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 will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you and good morning, everyone. 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 our earnings 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.

Thank you, and good morning, everybody. And thank you for joining today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; Bruce Gross is here, our CEO of Lennar Financial Services; and we have a few others as well. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon's going to give an operational overview updating construction costs, cycle time, and some other operating overview. As usual, Diane is going to give a detailed financial highlight along with some limited guidance for our third quarter and full-year 2024. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask that you please limit yourself to one question and one follow-up so that we can accommodate as many as possible. But before I begin, however, I would like to express on behalf of all of the associates of Lennar the sadness we all feel for the recent loss of another pioneer of our industry, Don Horton. While we homebuilders compete, sometimes aggressively, in the field and across geographies, it is always with humble admiration and respect for our competitors. We learn from each other. We have reverence for all of their accomplishments. We learn from their successes and sometimes their failures and we are pushed to be our very best by their comparative accomplishments. This business is not easy. And those who succeed over years are to be admired. Don was a tremendous success among homebuilders. And his success spanned decades. He climbed from humble beginnings to the greatest heights within our industry. To the associates of D.R. Horton, as well as to Don Horton's family,…

Good morning. As you heard from Stuart, our operational teams at Lennar continue to refine and improve upon the execution of our core operating strategies. Each quarter, our divisions further refined elements of these strategies and how they can more effectively work in concert. We are laser focused on creating an even flow production first homebuilder designed to deliver maximum results. As part of this process, Stuart, myself and our Regional Presidents travel to our divisions meeting with their management teams after the close of each quarter to review each of the elements of our operating strategy. In fact, we're in the middle of these reviews right now, taking today off of course to address our earnings, but back at it tomorrow. In these meetings, we learn together what is working and what needs improvement. With the end goal in mind of even flow production, we have built a strong sense of confidence in the liability and results driven by selling the right homes at the right price. Every day our divisions learn from their engagement within our machine constantly adjusting and trying new tactics. The machine produces information in the form of dashboards for analysis and decision making. There is a continuous feedback loop as leads move from the top of the funnel, through the funnel and ultimately to a sale. This review enables lower customer acquisition costs while also improving the customer experience. Again, this quarter our operating results produced starts that were evenly matched with sales and are projected to be evenly matched again in the third quarter. We will continue to refine this process of matching sales and production pace production, which provides maximum benefit to our supply chain and our trade partners. Last quarter, I described to you how our divisions hold machine learning meetings…

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our home building performance. So, therefore, I'm going to spend a few minutes on the results of our financial services operations, summarize our balance sheet highlights, and then provide estimates for Tier 3. So, starting with financial services, for the second quarter, our financial services team had operating earnings of $146 million. The strong earnings were primarily driven by an increase in homebuilding volume and a higher capture rate. Additionally, there is a constant drumbeat to embrace technology to continue to find ways to run a more efficient business. Our financial services team is intensely dedicated to providing a great customer experience for each home buyer and has created true partnerships with our homebuilding teams to best accomplish that goal. That partnership is clearly reflected in their solid results. So, now turning to our balance sheet, this quarter, once again, we were steadfast in our determination to turn our inventory and generate cash by maintaining production and pricing homes to market with the goal of delivering as many homes as possible to meet housing demand. The results of these actions were that we ended the quarter with $3.6 billion of cash and no borrowings on our $2.2 billion revolving credit facility. This provided total liquidity of $5.8 billion. As a result of our continued focus on balance sheet efficiency and reducing our capital investments, we once again made significant progress on our goal of becoming land light. At quarter-end, as Jon indicated, our years owned improved to 1.2 years from 1.7 years in the prior year, and our homesites controlled increased to 79% from 70% in the prior year, our lowest years owned and highest controlled percentage in our history. At quarter-end,…

Thank you. We will now begin the question-and-answer session of today's conference call. [Operator Instructions] Our first question comes from Stephen Kim from Evercore ISI. Please go ahead.

Thanks very much, guys. Appreciate all the color and solid results in the quarter. Wanted to first start with the land asset structures that you're envisioning, particularly the spin, I know you said that there's going to be more information provided at a later date. But that you did offer up that it would have about $6 billion to $8 billion of land. That's higher than, I think, that you previously envisioned. I think you said it would have no debt; the team would be led by Fred Rothman. And so, just taking some of those, I'm curious what additional land assets are now being included versus what you previously thought? When you say the spin will have no debt, do you mean on a standalone basis it will operate with no debt? And if so, are you going to feed the entity with cash, do you think? And then, lastly, is the entity going to be staffed by current Lennar employees or primarily industry external personnel?

So, that's a bundle of questions in one question, Steve. We see you. So, as noted, we're fairly limited in what we can talk about. Just for clarification, it's being spun with no debt. We do have land assets on our books, and have continued to, as we have evolved our thinking and structuring of the spun entity, as I noted, we had stood up a [straw-man] (ph) with a $4 billion number. As we refined our thinking, we've just included more of the assets that we have. Giving more detail than that would be outside of the boundaries. What I noted about Fred is that he has been leading the effort to build the filings that were filed with the SEC. And we haven't gone beyond that to talk about the population of the spun asset. That is something that we'll discuss at some future date. It was more to highlight that we have a dedicated team that is very focused on the execution of the program that we are putting forth, and there will be more detail as we report in future.

Okay, so I guess we're going to -- that's fine, I guess we're just going to have to wait for more info. That's fine.

That's correct.

The second question I have relates to your gross margin. I think you alluded to the curiosity that people have about the guide seeming to imply something around 25% or something in 4Q. I'm hoping you can talk about what gives you confidence that the 4Q gross margin will rise? And in particular, I know that you have talked about your even-flow production schedule perhaps affecting the seasonal cadence of gross margin. So, maybe I can ask the question this way. If, hypothetically, market conditions were to be stable for like a whole year, how much seasonal variance would you generally expect by quarter? Would it be that your fourth quarter would generally have the highest margin with a consistent set of market conditions? And help us think through the quarterly cadence, if you could?

Well, first, let me say that we've been clear that we are migrating to a much more even-flow model, and that would take some of the seasonality out of the margin variance that has been historic and has been seasonal, but some of it. Some of it just tends to ebb and flow, along with market conditions during different seasons of the year. We do understand that margins will be materially higher in the fourth quarter, some of that is seasonal. Some of that has been directional in terms of the work that we've done on building both core plans and reducing our construction costs as we have continued to build volume and continued to consistently address a somewhat volatile market. We have earned not only the respect, but cooperation of our trade partners in understanding that they can depend on production. And we have used that cooperation to be able to build a more efficient program. It takes you time for some rate savings to flow through. We do have visibility as to what those savings are and how they're flowing through. And as I said, some of that includes and in margin is embedded in our backlog. Of course, as the market ebbs and flows, some of it driven by interest rate, some by consumer confidence, we'll have to see how shelves and pricing resolve as we go through the remainder of the year, and we leave that open. And we'll see that together as market conditions present. And Diane, anything you'd like to add to that?

Yes, just the other thing is, as you know, the expense -- field expense, so that in and of itself, generally, if you look back last year, for example, from Q3 to Q4, we had about a 40 basis point benefit just from the field. So, that 40-50 basis points is pretty consistent lift that we get from Q3 to Q4 just from field expenses.

Okay, great, that's helpful. So, just to make sure I understand, if it sounds like that the seasonal aspects, which might be the field expenses, is a fairly minor benefit to your 4Q. And so, it sounds like you're attributing more of the stronger 4Q gross margin to actually your scale advantages that you've been building up. That sounds like something that's more persistent and not necessarily something that is particular to a fourth quarter per se, right? And so this sort of gives us a thought process that your margins are generally improving as you've been improving your scale. And that's the message that we should take back for this 4Q lift in gross margin?

I think that's a good takeaway. And I think that in many ways, this is structural and durable for the future. So, a lot of what we've been doing on the one hand has been muted by the fact that market conditions have moved around quite a bit, as I noted, interest rates moving up through this last quarter tested edges. But on the other hand, the cost savings and the way that we are, number one, configuring production in the field, and number two, re-engineering our product lines to be much more consistent with core products that are repeatable from market to market and across individual markets is creating a durable efficiency that will be with us for years to come. So, yes, I think that this will be sticky and stay with us as we move forward.

Perfect. Thanks so much, guys. Appreciate all the help.

You bet.

Next, we'll go to the line of Carl Reichardt from BTIG. Please go ahead.

Thanks. Good morning, everyone. Thanks for taking my questions. Jon, you mentioned differentiating among markets that pricing power versus the need to increase incentives. Can you talk a bit about what those markets are or were in second quarter? And then in particular, I'm interested in Florida with the existing home inventory higher, some evidence of vacant capacity from the rental market coming back to for sale, second homes. Can you talk maybe specifically about those metros too? Thanks.

Sure, as we saw in most of Florida markets continued strength, particularly from southeast Florida up the eastern coast of Florida. We saw very strong year-over-year growth in our pace, which indicates that the other panes of the market demand are there. I would say we saw more of a return to seasonality in southwest Florida this year. So, she strengthened that market, but definitely saw that occur. Saw real strength up through the Carolinas, Atlanta, and up into the mid-Atlantic. And then, in Texas saw the ability to continue at a pace that the matchup production which is again supported by the underlying demand. And our west, strength was seen in some of the mountain areas in Denver and Salt Lake City and then out in California really led by the affordability and the Empire and just ongoing supply demand and balance in the Bay Area.

Thank you for that, Jon. And then, I have sort of a broader question. As you at Lennar and some others have kind of transitioned away from, I guess, what you could call a land speculation type of business model years ago to more of a vertically integrated manufacturer, retailer, building more spec, pricing more aggressively. Stuart, do you think the consumer is becoming conditioned to expect discounts in the market, especially seasonal ones, the same way we've seen it in other sort of big ticket retail businesses? And I ask in part because pricing and changing in base pricing has been a bit of an issue in this business given that homes are also investments as opposed to simply consumer products and so stability in price is of value to some degree. So, maybe you can talk about how the consumers responding or might respond in the long run if their views are changing on when they buy [technical difficulty] --

There is a supply shortage. But on the other hand, the consumer out of necessity is looking for elements of incentives or discounts to be able to afford, to be able to access the housing stock that they need. I don't think that we can draw long-term conclusions about discounting from this moment in time. And I think it's very differentiated from the broader retail world in that we have a structural and chronic supply shortage. There will be a moment in time where affordability is less challenged. At that moment in time, the supply shortage will be a more dominant theme. And I think you'll more quickly see a snap back to where demand will come to market, outstrip the supply, and some of the discounting, a lot of the discounting will kind of snap back to normal levels. So, I think it would be overly aggressive to try to draw a conclusion just to the way the market will evolve in the future from today's current configuration.

I appreciate your thoughts. Thanks, Stuart. Thanks all.

You bet.

Thank you. Next we'll go to the line of Susan Maklari from Goldman Sachs. Please go ahead.

Thank you. Good morning, everyone. I want to focus a bit on the cash flows and thinking about the capital allocation. You know, Stuart, in the past you've mentioned getting net income and free cash flow closer to being in line together. As you think about a lot of the initiatives that you're putting in place and the progress you're making there, can you talk about how far out you think you are from achieving that and what are the roadblocks that perhaps still exist to getting there?

I'll pass back to Diane for a second. Go ahead.

I'll jump in. I think with each quarter that goes by, we're getting closer to closer and sometimes we exceed. You know, if you look at this quarter, for example, in that area, let's just call it $950 million. And our capital allocation, when you combine the share purchases and the debt paydowns was in excess of that, right, at about $1.1 billion. So, it actually flows a little bit. Sometimes it's a little short, and sometimes it's a little over. But I think the important thing is that as we continue to really focus on being the manufacturer and have even flow really become even more prominent in our business and purchasing on a just-in-time basis, I think you're going to see those two much more consistently aligned.

Okay. That's helpful. And then, as you do think about the business further out and, you know, as I said, the initiatives that you're going through, what is the level of cash balance that you will eventually feel comfortable holding on the balance sheet? How much will you need to sort of maintain the business? And how do you think about the allocation of the amount that comes in above that level?

It's a fair question. It's a good question and I think that we are not quite there in being able to project out exactly how to think about that. As we go through and have gone through some of the reconfigurations, we have been -- I want to say surprised, but surprised is too aggressive a word. To the upside and to the downside as to exactly how cash flows from quarter-to-quarter through the year, and the answer to your question is going to be directly tied to how our cash edge and flows as bricks and bricks flow through the operational manufacturing machine that we have. I think that we are leaving ourselves some latitude to develop some real-time understanding and expertise in how those dollars will flow in and out. And that's why we've been a little stubborn on using our cash a little bit more aggressively, particularly as we craft the spin company, it adds complication to some of these calculations and these structural changes make it a little bit complicated. Diane, do you want to add to that?

Yes, the only other thing I'd say that's really just in support of that is if you look at the statistic that I mentioned, which is when you look at the deliveries this quarter, 60% of the deliveries had homes that were purchased on a finished basis. And so, as I think as we see that migrate higher, that does get us to a more consistent, predictable, and visible cash flow. And then, when we get to that point, I think we can really start to have a conversation about what's that balance because that consistency and visibility has now you know come into more focus.

Yes. Okay. Thank you for those thoughts. I appreciate it. Good luck with everything.

Susan, let me just say one more thing. There's another element and that is appropriate capital for growth. So, it's something, it's another part of the equation. We remain growth minded, as we build structures for the future. So, that's another variable that goes into that question about how much cash do we retain. Just finishing up --

Okay. No, that makes sense. Yes. No, that makes sense, Stuart. Thank you.

Thank you. Next, we'll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.

Hey, guys. Nice quarter and congrats on all the behind the scenes work on pivoting towards just-in-time. I think it's going to be exciting to see it all done in the quarters and years ahead. Stuart, first question, last quarter, you guys kind of referenced a little bit of, I guess a weakening in the overall quality, the credit quality of the consumers you were seeing by the potential buyers in your community is maybe some higher credit card debt, lower credit scores. And I think at the time, you were kind of the first to kind of address that and we've since heard some more anecdotes about that, both from homebuilders as well as other industries. So, just curious my first question, what you are seeing from the consumer today? Are you seeing more kind of yellow flags or red flags unfolding? Or have things been pretty stable since then?

Yes. Thanks, Alan. You're right. We did detail that in the last quarterly call. I felt it was important to put out there at the time. Since that time, it has been much better documented. And so, I think it's fairly well known, but there has been some movement upward in consumer debt, the debt of some of our customers. It has not spiked, shrink spend. It has not changed materially to the negative. But there's no question that given inflation rates and the cost of living expenses, the consumer is definitely feeling a little bit more stressed and we are starting to see a little bit more credit challenge as customers come through, but that's consistent with what we were seeing last quarter. And of course that makes the interest rate movement all the more, it creates more sensitivity. So, as interest rates have started to subside a little bit, it will be interesting to see how that ripples with the current state of the consumer and we're looking forward to addressing market conditions as they present.

Great. I appreciate that update on that and encouraging to hear at least it's not accelerating or the deterioration is not getting worse. Second, I'd love to spend a minute just talking about the SG&A and the corporate expense line because I think that was the one area on the model that maybe was a little bit worse than guided for. And I think in general, it's been trending higher than a year ago. And I know there's a lot that could potentially be driving that. Obviously, broker commissions and things like that could be a function of where demand is. But I know you've got a lot of stuff going on behind the scenes as well with SpinCo and Apartments. And I was hoping you could just spend a minute or two talking about what's going on with the SG&A, where you see that going forward beyond the third quarter and kind of pick apart the pluses and minuses there?

Yes. We probably didn't spend enough time on SG&A. I thought about that as I was writing my remarks. SG&A is not the tight programming that we've had historically, it's simply because we are working on so much and recalibrating the way that the business actually operates. And if you think about the fact that over the past few years, we've probably migrated about $20 billion of land to off balance sheet kind of programming in favor of adjusting time delivery system. And the development of that delivery system in and of itself is a reorganization of the entire platform and comes with some cost ebbs and flows that are flowing through SG&A. And in particular, as we now start building an additional subsidiary kind of program in that regard, meaning the some of a large part of the other land that we own and building this SpinCo, you can imagine that some of the ebbs and flows of SG&A will be altered from its normal course by some kind of anomalous additions that are flowing through. So, Diane, maybe you can give a little bit more color on that.

Yes. I think that's right. I think you've seen the incredible progress and transformation of our balance sheet with regard to the year zone and the percent of land that we control. And so, therefore, there has been more expenses with those transactions to accomplish that greater base. So, I think that's a little more color that corresponds with what Stuart was mentioning. Also, I think additionally, just remember that, and I know everybody's experiencing this, but insurance costs have gone up. So, as we think about our insurance policies and our deductibles and things like that, there's a little bit of that, also incredibly focused on generating non-brokered leads. And so, sometimes depending on market conditions, that requires a little bit more digital marketing and advertising spend. So, those all came together. The one thing I would note though is that the increase was not related to higher broker spend. We've been really focused on keeping that at lower level. So, however the offset to that is perhaps a little bit more digital spend so that you are creating those non-brokered deals.

Yes. Look, I just got to add to this and say that, I think we can't really break it down and compartmentalize the costs that are flowing through. It's a little bit of a jumbled picture. So, if you look at the base operation in every part of our operation from construction costs and all the way through SG&A, we are getting more and more efficient. And as we go through these next quarters, there will be a little bit of cloudiness in some of that. But as we break through to the other side, we think we're building a much better efficiency model that is going to work much better in terms of capital deployment, capital positioning and capital allocation that will work through the long-term benefit of the company.

Yes. I think as I think about it, as we talk about the benefits that the operational benefits from maintaining production in ebb and flow. The same relates to this as we continue to maintain the levels of off balance sheet transactions to generate the cash flow and the returns that it has been. We will also become more efficient with managing those costs.

Understood. I appreciate you running through all of that detail. So, thanks a lot, guys.

You bet.

Next, we'll go to the line of Michael Rehaut from J.P. Morgan. Please go ahead.

Good afternoon. Thanks for taking my questions. Wanted to just circle back to covered a lot of ground and obviously appreciate all the detail, just wanted to circle back if I could try and get a little more clarity on the 4Q gross margins. And appreciate your comments earlier, Diane, around the 40 or 50 bps of kind of operational leverage. Just want to make sure I'm understanding it correctly. I believe earlier, Stuart, you said that it was in part based on backlog, part based on what you expect to do, market conditions, et cetera. On the point of backlog versus market conditions, just kind of curious on if that 25 percentage type gross margin, if that is in fact what you're seeing in a part of your backlog today because obviously part of that backlog would be delivered in the upcoming quarter at 23% gross margins. How much of the 25% is based off of the backlog versus perhaps as rates have come down over the last month, we're also thinking that maybe there's a little less incentives out there today and wondering about current orders, if that's also kind of a better margin today and I don't know if mix is a part of it as well, but just trying to get a little more granular on the drivers of that 4Q improvement versus 3Q?

Good morning, Mike. Thanks for the question. So, this is an imperfect calculation. It is always imperfect to flow through production cost reductions. And so, giving more detail is a little bit complicated. Some of that and some of the higher margins will flow through our third quarter. Some of it will flow through the fourth quarter and some into the next year. It's hard to know exactly where those numbers will flow through. And so, there's not a lot more detail that we can give. It's just that directionally; we understand margin is in part driven by the price that we get for home. It's in part driven by the cost we pay for the building of that home. As we have been focusing on volume at a time where there is variability in the marketplace, we've been able to rethink not only our product lines and our core products, but also the cost structure that we work with our trade partners. And so, it's in part flowing through the revenue side, in part flowing through the cost side of the equation and we're going to see how that evolves as we go through. And while all of that is happening, we are still continuing to sell homes in the current market conditions as it ebbs and flows. So, it's a little hard to put the pieces together, but those are the pieces that we see coming together as we give guidance and as we try to do the best we can to tell you what we see ahead. Of course, the part that is in backlog, we understand components of it, but we're not sure of which homes will close in the third and the fourth quarter and into the first. And as for the homes that we will sell over the next months, we're going to have to wait and see how the market evolves in a volatile market condition as we've been there. I don't know if that's helpful, but I wish I can give it to you in more granular form.

Yes. No, no. Yes.

The first one, I think you alluded to is incentives and as you think about the continual increase for most, in interest rates for most of Q2, of course, that impacts the closings in Q3, and so, if we see some stability, and then we don't have a crystal ball on that, but if we see some stability with rates instead of the increase that we saw last quarter, that will also be helpful to margins. So, what we saw in Q3, of course, we delivered in Q4.

Right. No, no, no. Thank you for that, Diane. Maybe my second question, I just wanted to focus on more maybe kind of month-to-month trends and you kind of alluded to this earlier that earlier in the quarter you were dealing with a little bit of higher rates, perhaps using more incentives. Just wanted to get a sense and then obviously more recently rates coming in a little bit. Just wanted to try to get a sense if possible around how that impacted incentives as a percent of sales throughout the quarter and if there was a high watermark perhaps earlier in the quarter and just trying to get a sense of where you might be relative to that higher watermark, let's say, a couple of months ago in terms of trying to gauge pricing power and level of incentives in the marketplace today versus in rates where 30, 40 bps higher, let's say?

Well, let me start and maybe Diane will give us some additional color. But remember, as I said in my remarks, that when we started the quarter, the rates were at about six and three quarters. As we went through the quarter, it migrated up to about 7.3%. It wasn't really until right at the end of our quarter that interest rates kind of took a sudden turn in the opposite direction. So, that didn't really reflect itself through our quarter, certainly not in any of the deliveries in our quarter. So, what we have found is that the current market condition is pretty sensitive to interest rate movements. And there is a relationship and a very direct one between interest rates migrating higher and the need for higher incentives to offset some of those interest rates, it became a little more difficult as interest rates migrated to the 7.3% kind of range and there were higher incentives that went along with interest rates at that level. And I think that that's something that we can kind of expect is going to continue as rates trend up. There will be a little bit more incentive as rates trend down. It seems that some of the incentives come off. And we'll have to see if that continues to hold up, continues to be the consistent pattern. And order of magnitude, it's an everyday kind of assessment that moves around a little bit. I don't think I can peg for you that 25 basis points in interest rate translate into X number of incentive dollars spent in one area or another. It's very market-by-market, and the consumer base is very different in different markets. Diane, any --

Yes, I think that's right. I think, and to answer your question like so, is we looked at the incentives given in March, April, and May. Each month, those incentives as a percent did increase, which is very consistent with what Stuart said. It really mirrored the direction of interest rates. So, as they've moderated, it would be our hope that the levels that we saw in May would also moderate.

Great. Thanks so much.

Okay. Thanks, Mike. And let's take one more question, please.

And for our final question, we'll go to the line of Kenneth Zener from Seaport Research Partners. Please go ahead.

Hello, everybody. Well, I think we could avoid a lot of the gross margin comments if one Q perhaps is just the bottom in gross margin versus the flat math we're doing. But I want to focus on gross margin seasonality separate from the fixed yield cost, because that's kind of straightforward to model. Now, your incentives in 1Q are like 10.4, great disclosure in your Q. What was it in 2Q versus the kind of 5 to 6 level in '18-'19. And I'm asking because it seems even flow, your model, which helps obviously cost, creates a little incentive seasonality, which I think separate from the macro and the rates, because when you build a house, first-half less sales demand, so it's kind of like selling ice in the winter versus the second-half, I believe, is your thinking based on past trends. And if you can kind of talk about that, at least, I think that's what's missing in the even flow discussion a little bit, if you would. That was my first question.

So, Ken, you were asking specifically about the incentives on deliveries. Is that what you're referring to?

Yes, yes.

So Q1, they were 3.9%. Q2, they were 9.4%. And then, of course, perhaps in seasonality, but I really, as we've been saying, I really think it's more a direct correlation, a more direct correlation to the interest rate environment. I think that perhaps what you're really referring to on a broader base, so as it's trying to punctuate that the gross margin on a go-forwarded basis should be more aligned with the changes that we've been talking about from an operational standpoint. So, the sustainability and the durability of the efficiencies and the cost benefits that we're seeing in margin should be maintained on a quarter-to-quarter basis with a little bit of seasonality mixed in, but you should see a very strong and sustainable gross margin as we become even more proficient with even soil. I think that's what you're probably trying to punctuate, so that sometimes there'll be some fluctuations in margin relative to the environment, but there's a lot of durability and sustainability in what you're seeing.

Good. Second question, I guess, Stuart, this is a little more for you in the sense of your -- it's comparing ROI of your core homebuilding, which you're directionally going towards. Timing is as much tied to unknown things, right? And no need to get into that. But your choice to have so many other assets, which are a third or 40% of your total asset base, how do you think of your ROI goes from 30% down to ROA kind of in the low teens there, but how is multifamily, I know that land will improve your home building returns, but do you really need, like the multifamily? Is technology part of that core homebuilding, in your opinion? I'm just trying to see how philosophically you think about these other assets. I realize we can't address the timing, but that's like the biggest drag merging your ROI and your ROA. And I'm just seeing if we really need these other parts in your longer term philosophy as it's not clear to me yet. Thank you.

Well, again, we are focused on being the greatest homebuilder that we can be and doing our part building a healthier housing market. The multi-family programming that we have in place is really quite adjacent to our core homebuilding business. We basically already build the same product, but the uncore product represents for a for-sale market. Building it for for-rent market is something that we can do at the division level because there is an adjacency to what we already build. And will build it in a third-party platform. So, we don't think that that will be impactful overall in term to ROI or ROA or any of those calculations. In terms of technology, technology is a small component of the overall. It's a very important component of how we are building our business. Every element of our business is being modified, reengineered, rethought in and around technology and the way that we actually -- in the way that we actually operate. From our machine, which we have talked about quite a bit, digital marketing, to dynamic pricing and everything in between that machine has been a game-changer. And the way it has been informed by the technology investments and engagements that we have worked through over these past years. The constant flow of technology, imagination, and innovation through our company is going to keep us modern and relevant as we continue to be a better version of ourselves. So, we will continue to be engaged with technology programming as we go forward. But many of the asset-heavy kinds of investments that has been part of our engagement in the past, those will be recalibrated out of the company and will be focused on things that are direct adjacencies to what we do. And that is to build affordable housing and fill the supply deficit that exists across the country.

Yes, and Kenneth, obviously those are same for having material impact not only to ROI, but ROE. So, we are very focused on that. And just going on to comment on what percentage, I don't know it is of importance to us because the business is adjacent to our core business. But in our call Stuart mentioned that we were doing in a very capital efficient way using third-party capital. So, we feel that it's a complementary business being funded in a very capital efficient way notwithstanding that we are monetizing the frontline assets. And as Stuart mentioned, we are constantly looking at other assets. So, it's an enormous focus on the company and I think that's the improvement on a go-forward basis.

Thank you very much.

So, thank you, Ken, and thank you everyone for joining us today. We look forward to continuing to deliver and provide you further information on our progress as we move forward and build the best version of our company as we go forward. So, thank you for joining. And, we will see you next time.

That concludes today's conference. Thank you all for participating. You may disconnect. And, please enjoy the rest of your day.