debt retirement into increased inventory, and increased certainty in deliveries and that’s exactly what’s been happening as we prepare to spend.

John Lovallo — UBS — Analyst

Got it. Thank you guys.

Stuart Miller — Executive Chairman

Okay. Why don’t we do our last question?

Operator

Thank you. Alan Ratner with Zelman & Associates. You may go ahead, sir.

Alan Ratner — Zelman & Associates — Analyst

Hey, guys. Thanks for squeezing me in. Appreciate it.

Stuart Miller — Executive Chairman

Hey, Alan.

Alan Ratner — Zelman & Associates — Analyst

So there’s been some data points that suggest maybe, more in a global kind of a housing market scale that recently, the strength in sales, at least on a year-over-year basis, has been driven primarily by non-primary buyers. So that would kind of be a catch-all for second home buyers, SFR investors and funds, build-to-rent, et cetera. And the actual primary buyer activity has kind of stalled a little bit, and there’s probably a lot of reasons for that, and maybe, that’s not representative of the new home market, specifically. But I was wondering if you could talk a little bit about the mix of your business right now that is non-primary to the extent you can quantify it? I know it’s often challenging to identify all investors that might come in through the MLS, et cetera, but are you seeing any differences in trends among the primary, non-primary buyers, maybe, over the last 60, 90 days, especially since rates have started to move?

Stuart Miller — Executive Chairman

Let me start and ask Rick to see if he can dig up a statistic or two, but there hasn’t really been a big change or migration away from primary buyers towards the institutional group. But what I would say is it all seems to me to be a zero-sum game. If you look at both rental properties on the multifamily side, rental properties on the single-family side and for-sale properties where people — primary buyers are actually buying, all of them are fully occupied. And rental rates are migrating upwards at a fairly rapid click, suggesting that these are not really institutional purchases or the building of spec inventory or things like that. It’s all basically primary, but done in a format that might be primary buyer owning their home or institutional buyer enabling someone to access a single-family lifestyle or just multifamily tenants. And across the board, you’re seeing pretty aggressive escalation in prices because demand is strong and supply is constrained. So that’s what we’re seeing in our world. Rick, do you have some specifics or anything?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yes, I would say that probably, less than 5% of the homes in the last quarter were sold to folks that either are institutional renters of product. We sold some homes to our upward America venture that we have with our other investors that Stuart talked about that has about $2 billion of committed funds for that vehicle. But it’s a very small percentage, and most of what we’re seeing out there are primary buyers.

Alan Ratner — Zelman & Associates — Analyst

Got it. All right. No, that’s helpful. And thank you for the thoughts there, Stuart. I appreciate that. I guess, second one, just to kind of end the call here. So the acquisition you made at Breland, I know you kind of talked about it being fairly small in terms of contribution for the overall business. But just curious, at this stage, you talked a lot about your views on likely continuing to take share from smaller private builders, and it’s clear that you guys definitely have a real operating advantage in today’s difficult kind of environment. Are you seeing, perhaps — I don’t know if capitulation is the right word, but more interest from private builders looking to sell or partner up given the challenges that are out there in the market and how high is your demand right now on the M&A front, from that standpoint?

Stuart Miller — Executive Chairman

So, let me just say that, I wouldn’t — Rick, you’ll jump in, in a second, I know. But let me just add, I wouldn’t say that we’re seeing capitulation out there. The market is strong. Demand is strong across the board. Capitulation would suggest throwing up the arms and pricing coming down, I think that pricing is robust. The bigger issue or question for us is, we’ve identified markets where organically, we would like to step in and participate in those markets, and where we can find a first-class established management team and basically, make an organic step into a market, but with a management team. That’s a unique opportunity. Breland is clearly best of class in this part of the world. We are really enthusiastic about the operators, as well as the assets and think that we have a unique opportunity with that one. Those will be few and far between, because we’re so focused on the quality, not just of the assets, but the people, as we step into new and unique markets. And Rick, do you want to add to that?

Rick Beckwitt — Co-Chief Executive Officer and Co-President

Yes. I think Stuart is exactly right. We’re laser-focused on quality and professionalism, and that’s exactly what the Breland opportunity brought to us. They’re a great company. They are laser-focused on product that is simple to build. And one of the better parts of that opportunity was having the opportunity to create a land relationship on a go-forward basis with Louis Breland, who is an expert in finding land, entitling land, and it’s just a continuation of our land strategies, business where we have that done, not on our balance sheet, but off balance sheet and controlling that pipeline. So it’s very consistent with what our focus is.

Alan Ratner — Zelman & Associates — Analyst

Got it. And I appreciate that. And Stuart, just to clarify, I wasn’t referring to capitulation on the demand side, more just the frustrations with the supply chain and how difficult that is for smaller builders in today’s environment?

Stuart Miller — Executive Chairman

So I appreciate that, Alan. I don’t think we’ve seen that yet, but earlier, the question was asked about picking up market share. This is kind of one of those markets where it kind of seems inevitable. Size and scale is working to our benefit in reconciling the supply chain. It’s getting frustrating out there. We’ll see what happens. We’re not going to be engaging a lot of M&A as we grow our business at the large-scale side, but as we enter new markets, certainly on the table.

Alan Ratner — Zelman & Associates — Analyst

Great. All right, guys, thanks a lot.

Stuart Miller — Executive Chairman

All right. Very good. Thank you, everyone, for joining today, and we look forward to reporting back with our second quarter. Have a nice day.

Operator

[Operator Closing Remarks]