Millrose Properties, Inc. (MRP) Q2 2026 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for joining us and welcome to the Milrose Properties Second Quarter Earnings Call. After today's prepared remarks, we will host a Q&A session. Please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Jesse Ross, Millrose's Head of Financial Planning and Analysis. Jesse, please go ahead.

Good morning. Thank you for joining us to discuss Millrose Properties second quarter 26 results. Joining me on the call today are Darren L. Richman, our Chief Executive Officer and President Robert Nitkin, our chief operating officer Garett Rosenblum, our Chief Financial Officer and Steven Hensley, our senior market risk analyst. Before we begin, I would like to remind everyone that today's discussion may include forward looking statements and references to non-GAAP financial. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For a more complete discussion of these factors, as well as reconciliations of non GAAP measures please refer to our earnings release and investor presentation both of which are available on our Investor Relations website. With that, I will turn the call over to Darren.

Thank you, Jesse. Good morning, everyone. Millrose delivered another strong quarter. We grew invested capital boosted recurring AFFO, deepened builder relationships, and expanded the range of solutions our permanent capital platform provides. Demand for what we do has never been higher, even as builders continue to navigate a fourth consecutive year of mortgage rates above 6% elevated incentives, and a full year 2026 delivery guidance moving lower across the largest public builders. In this environment, as we said before, builders are 4 competing objectives simultaneously. Maintaining sales pace through pricing and incentive strategies, protecting profitability in a more competitive selling environment, preserving and growing their future community count, and limiting capital tied up in long duration land ownership. Those priorities have made capital efficiency a necessity and our permanent capital platform was created to respond to that very need. Homebuilders cannot simply stop their production activity because near demand moderates. The communities that they expect to deliver in 2028 and 2029 require land acquisition and development decisions today. The Millrose platform allows builders to continue investing for long term growth while preserving balance sheet flexibility, and improving capital efficiency. We believe this is more than a cyclical to today's market. It reflects a structural evolution in how builders think about capital allocation. That evolution is playing out visibly across the sector. With public builders, owned and controlled lot positions trending low for 4 consecutive quarters. Builders are not chasing land at any cost. They are rightsizing land inventory to match demand and are now more regularly outsourcing ownership to third party capital providers like ourselves. Turning to our second quarter results, our invested capital reached $8.8 billion at quarter end. Importantly, we recycled $1 billion during the quarter, capital returned from builder takedowns and development loan repayments, and redeployed it into $1.1 billion of new opportunities at underwriting standards that have not moved. That velocity of deployment held to a consistent underwriting bar is what a mature permanent capital platform is designed to produce. There were no option terminations across the platform this quarter. And in fact 0 option terminations since the inception of Millrose's platform. Every counterparty has honored every option contract as scheduled. Against a backdrop where several public builders have continued to record walk away charges, on parcels they chose to abandon the durability of our portfolio reflects both the quality of our underwriting and the strength of our builder relationships. We now serve 18 third-party counterparties including several of the nation's largest homebuilders, with 32% of invested capital deployed outside of our founding Lennar master program agreement. We added 2 new counterparty relationships this quarter, Among them is a new land banking relationship with JPI. A wholly owned subsidiary of Sumitomo Forestry. It represents our first expansion into multifamily assets. This is a meaningful new use case for the platform and opens additional runway across the residential housing ecosystem. Beyond expanding our counterparty set, we are also finding new ways to deploy capital across the platform. In May, we announced our intent to provide land banking capital and support of DreamFinders Homes. Proposed acquisition of Beazer Homes. While there is currently no agreement in place between those 2 parties, we believe the announcement illustrates a broader strategic role Milrose is beginning to play. Not just supporting organic growth at our counterparties, but facilitating capital efficient consolidation across the industry. With M&A activity accelerating across the homebuilding we expect further opportunities to demonstrate that capability. AFFO for the quarter was $127 million or $0.77 per diluted share. Driven by higher recurring option fee income and growing invested capital base. That figure absorbed a first day of quarter early repayment of $284 million of development loans. Which Garett will unpack in more detail. Our run rate AFFO exiting the quarter was $0.80 per share, at the high end of our previously provided exit run rate guidance. At the same time, we continue looking to improve our business internally. Our technology platform and operating infrastructure have matured, and we have turned increasing attention to how our business operates at every level. We are focused on making sure every dollar of capital is working as hard as possible. And we expect that focus to show up in our results over time. We maintain a strong capital position with $1.4 billion of available liquidity and a conservative balance sheet Finally, we declared our 6th consecutive quarterly dividend increase raising the dividend to $0.77 per share. The dividend is fully supported by recurring AFFO and represents an annualized yield of 8.8% on book equity. We believe the consistency of our dividend growth reflects the durability of our earnings model and our confidence in the platform's long term trajectory. With that, I will turn the call over to Robert for an operational update.

Thank you, Darren. Our platform had another strong quarter across capital deployment, portfolio management, and capital recycling. We remain focused on deploying capital into high quality opportunities while maintaining the underwriting discipline that defines our business and on making the platform more productive as it scales. We ended the quarter with approximately 144 thousand homesites across 877 communities in 30 states, serving 19 counterparties after adding 2 new relationships during the quarter, As Darren mentioned, we are excited about a new land banking relationship with JPI, a wholly owned subsidiary of Sumitomo Forestry, which represents another expansion of the use cases for the Milrose platform across the residential housing ecosystem. The continued diversification of the portfolio beyond our foundational Lennar agreement reflects the growing adoption of our permanent capital solution across the home building industry. Our counterparties continued to perform. And we again saw no option terminations across the portfolio amidst approximately $1 billion of net repayment proceeds in the quarter. While it is easy to make broad statements about the national housing market, our continued strong performance is a reminder that housing is highly local and property-specific. Housing profitability can vary widely by location, product type, and land basis. that is why our data driven systematic approach to underwriting is so crucial. As you will hear further from Steven Hensley, we track home sales in real time and benchmark against proprietary lot pricing datasets. Adjusting for specific submarkets and lot sizes, That quantitative discipline is what underpins the durability of the portfolio and our confidence in it. Capital recycling was again a defining feature of the quarter. Roughly $1 billion came back to us from takedowns and development loan repayment. We redeployed all of it and more into $1.1 billion of new deals with a modest revolver draw funding the difference. Operational execution remains 1 of our key differentiators. The combination of our technology platform, experienced team, and processes let us evaluate a high volume of opportunities efficiently and proactively manage risk across a geographically diverse portfolio. As we scale, we keep sharpening those processes to drive further efficiency. Ultimately, stronger returns for our shareholders. That scale continues to strengthen our competitive position. Managing a portfolio of this size requires sophisticated systems, deep market knowledge, and operating infrastructure built over many years. Capabilities that become increasingly valuable as builders seek experience, institutional capital partners. That same scale and infrastructure also position us to support capital-efficient M&A across the industry. As Darren noted, the potential opportunity with DreamFinders Homes is 1 example of how our platform can help facilitate strategic transactions. With industry consolidation accelerating, we are optimistic about further opportunities to demonstrate that capability going forward. Turning to portfolio composition, The Lennar Master Program agreement continues to provide a stable foundation, representing 68% of invested capital. The remaining 32% is deployed through our other agreements which remain the primary driver of growth and diversification across counterparties and geographies. These other agreements generated a weighted average yield of 10.6% during the quarter, In today's market, we have prioritized higher quality opportunities stronger builders, less development complexity, and a greater margin of safety. A mix shift towards lower risk assets strengthens the durability of our recurring income. These option rates are generally floating and subject to contractual floors, which protect the yield on our invested capital if benchmark rates decline, while remaining poised to benefit in the event that benchmark yields increase going forward. Looking ahead, our priorities are unchanged. Disciplined capital deployment prudent portfolio management, and expanding relationships with high quality counterparties We continue to explore additional applications for the platform that meet our criteria for AFFO accretion. Our pipeline is active, our opportunity set continues to grow, and we remain as focused on how the business operates as we are on the capital we deploy. With that, I will turn the call over to Stephen, who will provide you an update on the housing market and why our constructive stance has not changed.

Thanks, Robert, and good morning, everyone. I will start with a brief operational and macro update on the housing industry followed by our view on the industry and how we are navigating current market conditions. Builders continue to exercise disciplined cost control and spec inventory management in a challenging market. Incentives, while still elevated, appear to be trending in the right direction. Cycle times have also broadly recovered from the post COVID supply chain disruptions. We view these as constructive developments for the industry. As they indicate builders are iterating their operating models in real time. Leaner spec inventory and improved cycle times are giving builders more flexibility to match starts with demand as it materializes. Rather than being forced to discount aged completed homes, a dynamic that is supporting margins even without a meaningful improvement in top line demand. We also see a very disciplined land market. With public builders owned and controlled lot positions trending lower for 4 consecutive quarters. This is a meaningful positive. Rather than chasing land at any cost to defend volume, builders are rightsizing land inventory to match current demand. Just as notably, underwriting hurdles have not budged even as builders continue to transact. Over the past 4 quarters, new Milrose transactions have carried an average underwritten gross margin of 21%. A standard that is held consistent across every price point. The steadiness of that underwriting bar even amid a softer demand backdrop is a clear sign that builders are prioritizing return discipline over growth for growth's sake. The inventory picture across the industry is constructive. With existing home inventory stabilizing and new-home standing inventory declining. Existing home supply, in particular, has stabilized meaningfully from a year ago. When it was growing rapidly, especially in Florida and Texas. The simultaneous growth of existing and new inventory placed considerable pressure on the industry in the second half of 25. But much of that pressure has since subsided. This combination is constructive for the industry because it removes a key source of competitive pressure builders were facing on 2 fronts at once. Growing resale competition and a new home market carrying its own elevated standing inventory. With existing home supply no longer expanding rapidly, new-home standing inventory working lower, builders face less competing supply and fewer completed unsold homes of their own. Supporting a more stable footing than the environment that prevailed a year ago. Consumer confidence and affordability constraints remain the primary factor shaping the industry conditions with mortgage rates fluctuating meaningfully through the quarter. Affordability is frequently cited as the defining headwind and at a headline level, that framing is fair. But treated as 1 uniform constraint it obscures how bifurcated the market actually is. Demand strength varies enormously by submarket, by price point, and by product type. Often meaningfully within the same MSA. The right question is not whether affordability is a headwind, It is. But where within that headwind a specific asset can still perform. We believe what ultimately matters is the ability to curate product that finds willing buyers, That starts well before the home is ever built. With the right land in the right location at the right basis, and extends through creating the right product for that specific submarket whether that is age targeted communities or homes engineered around the optimized cost structure. When those elements come together, demand follows. Even in a market where affordability is a headline concern. The demographics reinforce this. Today's buyers skew older and carry more accumulated wealth and several powerful economic trends continue to support the balance sheet of The US consumer. The ongoing transfer of wealth from the baby boomer generation historically high employment, steady wage growth, and strong asset and equity performance. These are durable tailwinds concentrated among precisely the buyers driving today's transactions. This is why we underwrite deal by deal rather than to a market average. A generalized read on affordability would tell you to be cautious everywhere. Our approach with vast proprietary datasets and an unmatched land pricing dataset tells us where demand is real, where land basis and product line up and where a specific asset can outperform regardless of the broader narrative. Our scale of approximately 877 communities across 30 states serving 19 counterparty relationships gives us a unique advantage of being able to underwrite diligently at a local level. That discipline and insight is what lets us navigate a bifurcated market with confidence. I will now pass the call off to Garett to discuss our financial performance.

Thank you, Steven, and good morning, everyone. Our second quarter results reflect what happens when permanent capital meets disciplined underwriting. Every dollar we deploy translates directly into recurring income for our shareholders. For the second quarter, we reported net income of approximately $125.9 million or $0.76 per diluted share driven primarily by $195.4 million in recurring option fee income generated from our growing invested capital base together with $1.5 million in development loan income. As we have discussed previously, adjusted funds from operations or AFFO remains the best measure of the recurring earnings power of our business. AFFO for the quarter was approximately $127.6 million or $0.77 per diluted share, reflecting continued growth in recurring option fee income on a higher average invested capital base. On the first day of the quarter, $284 million of development loans were repaid early. We redeployed that capital during the quarter into new opportunities at our current underwriting standards. Because the repayment occurred at the start of the quarter, reported AFFO reflects a partial period of reinvestment. Our run rate AFFO exiting the quarter was $0.80 per share at the high end of our exit run rate AFFO guidance range and a better representation of the platform's underlying earnings power of the fully redeployed base. Book value per share was $35.24 quarter end. Management fee expense totaled $29.9 million calculated transparently at 1.25% of gross tangible assets. Interest expense was approximately $40 million and income tax expense was approximately $2.5 million. During the quarter, we declared our 6th consecutive quarterly dividend raising the quarterly dividend to $0.77 per share or approximately $127.9 million in the aggregate. The dividend continues to be fully supported by our recurring earnings and reflects our confidence in the long term cash generating ability of the platform. On the balance sheet, we ended the quarter with approximately $9.7 billion of total assets and $8.8 billion of invested capital. Our debt to capitalization ratio remained 30% and we are in the process of finalizing a deal with our lending partners to reduce the borrowing rate on our revolving credit facility by 25 basis points in exchange for a fee. We ended the quarter with approximately $485 million outstanding under our revolving credit facility, $34 million of cash, and approximately $1.4 billion of available liquidity providing ample financial flexibility to support our active deployment pipeline. With that, I will turn the call back to Darren.

Thanks, Garett. Before we open the line up for questions, I would like to leave you with a few closing thoughts. This quarter reinforced what the numbers have shown every quarter since inception, Demand for our permanent capital solution remains robust. Our partnerships are durable. Our underwriting capability is differentiated by proprietary technology and in institutional scale, the platform keeps growing. Those fundamentals continue to position us well regardless of where we are in the housing cycle. We are deeply engaged with our homebuilder counterparties. The quarter continued to demonstrate that there are ways to deploy our platform creatively in response to builder needs while generating returns that meet our standards. We expect to continue finding those opportunities and fulfill an expanding role as a strategic capital partner to homebuilders. Before I close, a word on the broader picture. The United States remains structurally short several million housing units. And the process of moving raw land through zoning in entitlement, and development approvals has never been more difficult or more time consuming. That scarcity is not cyclical. It is a durable secular tailwind. It supports the underlying value of the land that Millrose already owns all of which benefits from all necessary entitlements and discretionary approvals. It is 1 of the most important and most underappreciated features of this platform. Those secular tailwinds are offset in the near term by cyclical headwinds. Elevated mortgage rates and what is broadly labeled affordability. As Steven mentioned, affordability is a composite statistic that obscures the ways the market is actually adjusting. Buyers are getting older, Homes are getting smaller. And a substantial wealth transfer from older to younger generations is quietly supporting demand at the point of sale. It is unquestionably a tough market, particularly at the first time buyer segment. But the builders are meeting it with the ingenuity and age old tools including rate buy downs, product mix shifts, community level incentives, and floor plans that are right sized, for current market conditions. Looking ahead, we remain focused on disciplined capital deployment deepening our counterparty relationships, and expanding the ways this platform serves the residential housing ecosystem. Our pipeline is active, Our opportunity set continues to grow, and our underwriting standards remain unchanged. I would like to thank our builder partners for their continued trust, and our shareholders for their continued support. We have built something that did not exist before, and we are just getting started. We appreciate your interest in Millrose, and look forward to updating you on our progress next quarter. With that operator, please open the line for questions.

We will now begin the Q&A session. If you would like to ask a question, please press 1. To raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please standby while we compile the Q and A roster. Your first question from the line of Julien Blouin with Goldman Sachs. Julien. your line is open. Please go ahead.

Yes. Thank you for taking my question. I just wanted to check, generally, how should we think about the yields on the multifamily land banking deals Are they sort of similar to the non Lennar activity? And then do you foresee sort of similar additional structures with other developers going forward Yeah.

Sure. it is Robert. Thank you for the question, Julien. and good morning, everyone. So to your first question, yes, the yields of that multifamily product are totally consistent with, you know, the rest of our other agreements, you know, land banking deals outside the Lennar master program agreement. So certainly accretive to our yield. And as we said, something that we are really excited about to use a very similar structure and economics of our just bread and butter land banking product to another certainly very large portion of the homebuilding market. And then, you know, in terms of going forward, yeah, I think we are certainly looking forward to, you know, potentially do more of that and anywhere that we can get the yields and the earnings, you know, that is that is accretive to our AFFO and help provide capital efficiency for residential developers, we will we will we will certainly evaluate that, you within the constraints of all of our risk evaluations and underwriting.

Yeah. I would I would add, Julien. This is Darren. Look. it is incumbent upon us to continue to disrupt ourselves, disrupt the market, and develop new use cases for land banking. It all starts with making sure we are protecting capital and we have additional, you know, margin of safety in everything we do. So making sure we are we are at first, protecting capital, and then getting the returns that, we and our investors have come to expect But I would think in the next months and quarters, we will continue to push out and find, new structures and new use cases. To deepen our relationships with our existing partners as well as to find ways of targeting a new class of partner.

Got it. Thank you. And then I was wondering, are you sort of setting aside deployment capacity for the proposed DreamFinders-Beazer deal Or put another way, if sort of another opportunity came your way, would you be willing to sort of pivot to supporting that deal and sort of taking your leverage to, you know, the 33% or slightly above that sort of limit you have set Yeah.

it is a good question. And quite candidly, it is something that we, as a management team, continue to think through. What is an appropriate leverage target. We are we are not changing anything today on this call. But we put the leverage target in place, it was very much into the unknown. We did not know what the how the portfolio would behave We did not know how our systems would function relative to the behavior of the portfolio. And we did not know how the non Lennar, you know, third party deals would come together and what the duration of those deals would look like. And if you go into the prepared materials, the slides that we prepared, you will see on page 9 that the average duration associated with the non-Lennar deals is certainly lower than the Lennar deals. And we have not had 1 builder walk away or threaten to do so we have a lot more comfort in the consistency We have always had comfort, but we have a lot more comfort in the consistency of the timing of the cash flows So we are we are definitely thinking through what is an appropriate target. We always thought about leverage in terms of downside protection and making sure we can inoculate our debt in the ordinary course regardless of the market conditions, and that has not changed. You know? We wanna make sure that we never put ourselves in a position where we are destabilizing our asset base because of leverage. But in view of kind of some of those facts that I just spoke about, we are thinking through, you know, what is an appropriate leverage target in the ordinary course, we certainly feel more comfortable, which we have talked about, in the context of M&A taking our leverage target beyond the 33% because a lot of the land that we have acquired in Rausch Coleman and in Lansea was much more developed quick turning, So we know that if we pause our purchases, we will be able to generate cash rather quickly.

To pay down debt, To answer your specific question about where we kinda husbanding cash you know, reserving cash to make it available That certainly is part of our priority of capital deployment. And so we are definitely thinking through an eye towards capital deployment for the entire year. And what we have seen in other M&A, the timing is not is not certain. Over any month. But over the year, we have a high degree of predictability. I know, Rob, if there is anything you would add.

No. I think just reiterating that, you know, we have we had a billion dollars in net takedown proceeds you know, including the development loan repayment this month. We have had, you know, similar sort of substantial takedown proceeds, you know, as we have talked about in the past, as you can see in the materials. Since the founding of the company. I think we have seen a as Darren alluded to, generally faster turning, more mature, faster velocity cash generation across the portfolio, again, with no option terminations, then we initially thought we might encounter before the company existed. And so that is gonna inform the way we think about capital planning, and leverage going forward.

Okay. Great. Thank you so much.

Your next question from the line of Eric Wolfe with Citi. Eric, your line is open. Please go ahead.

Hey, thanks and good morning. I guess to follow-up on the multifamily, I guess, is there a certain LTV that you are underwriting to? I am just curious, you mentioned the structure a couple of times being similar. So I was curious about the LTV that you are underwriting to in general. Whether the structure will have deposits, term fees, cross-collateralization with similar to what you had in the homebuilding space because, obviously, you know, you look at some of your peers in the REIT space, the apartment REITs, they have had this preferred and mezz lending business and have had to take back a good number of assets over the last couple of years. So just trying to understand how you are going to structure the security enhancement, the risk mitigation, and how you are thinking about the risk here. Versus the homebuilding side.

Yeah. Sure, Eric. it is Robert. Happy to answer. So it is you know, it is focused on the land and the horizontal improvements. Right? So it is almost identical in structure to the rest of our, you know, land banking agreements. it is just obviously a different product with effectively rather than, you know, individual home sites. it is obviously single property. More in structure, think of it as like our Yardley business, you know, with Taylor Morrison We described in the past, single tax lot, Ultimately, where, you know, it includes, you know, many of the features you mentioned just as all of our land bank contracts do, deposits, you know, a fixed option rate on the investment balance work exactly the same way. And, ultimately, you know, just like in our single family, you know, bread and butter home building business, we are evaluating what the ultimate value of the community is, making sure there is enough, you know, development margin for the counterparty in that transaction such that they are financially incentivized. To, you know, take down the land once it is fully developed from us. And if for whatever reason they do not, we make sure that net of the deposit we hold from the counterparty, you know, we feel really good about our net land basis that we would own it free and clear in that scenario. So it is a great relationship. it is a great organization. We have a huge amount of respect, and I really enjoyed working with the JPI team and we are looking forward to a lot of a lot of good things there. But, yeah, totally consistent structure with the rest of our business.

But Eric, it is Darren. This is not maybe to your question, this is not a 1-size-fits-all. It all starts with the land. It starts with the basis relative to the selling price of the units. it is, part of our due diligence is, like, plan b, c, and d. What would we do with the with the land if we were to take it back? Who else could we bring in to transition that land to bring it to its-- you know, the-- You know, about the leverage levels, You know, I think we have talked in the past about potentially getting Today than we did at the time that we were spun out. And so we wanna make sure that we are being very thoughtful just like we are in terms of, like, debottlenecking some of the some of the systems and processes inside of the company we are thinking about, making sure that we are being as optimal we are optimizing our leverage profile relative to the performance of the portfolio. So to answer your question, investment grade is important to us. It is a priority. Among, a number of priorities. We are not going to do anything to jeopardize kind of the posture of the portfolio. We have no we have no announcements to make today. Push us outside of that 33% debt cap. We are just you know, being as transparent as, we have been in the past in terms of relooking at our portfolio and rethinking our leverage target in view of the actual operating history we have had, And, again, this operating history, the recent has occurred, as Steven talked about, against the backdrop for the last 2 years. Of an uncertain and volatile housing market. So we have gotten a chance to see how the portfolio behaves at a time when the markets have dealt us you know, a number the sector a number of headwinds. So we have we have been able to watch this portfolio behave under scrutiny. Got it.

Thanks for the detail.

Your next question from the line of Craig Kucera with B. Riley Securities. Craig? Line is open. Please go ahead.

Yeah. Hey, good morning, guys. I think the last few quarters you thought you might deploy a net $2 billion of capital by year end. Can you give us some insight into your pipeline and what you think you will deploy? Or is it too difficult at this point?

Yeah. Sure. Well, maybe just to reiterate, the way we framed it is we sorta had 2 different scenarios we talked through in terms of our guidance. 1 was $1 billion of net increase, you know, assuming we did not raise equity, you know, given the leverage constraint. That we set for ourselves. And then $2 billion you know, is sort of the natural pipeline and what it would result in. You know, if we could. So if we were unconstrained if we were unconstrained exactly by capital. But, you know, while on the 1 hand, we know we lived in a in a finance finite capital world, although we are thinking through that know, particularly from a leverage perspective as Darren alluded to. Nothing's changed about our expectations for the pipeline. You know, we certainly have some potential lumpy M&A opportunities that we are optimistic about. it is unclear if those are going to happen. But generally speaking, pipeline is still strong. We are see just seeing as much demand, you know, as ever. From builders who need to maintain even in this environment, a good multiyear land control pipeline and plan for years out, they are looking for a capital efficiency in doing so. And more and more see the value of a large institutional diversified public and transparent platform to be their partner. So nothing's changed about, you know, the general view of the pipeline. it is just, you know, we continue to evaluate all the opportunities we are seeing. In the context of, in the context of our capital plan that we are thinking through.

Yeah. And maybe that to just fill out what Robert said, there is there is more demand for capital than there is capital available. So it allows us to be thoughtful and patient in deploying those dollars But we are sort of on pace organically relative to the expectations that we set I think, you know, we were just talking about this as a management team. Organically, we are probably putting plus or minus $400 million to work per quarter. With M&A, that number is probably closer to $500 million. And M&A has become part of our roster and of our backlog. So there is nothing that stops us from achieving that $2 billion target. Again, unconstrained by capital that we talked about, It really is just make it is it is it is making sure that we are not over levering our balance sheet and we are not gonna do anything dilutive as we have talked about from a capital from an equity capital raise perspective.

Okay. that is helpful. I found the JPI opportunity to be very interesting. I mean, the addressable market in multifamily development is very large. Do you see expansion into the sector as a core strategy going forward? Or was this more of a 1 off?

Think we are being opportunistic. You know? I would hesitate to call it a core strategy at this point. I mean, we are continuing to be focused on being a holistic solution to homebuilders and the capital efficient solution to homebuilders. What we are, you know, students and the hands of the single family residential for sale market right now. But you know, we would be remiss if we did not think about entire residential opportunity as a way to use the structure we have created and the benefits we have created. You know, we really like this particular partner. We like the specific deal that we were able, you know, to come to with them and found a lot of benefit in it. it is highly accretive to us. Our earnings. And also presents a really good risk weighted return. We feel really good about the strength of their balance sheet certainly. Their financial backing, and their development aptitude. So I would say at this point, we are being optimistic. We are certainly spending more time thinking about that large addressable market. But I would not think of it as a wholesale strategy change in any way just yet.

Yeah. We are seeing 1 last point, we are seeing across the board and this is in our land banking business. As much as across the entire spectrum is there is more of a need for capital today with the banks pulling back and receding from the sector. And so it gives us a lot more opportunity to create structures that are downside protected and produce the returns that we are looking for. And I believe we are going to continue. I mean, I am very optimistic about the what is ahead of us in terms of expanding our product set to deepen our relationships with our homebuilder counterparts, and to make sure we are adding value where, there is opportunity and using our footprint and our relationships to the benefit of our shareholders. So I think there is absolutely an expansion of our product suite And, you know, we are in the lab tinkering today and, hopefully, we will have more to say over the next months and quarters. As to filling out a product suite that is complementary to our existing business and also deepens our relationship with our home builder counterparts.

Got it. And does that contemplation of a new suite of products, does that include anything outside of residential, you know, perhaps to other types of commercial developments such as retail or industrial?

No. I think it is it is all very much within the residential real estate market. This was this was created as a permanent capital vehicle for the benefit of the residential, mostly single family, but, you know, there is an opportunity multifamily now. But it really is meant to be an extension of the markets and the customers that we are doing business with every day.

Okay. Great. Just 1 more for me, for Garett. I think your income tax expense was down this quarter. Think it is about 2% of pretax. I think the last year or so, it is been closer to 4% or 5% How should we think about that going forward?

Going forward, I would say, as far as that is gonna be more normalized run rate, it was basically changes in allocation of taxable income It was based on updated market assumptions and third party analysis. When we say, like, debottlenecking and optimizing, you know, it includes every aspect of our business, taxes, cash management, You know, we are now, in the process of refining all our processes, our systems, every element that sits on our balance sheet, making sure that our cash is working for us. As productively and optimally as possible. And taking a look at our tax reserve policy was certainly included in that.

Okay. Thanks. that is it for me.

Your next question from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead.

Thanks. Good morning, everyone, and thanks for taking my questions. The first 1's on the other agreement yield, and it sounded like the tick down to 10.6% from 10.7% in the quarter was a mix shift to higher quality opportunities. I just wanted confirm that was the case and then if we should expect any further mix shift ahead in Q3 and Q4.

Yeah. that is right. And I would not you know, I would not draw any trends from that. there is always going to be a little bit of volatility as the mix changes around in the portfolio. You know? 10 basis points 1 way or the other. So I would not extrapolate the trend, but, yeah, you have it, Ryan.

Okay. Great. And then I know it is just been a month or a month and a week at this point, but has the move up in rates in July shifted builder demand for land banking or how you are thinking about underwriting new opportunities given we are, you know, at kind of a 6, 7, 5 plus 30 year fixed?

Yeah. This is Darren. We, I spoke about this on the last call. But the and we spoke about it in our prepared remarks. The move in rates which is having an impact on affordability, is really having an impact at the first time segment of the market. This is where there is probably the most competition going on And what is kind of paradoxically happening is that as there is more and more volatility in rates and it is impacting prices and demand We are seeing more and more builders, not in the last 5 weeks, but I would say on a macro basis, deciding to use off balance sheet financing rather than pulling this land under their balance sheet at such an uncertain time that it is causing them to wanna tie down land they do not wanna make decisions today that are gonna impact their community count 3 to 5 years from now. And so the only way to really bridge that divide of near term volatility and not wanting to lose ground 3 to 5 years from now is by using more and more off balance sheet third party solutions. So there is nothing to speak to in the last 5 weeks that has changed behavior. Our own baseline view is that rates are gonna be elevated and that, you know, that is the-- watch me be wrong. But our own view, at least you know, in terms of planning for our business is that rates will be, elevated for the, you know, for the in the into the distant future.

I do not know if-- Steven, if there is anything you would add Yeah. I would just add that, you know, obviously, rates are have been a bit volatile lately, but you know, that really only impacts a certain segment of the buyer profile and the consumer that is out there. There is still a vast, you know, buyer set that is less impacted by some of the volatility and the affordability constraints that the rates are causing, which, you know, we sort of alluded to in the prepared remarks. So you know, I think it is important to understand that there is, you know, different segments to the consumer out there today, and we are seeing builders, you know, adjust in real time to try to make-- try to, you know, target those buyers a little bit more and be a little bit more flexible on the entry level side. So know, they are always iterating, and I do not think that is gonna change much of in the short term. They are still, you know, some pretty, you know, strong demographic tailwinds and other things that we alluded to in the remarks that support the general demand for housing across the board.

Okay. Got it. And I think that probably answers my next question that I am going to ask anyways, is I thought the underwritten gross margin of 21% that you mentioned in the prepared remarks was really interesting since it is above where most of the builders have reported so far. And I am wondering if you can expand on how they are achieving that 21% underwritten gross margin given I would assume they are underwriting flat incentives. Is that is that a function of value engineering in the vertical construction? Or are land values trending down? We have think we have heard from most of the builders that land valuation has been pretty stable. So just, yeah, just expanding on how we are getting to a 21% gross margin would be really helpful.

Yeah. Steven, actually, why do not you start, and I will finish.

Sure. Yeah. I mean, I think it is you know, it really has been a number of different factors that are playing into that. First being the lower cost structure that builders have been able to realize, especially with our you know, strong counterparties. They are you know, they have got the scale. They are they are larger builders that can, you know, demand a little bit better cost structure. So we are underwriting to that. Know, another thing too is we have seen, you know, some modest improvements in incentive levels over know, the past 12 months or so, which is benefiting that margin as well. And then you know, we have also seen a little bit of a mix shift in our underwriting and new transactions where we have got you know, nearly 50% of the new transactions that we have had were located in the Southeast. You know, think North Carolina, Georgia, Tennessee, you know, and those in those regions, you know, home values have held up better. Demand has held up better. And you know, builders are able to underwrite a little bit more well there than other parts of the country just given the know, current market conditions in that region.

And I will Darren, I do not know if you had anything else to add on that. Yeah. I mean, our we have been underwriting to this margin profile for as long as Millrose has been public. And certainly longer for Kennedy Lewis. So this margin profile is something that we, we prioritize. So this is not new and this seems no home price appreciation This is this is kind of flat The status quo, the existing environment in each of the markets that we that where we own land. So we wanted to make sure we were giving transparency into our underwrite, into the quality of the portfolio, into the margin profile, And homebuilders themselves are reworking their own business lines to debottleneck to bring cost down, And there is it is probably on the margin to margins, where land values are correcting, and the builders can take advantage of that. But mostly, it is they are taking advantage of cost deflation in other parts of their business.

Okay. Great. Thanks very much.

Your final from the line of Eric Wolfe with Citi. Eric, your line is open. Please go ahead.

Hey, thanks for taking the follow ups. So I understood JPI on that front. Guess, are you considering, you know, sort of condo projects as well with other partners? I kinda remember I thought you were maybe doing 1 right now. But my-- I guess my overall question is it sounds like the multifamily piece right now is being structured similar in the sense that it is all land and horizontal construction cost, so perhaps differs a bit from how you are approaching BTR. But would you also consider, you know, financing the vertical construction on the multifamily side as well?

Yeah. Sure. Hey, Eric. Well, we certainly considered it. And if you remember as we talked through in the past, you know, our Yardley transaction with Taylor Morrison, and that does include the vertical. So to the extent the builder views it as accretive, we are we are happy to evaluate that and do that But yeah, on JPI, it is multifamily. We have you know, certainly spent a lot of time on the horizontal cost structure that is slightly unique to a, you know, single tax parcel multifamily property. But, also, you gotta remember, it has the benefit that rather than relying on, you know, on a second order, an ultimate home buyer to come and buy it, you know, we ultimately look to balance sheet of a really financially strong counterparty for the take down to buy that lot back from us and develop. So there is puts and takes either way. But we are definitely open to any way that we can get our capital to work again accretively for us, whether that is vertically or just horizontally, as JPI is, only horizontal. But first goal is, protecting capital, make sure that we are protected from the downside, but within those constraints, maximize our yield and our accretion.

Got it. And then last question. I guess, is there a potential to sort of sell off pieces of these option agreements, I guess, potentially lower yields to enhance the yield on what you are retaining? Or would that not sort of work under your structure or make it sort of overly complicated? Just wondering if that could be a sort of source of capital as you expand to other partners.

I do not know exactly what you are referring to, but if you are saying, like, to sell off first loss pieces or to lever it, we are not gonna do it on a 1 off basis. The leverage profile is really gonna come from our balance sheet. There may be opportunity to optimize our balance sheet in the future, but for right now, it we are just we are just using our revolver and the and the notes that we have raised. To provide that leverage profile.

Got it. Yeah. No. Makes sense. That was my question. Was there, like, sell first loss or some other piece that you felt was sort of mispriced in the market. But that makes sense. Thank you.

Thank you, Eric. We have 1 final question from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead.

Hey. Thanks for taking my follow-up, guys. I wanted to ask 1 on terminations, and it is been great to see that there have been no terminations to date and not a surprise either given the structural and operational features that you put in place to minimize the risk of terminations, but and, you know, also builders have been telling us that finished lot supply is still pretty tight. But I am just wondering if you could give us some insight into, your contingency planning or how you would address a termination if we do start to see some in the event that the market gets worse from here.

Yeah. I mean, it is probably a really good reminder to everybody on this call that because it has not happened does not mean it will not happen. And we certainly think through as I was saying, in the context of JPI, but certainly for our more traditional business, you know, what is plan b, c, and d? If we do get terminations? And it all starts with regardless of the credit enhancements that may or may not exist, it all starts with the land itself. It starts with the underwriting. It starts with our 45 person team who is in the underwriting and the asset management part of the group. It starts with Steven Hensley, making sure that we have a full appraisal of the community that we are, considering buying into. And, again, we are using all of our real time indicators. So the nearly 300 thousand home sites that we own as a company as Kennedy Lewis, not just Millrose, is giving us real time information in terms of sales, pace, pricing, margin, We are underwriting to a 20-plus percent gross margin, which we talked about And our we benefit from a deposit Historically, that deposit was closer to 20% to 25%. Today, in our portfolio, it is closer to 10%. And, really, the difference is just credit enhancement. We are we are sort of agnostic as to if it is gonna be a big deposit or people wanna pull. It really depends upon how they do they wanna sit with idle cash or not? And so we have already thought through as part maybe to get to your direct answer, who builds adjacent, Who else could we bring in? If it is a midsized builder that walks away, almost unquestionably a bigger builder, can build at a margin profile to make land work that maybe a midsized builder could not make work? So we are we are constantly thinking about what is our contingency plan, including today, there is a whole world of BTR and scattered site rental. And all of which was carved out of the most recent regulation. So we feel very good about the quality of our portfolio. We feel very good about the base We feel good about the backdrop of how hard it to get land approved for development. We have actively picked where our land is located, what communities we wanna be invested in, at what margin profile. And who else we could bring in to the extent a builder did walk away for whatever reason that we could make that land work either with them on a modified schedule or with somebody else who comes in and merchant builds.

Great. Thanks so much. Appreciate it.

There are no further questions at this time. I will now turn the call back to Darren L. Richman, CEO and president, for closing remarks.

Yeah. I wanna thank everybody for their participation today. I will acknowledge that this call is probably the longest 1 we have had, which I think is great. It underscores the interest in our business. And the nuances associated with the business. We are happy to provide as much information as people like on this call. Or feel free to get to any 1 of us after We look forward to speaking with you inter quarter and in the next quarter conference call. So thank you.

This concludes today's call. Thank you for attending. You may now disconnect.