Where are land prices headed? Millrose Properties Q2 2026 Earnings Call

THE SELF STORAGE REPORT — EARNINGS CALL TRANSCRIPT Company / Call: Millrose Properties, Inc. (NYSE: MRP) — Second Quarter 2026 Earnings Call Participants: Darren Richman — Chief Executive Officer and President; Robert Nitkin — Chief Operating Officer; Garett Rosenblum — Chief Financial Officer; Steven Hensley — Senior Market Risk Analyst; Jesse Ross — Head of Financial Planning and Analysis Analysts: Julien Blouin — Goldman Sachs; Eric Wolfe — Citi; Craig Kucera — Lucid Capital Markets; Ryan Gilbert — BTIG Recorded: 2026 Video: https://www.youtube.com/watch?v=DwlDNszRTc8 Key topics: Land prices and a disciplined land market, with public builders' owned and controlled lot positions trending lower for 4 consecutive quarters; builders right-sizing land inventory rather than chasing land at any cost; 21% average underwritten gross margin held across every price point over the past 4 quarters; $8.8 billion of invested capital and $9.7 billion of total assets; approximately $1 billion recycled and $1.1 billion redeployed in the quarter; zero option terminations since inception; 143,771 home sites across 877 communities in 30 states; the JPI / Sumitomo Forestry multifamily land banking first; land banking capital offered in support of Dream Finders Homes' proposed acquisition of Beazer Homes; 10.6% weighted average yield on non-Lennar agreements versus 10.7% prior; AFFO of $127.6 million or 77 cents per diluted share with an approximately 80 cents per share exit run rate; 33% debt cap under review and book value per share of $35.24; the structural US housing shortage and the difficulty of zoning and entitlement as a durable secular tailwind supporting land value. Note: Speaker attribution reconstructed from an unlabelled source transcript. Light cleanup of transcription errors only; wording preserved. Spelled-out figures converted to numerals. Turns marked [attribution inferred] could not be attributed with certainty. ————————————————————————————— Jesse Ross: Joining me on the call today are Darren 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'd like to remind everyone that today's discussion may include forward looking statements and references to non-GAAP financial measures. 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'll turn the call over to Darren. Darren Richman: Thank you, Jesse, and 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 balancing 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-term 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 response to today's market. It reflects a structural evolution and 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 right-sizing 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 approximately $8.8 billion at quarter end. Importantly, we recycled approximately $1 billion during the quarter, capital returned from builder takedowns and development loan repayments, and redeployed it into approximately $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, zero 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 approximately 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, which represents our first expansion into multifamily assets. This is a meaningful new use case for the platform and it 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 in support of Dream Finders Homes' proposed acquisition of Beazer Homes. While there is currently no agreement in place between those two parties, we believe the announcement illustrates a broader strategic role Millrose 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 home building sector, we expect further opportunities to demonstrate that capability. AFFO for the quarter was $127.6 million, or 77 cents per diluted share, driven by higher recurring option fee income on a growing invested capital base. That figure absorbed a first day of quarter early repayment of approximately $284 million of development loans, which Garett will unpack in more detail. Our run rate AFFO exiting the quarter was approximately 80 cents per share, at the high end of our previously provided exit run rate guidance. At the same time, we continue looking for opportunities 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 foundation with approximately $1.4 billion of available liquidity and a conservative balance sheet. Finally, we declared our sixth consecutive quarterly dividend increase, raising the dividend to 77 cents per share. The dividend is fully supported by recurring AFFO and represents an annualized yield of approximately 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'll turn the call over to Rob for an operational update. Robert Nitkin: 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 143,771 home sites across 877 communities in 30 states, serving 19 counterparties after adding 2 new relationships during the quarter. As Darren mentioned, we're 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 Millrose platform across the residential housing ecosystem. The continued diversification of the portfolio beyond our foundational Lennar relationship 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's 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's why our data-driven, systematic approach to underwriting is so crucial. As you'll hear further from Steven Hensley, we track home sales in real time and benchmark against proprietary lot pricing data sets, adjusting for specific sub markets 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 approximately $1.1 billion of new deals with a modest revolver draw funding the difference. Operational execution remains one of our key differentiators. The combination of our technology platform, experienced team and discipline 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 and 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 experienced 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 Dream Finders Homes is one example of how our platform can help facilitate strategic transactions. And with industry consolidation accelerating, we're 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 approximately 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 approximately 10.6% during the quarter. In today's market, we've prioritized higher quality opportunities, stronger builders, less development complexity, and a greater margin of safety. A mixed 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. Discipline 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'll turn the call over to Steven, who will provide you an update in the housing market and why our constructive stance has not changed. Steven Hensley: Thanks Rob, and good morning everyone. I'll 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 right-sizing 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 Millrose transactions have carried an average underwritten gross margin of approximately 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 plays considerable pressure on the industry in the second half of 2025, 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 two 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 and 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 factors shaping 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 one uniform constraint, it obscures how bifurcated the market actually is. Demand strength varies enormously by sub-market, 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 sub-market, whether that's age-targeted communities or homes engineered around an 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 data sets and an unmatched land pricing data set 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'll now pass the call off to Garett to discuss our financial performance. Garett Rosenblum: 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 76 cents 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've 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 77 cents per diluted share, reflecting continued growth and recurring option fee income on a higher average invested capital base. On the first day of the quarter, approximately $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 approximately 80 cents 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 a quarter and management fee expense total $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 sixth consecutive quarterly dividend increase, raising the quarterly dividend to 77 cents 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 approximately $8.8 billion of invested capital. Our debt to capitalization ratio remained approximately 30%, and we are in the process of finalizing a deal with our lending partners to reduce the borrowing rate on a 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'll turn the call back to Darren. Darren Richman: Thanks, Garett. Before we open the line up for questions, I'd 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 institutional scale, and 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 home builder 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 home builders. 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 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 one 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 great buy downs, product makeshifts, community level incentives and floor plans that are right sized for current market conditions. Looking ahead, we remain focused on discipline, 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'd 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. Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 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 stand by while we compile the Q&A roster. Your first question from the line of Julien Blouin with Goldman Sachs. Julien, your line is open. Please go ahead. Julien Blouin: Yeah, 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? Robert Nitkin: Yeah, sure, it's Rob. 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 of our master program agreement. So certainly accretive to our yield and, as we said, something we're really excited about, to use a very similar structure and economics of our just bread and butter land banking product to another, uh, certainly a very large portion of the home building market. And then in terms of going forward, yeah, I think we're certainly looking forward to potentially do more of that, and anywhere that we can get the yield and the earnings that's accretive to our AFFO and help provide capital efficiency for residential developers, we'll certainly evaluate that within the constraints of all of our risk evaluations and underwriting. Darren Richman: Yeah, I'd add, Julien, this is Darren. Look, it's 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're protecting capital and we have additional margin of safety in everything we do. So making sure we're 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'll 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. Julien Blouin: Got it. Thank you. I was wondering, are you sort of setting aside deployment capacity for the proposed Dream Finders 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've set? Darren Richman: Yeah, it's a good question, and quite candidly, it's something that we as a management team continue to think through. What is an appropriate leverage target? We're not changing anything today on this call, but when we put the leverage target in place, it was very much into the unknown. We didn't know how the portfolio would behave. We didn't know how our systems would function relative to the behavior of the portfolio. And we didn't know how the non-Lennar 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'll see on page 9 that the average duration associated with the non-Lennar deals is certainly lower than the Lennar deals. And we haven't had one builder walk away or threaten to do so. So we have a lot more comfort in the consistency. We've always had comfort, but we have a lot more comfort in the consistency of the timing of the cash flows. So 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 hasn't changed. We want to make sure that we never put ourselves in a position where we're destabilizing our asset base because of leverage. But in view of some of those facts that I just spoke about, we are thinking through what is an appropriate leverage target in the ordinary course. We certainly feel more comfortable, which we've talked about, in the context of M&A, taking our leverage target beyond the 33%, because a lot of the land that we've acquired in Rausch Coleman and in Landsea was much more developed, quick turning. So we know that if we pause our purchases, we'll be able to generate cash rather quickly to pay down debt. To answer your specific question about where we kind of husbanding cash, you know, reserving cash to make it available, that certainly is part of our priority of capital deployment. And so we're definitely thinking through an eye towards capital deployment for the entire year. And what we've seen in other M&A, the timing isn't certain over any month. But over the year, we have a high degree of predictability. I don't know, Rob, if there's anything to add. Robert Nitkin: No, I think just reiterating that we've had $1 billion in net takedown proceeds, including the development loan repayment this month. We've had similar sort of substantial takedown proceeds, as we've talked about in the past, as you can see in the materials since the founding of the company. I think we've seen, as Darren alluded to, generally faster turning, more mature, faster velocity of cash generation across the portfolio, again, with no option terminations, than we initially thought we might encounter before the company existed. And so that's going to inform the way we think about capital planning and leverage going forward. Julien Blouin: Okay, great. Thank you so much. Operator: Your next question from the line of Eric Wolfe with Citigroup. Eric, your line is open. Please go ahead. Eric Wolfe: Hey, thanks, and good morning. I guess to follow up on the multifamily, I guess is there a certain LTV that you're underwriting to? I'm just curious. You mentioned the structure a couple times being similar, so I was curious about the LTV that you're underwriting to in general and whether the structure will have deposits, term fees, cross pooling, sort of similar things to what you had in the home building space, because obviously, you know, you look at some of your peers in the REIT space, the apartment REITs, they've 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're going to structure the security enhancement, the risk mitigation, and how you're thinking about the risk here versus the home building side. Robert Nitkin: Yeah, sure, Eric. It's Rob. Happy to answer. It is, you know, it's focused on the land and the horizontal improvements, right? So it is almost identical in structure to the rest of our land banking agreements. It's just obviously a different product with effectively rather than individual home sites. It's obviously single property, more in structure. Think of it as like our Yardley business with Taylor Morrison. We described the past single tax lot ultimately where it includes many of the features you mentioned, just as all of our land bank contracts do. Deposits, a fixed option rate on the investment balance works exactly the same way. And ultimately, you know, just like in our single family, you know, bread and butter home building business, we're 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's fully developed from us. And if for whatever reason they don't, we make sure that net of the deposit we hold from, uh, 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's a great relationship. It's a great organization. We have a huge amount of respect and have really enjoyed working with the JPI team. Uh, and we're looking forward to a lot of, a lot of good things there, but yeah, totally consistent in structure with the rest of our business. Darren Richman: Eric, it's Darren. This isn't, um, maybe, maybe to your question, this isn't a one size fits all. It all starts with the land. It starts with the basis relative to the selling price of the units. It's part of our due diligence is like Plan B, C and D. What would we do 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 intent? You know, the project, bring it to its intended use. So we're going to be very, very selective as to what projects we consider in multifamily, um, for many of the reasons that at least the thrust of your question would suggest makes sense. Eric Wolfe: And they're all for sale, not rental, or would you consider rental as well? Darren Richman: No, they are rental. Um, that's JPI's. They are rental. [attribution inferred] Eric Wolfe: Okay. Okay. Um, and then if you look at the 80 cents I think you're guiding to for quarterly AFFO run rate, can you just talk about sort of what that implies in terms of average invested capital, weighted average yield, and sort of where that brings your leverage, especially since I think you kind of made some comments before about a maybe temporary willingness to go above that 33% leverage level? Robert Nitkin: Yeah, the way to think about that is that's just the math. The yield we're at today and our portfolio on the last day of the quarter, on June 30th, if the portfolio just behaved exactly with those investment balances at those yields and that same cost of debt, annualized, that's, you know, that's what we're going forward, you know, that that's what we're communicating, sort of the quarter end run rate. And so ultimately what that's really showing you is that the difference between the natural kind of linear ramp of the portfolio over the quarter, particularly with a little noise from that early, um, development loan repayment, gives you sense of where we are today. Uh, and so it doesn't take into account any, um, information or expectation about the third quarter so far or any changes. [attribution inferred] Eric Wolfe: Got it. And then I guess this last question, you know, about the leverage levels, you know, I think we've talked in the past about potentially getting investment grade rating. I guess, have you received any guidance from the ratings agencies in terms of what do they want to see, whether it's sort of leverage levels or other, you know, things that they're looking at that determine whether investment grade rating is appropriate? And as you think through like the benefit of having an investment grade rating, is it sort of worth it in terms of the reduced debt spread? Or do you think it actually is probably better just to have a little bit of a higher spread and have that flexibility to be able to lever up a bit? Darren Richman: Yeah, it's a really good question. The investment grade rating is important to us. Uh, it is among our priorities. We think the business itself, uh, and the consistency of the business justifies it. We're not here to front run the agencies and in terms of what their own opinions are and where they ultimately get to, but I do think as we continue to operate the business, uh, in the way we've operated it, with the consistency that the business has shown, with the debt levels that we're discussing, it certainly puts us in a very good position to argue for investment grade. Having said that, as we said, making sure we have ample financial flexibility to operate the business. We ourselves are learning how the portfolio behaves. We now have 5 full quarters of watching the portfolio come together, in terms of the existing Lennar land and how it's performed, as well as building out our counterparty relationships organically in the ordinary course and then through M&A. And so we have more insight today than we did at the time that we were spun out. And so we want to make sure that we're being very thoughtful, just like we are in terms of like de-bottlenecking some of the systems and processes inside of the company. We're thinking about, um, making sure that we're being as optimal, we're optimizing our leverage profile relative to the performance of the portfolio. So to answer the question, investment grade is important to us. It is a priority among a number of priorities. We're not going to do anything to jeopardize kind of the posture of the portfolio. We have no announcements to make today to push us outside of that 33% debt cap. We're just 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've had. And again, this operating history, though recent, has occurred, as Steven talked about, against a backdrop for the last 2 years of an uncertain and volatile housing market. So we've gotten a chance to see how the portfolio behaves at a time when the markets have dealt us, the sector, a number of headwinds. So we've been able to watch this portfolio behave under scrutiny. Eric Wolfe: Thanks for the detail. Operator: Your next question from the line of Craig Kucera with Lucid. Craig, your line is open. Please go ahead. Craig Kucera: 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? Robert Nitkin: Yeah, sure. Well, maybe just to reiterate, the way we framed it is we sort of had two different scenarios we talked through in terms of our guidance. One was $1 billion of net increase, assuming we didn't raise equity, given the leverage constraints that we set for ourselves. And then $2 billion was sort of the natural pipeline and what it would result in if we could. If we were unconstrained. If we were unconstrained, exactly, by capital. But while on the one hand, we know we lived in a finite capital world, although thinking through that particular leverage perspective, as Darren alluded to, nothing's changed better expectations for the pipeline. Um, you know, we certainly have some potential lumpy M&A opportunities that we're optimistic about. It's unclear if those are going to happen, but generally speaking, pipeline is still strong. We're just seeing as much demand, you know, as ever from builders who need to maintain, even this environment, a good multi-year land control pipeline and plan for years out, and they're 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 the general view of the pipeline. It's just we continue to evaluate all the opportunities we're seeing in the context of our capital plan that we're thinking through. Darren Richman: Yeah, and maybe to just fill out what Rob said, there's 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're 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's nothing that stops us from achieving that $2 billion target. Again, unconstrained by capital that we talked about. It really is just making sure that we are not over levering our balance sheet. And we're not going to do anything dilutive, as we've talked about, from an equity capital raise perspective. Craig Kucera: Okay, that's helpful. I found the JPI opportunity to be very interesting. I mean, the addressable market and multifamily development is very large. Do you see expansion into the sector as a core strategy going forward, or was this more of a one-off? Robert Nitkin: I think we're being opportunistic. You know, I would hesitate to call it a core strategy at this point. I mean, we're continuing to be focused on being a holistic solution to home builders and the capital efficiency solution to home builders. What we are, you know, students and the hands of the single family residential for sale market right now, but we would be remiss if we didn't think about the entire residential opportunity as a way to use the structure we've created and the benefits we've created. We really like this particular partner. We like the specific deal that we were able to come to with them, and they found a lot of benefit in it. It's highly accretive to us and 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're being optimistic. We're certainly spending more time thinking about that large addressable market. But I wouldn't think of it as a wholesale strategy change in any way just yet. [attribution inferred] Darren Richman: Yeah, we're seeing, one last point, we're 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 this sector, and so it gives us a lot more opportunity to create structures that are downside protected and produce the returns that we're looking for. And I believe we're going to continue. I mean, I'm very optimistic about what's ahead of us in terms of expanding our product set to deepen our relationships with our homebuilder counterparts and to make sure we're adding value where there is opportunity and using our footprint and our relationships to the benefit of our shareholders. So I think there's absolutely an expansion of our product suite and we're in the lab tinkering today and hopefully we'll have more to say over the next months and quarters as to filling out a product suite that is complimentary to our existing business and also deepens our relationship with our home builder counterparts. Craig Kucera: Got it. Does that contemplation of a new suite of products, does that include anything outside of residential, you know, perhaps other types of commercial development, such as retail or industrial? Darren Richman: No, I think it's all very much within the residential real estate market. If 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're doing business with every day. [attribution inferred] Craig Kucera: Okay, great. Just one more for me, for Garett. I think your income tax expense was down this quarter. I think it was about 2% of pre-tax. I think the last year or so, it's been closer to 4% or 5%. How should we think about that going forward? Garett Rosenblum: Going forward, I would say, as far as that's going to be the more normalized run rate, it was basically changes in allocation of taxable income. It was based on updated market assumptions and third-party analysis. Darren Richman: Yeah, when we say like de-bottlenecking 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. Craig Kucera: Okay. I think that's it for me. Operator: Your next question from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead. Ryan Gilbert: Thanks. Good morning, everyone, and thanks for taking my questions. The first one'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 to confirm that that was the case. And then if we should expect any further mix shift ahead in 3Q and 4Q. Robert Nitkin: Yeah, that's right. And I would not, you know, I wouldn't draw any trends from that. You know, there's always going to be a little bit of volatility as the mix changes around in the portfolio, um, you know, 10 basis points one way or the other. Um, so I wouldn't extrapolate the trend, but yeah, you have it correct. [attribution inferred] Ryan Gilbert: Okay, great. And then I know it's just been, uh, 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're thinking about underwriting new opportunities, given we're, you know, at kind of a 6.75% plus 30-year fixed? Darren Richman: 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's probably the most competition going on. And what is kind of paradoxically happening is that as there's more and more volatility in rates and it's impacting prices and demand, we're seeing more and more builders, not in the last 5 weeks, but I'd say on a macro basis, deciding to use off-balance sheet financing rather than pulling this land onto their balance sheet at such an uncertain time that it's causing them to want to tie down land because they don't want to make decisions today that are going to 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's nothing to speak to in the last 5 weeks that has changed behavior. Our own baseline view is that rates are going to be elevated and that, you know, that that is watch will be wrong, but our own view, at least, you know, in terms of planning for our business, is that rates will be elevated for these, you know, for that into the distant future. I don't know, Steven, if there's anything you'd add. Steven Hensley: Yeah, I would just add that, you know, obviously rates have been a bit volatile lately, but, you know, that really only impacts a certain segment of the buyer profile and the consumer that's 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's important to understand that there's, you know, different segments to the consumer out there today. And we're 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 more flexible on the entry level side. So you know they're always iterating and I don't think that that's going to change much in the short term. There's 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. Ryan Gilbert: Okay, got it. And I think that probably answers my next question, but I'm going to ask anyways, which is, I thought the underwritten gross margin that you mentioned in the prepared remarks was really interesting since it's above where most of the builders have reported so far. And I'm wondering if you can expand on how they're achieving that underwritten gross margin. I would assume they're underwriting flat incentives. Is that a function of value engineering and the vertical construction, or are land values trending down? I think we've heard from most of the builders that land valuation has been pretty stable. So, yeah, just expanding on how we're getting to a 21% gross margin would be really helpful. Darren Richman: Yeah, Steven, actually, why don't you start and I'll finish. Steven Hensley: Sure. Yeah. I mean, I think it's, 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're, you know, they've got the scale, they're larger builders that can, you know, demand a little bit better cost structure. So we're underwriting to that. You know, another thing too, is we've seen, you know, some modest improvements in incentive levels over, you know, the past 12 months or so, which is benefiting that margin as well. And then, you know, we've also seen a little bit of a mixed shift in our underwriting and new transactions where we've got, you know, nearly 50% of the new transactions that we've had were located in the southeast. You know, think North Carolina, Georgia, Tennessee, you know, and 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, um, well there than other parts of the country just given the, you know, current market conditions in that region. Well, Darren, I don't know if you had anything else to add on that. Darren Richman: Yeah, I mean, um, we've been underwriting to this margin profile, uh, for as long as Millrose has been public, and certainly longer for Kennedy Lewis. So this margin profile is something that we prioritize. So this isn't new, and this assumes no home price appreciation. This is kind of flat, the status quo, the existing environment in each of the markets 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 the home builders themselves are reworking their own business lines to de-bottleneck, to bring costs down. And it's probably on the margin of margins where land values are correcting and the builders can take advantage of that, but mostly it's they're taking advantage of cost, um, deflation, uh, in other parts of their business. Ryan Gilbert: Okay, great. Thanks very much. Operator: Your final question from the line of Eric Wolfe with Citigroup. Eric, your line is open. Please go ahead. Eric Wolfe: Hey, thanks for taking the follow-ups. Um, so understood JPI all rental. Um, I guess, are you considering, you know, sort of condo projects as well with other partners? I kind of remember I thought you were maybe doing one right now, but I guess my overall question is, it sounds like the multifamily piece right now is being structured similar in the sense that it's all land and horizontal construction costs, so perhaps differs a bit from how you're approaching BTR, but would you also consider, you know, financing the vertical construction on the multifamily side as well? Robert Nitkin: Yeah, sure, Eric. Well, we've 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 uses accretive, we're happy to evaluate that and do that. But yeah, on JPI, it is multifamily. We, you know, certainly spend a lot of time on the horizontal cost structure that's slightly unique to a, you know, single tax parcel multifamily property. But also, you've got to remember, it has the benefit that rather than relying on a second order, an ultimate home buyer to come and buy it, we ultimately look to the balance sheet of a really financially strong counterparty for the takedown to buy that lot back from us and develop. So there's puts and takes either way. But we're definitely open to any way that we can get our capital to work, again, accretively for us, whether that's vertically or just horizontally, as JPI is only horizontal. First goal is protect the capital, make sure that we're protected from a downside, but within those constraints, maximize our yield and our accretion. Eric Wolfe: And then last question, I guess, is there a potential to sort of sell off pieces of these option agreements, I guess, potentially, you know, lower yields to enhance the yield on what you're retaining, or 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? Darren Richman: I don't know exactly what you're referring to, but if you're saying like to sell off first loss pieces or an elaborate, we're not going to do it on a one-off basis. The leverage profile is really going to come from our balance sheet. There may be opportunity to optimize our balance sheet in the future, but for right now, we're just using our revolver and the notes that we've raised to provide that leverage profile. [attribution inferred] Eric Wolfe: Yeah, that makes sense. That was my question. It was really like sell first loss or some other piece that you felt was sort of mispriced in the market, but that makes sense. Thank you. Operator: Thank you, Eric. We have one final question from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead. Ryan Gilbert: Hey, thanks for taking my follow-up, guys. I wanted to ask one on terminations, and it's 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've 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'm 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. Darren Richman: Yeah. I mean, it's probably a really good reminder to everybody on this call that because it hasn't happened doesn't mean it won't 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're considering buying into. And again, we're using all of our real time indicators. So the nearly 300,000 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're underwriting to a 20 plus percent gross margin, which we talked about. And we benefit from a deposit. Historically, that deposit was closer to 20% to 25%. Today in our portfolio, it's closer to 10%. And really, the difference is it's just credit enhancement. We're sort of agnostic as to if it's going to be a big deposit or people want to pull. It really depends upon how they do, they want to sit with idle cash or not. And so we've already thought through as part, maybe to get to your direct answer, who builds adjacent? Who else could we bring in? If it's a mid-sized builder that walks away, almost unquestionably a bigger builder can build at a margin profile to make land work that maybe a mid-sized builder couldn't make work. So we're constantly thinking about what is our contingency plan, including today there's a whole world of BTR and scattered site rental, and all of which was carved out of the most recent regulation. We feel very good about the quality of our portfolio. We feel very good about the basis. We feel good about the backdrop of how hard it is to get land approved for development. We've actively picked where our land is located, what communities we want to 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. Ryan Gilbert: Great. Thanks so much. Appreciate it. Operator: There are no further questions at this time. I will now turn the call back to Darren Richman, CEO and President, for closing remarks. Darren Richman: Yeah, I want to thank everybody for their participation today. I'll acknowledge that this call is probably the longest one we've had, which I think is great. It underscores the interest in our business and the nuances associated with the business. We're happy to provide as much information as people like on this call or feel free to get to any one of us after. We look forward to speaking with you inter-quarter and in the next conference call. So thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect. — END OF TRANSCRIPT —