Millrose Properties Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2026

Key Takeaways

  • Positive Sentiment: Recurring earnings increased, with second-quarter AFFO of $127.6 million, or $0.77 per diluted share, and exit run-rate AFFO of approximately $0.80 per share. The company also raised its dividend for the sixth consecutive quarter to $0.77 per share.
  • Positive Sentiment: Invested Capital reached approximately $8.8 billion, while about $1 billion of repayments was redeployed into roughly $1.1 billion of new opportunities. Management said underwriting standards remained unchanged and reported no option terminations since the platform’s inception.
  • Positive Sentiment: Millrose continued to diversify beyond its Lennar relationship, with 32% of Invested Capital outside the Lennar Master Program Agreement and a new multifamily land-banking relationship with JPI, a Sumitomo Forestry subsidiary. Management views multifamily and potential industry M&A support as additional growth opportunities, though it described the multifamily expansion as opportunistic rather than a core strategy.
  • Positive Sentiment: The company cited disciplined builder land inventories, improving cycle times, leaner spec inventory, and stable or improving incentives as constructive market trends. Management said recent transactions continued to carry an average underwritten gross margin of approximately 21%, with no assumed home-price appreciation.
  • Negative Sentiment: Elevated mortgage rates, affordability pressures, incentives, and weaker delivery guidance across major public builders remain near-term housing headwinds. Although management is considering whether its leverage target can eventually rise above 33% to support opportunities such as M&A, it made no change to that limit and emphasized that investment-grade credit status and downside protection remain priorities.
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Earnings Conference Call
Millrose Properties Q2 2026
00:00 / 00:00

There are 10 speakers on the call.

Operator

Hello, everyone. Thank you for joining us, welcome to the Millrose Properties second quarter earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Jesse Ross, Millrose's Head of Financial Planning and Analysis. Jesse, please go ahead.

Speaker 1

Good morning, thank you for joining us to discuss Millrose Properties' second quarter 2026 results. 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.

Speaker 2

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 balancing four 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, our permanent capital platform was created to respond to that very need.

Speaker 2

Home builders 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 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 four 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.

Speaker 2

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 platform. Every counterparty has honored every option contract as scheduled. Against a backdrop where several public builders have continued to record walkaway 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.

Speaker 2

We now serve 18 third-party counterparties, including several of the nation's largest home builders, with approximately 32% of Invested Capital deployed outside of our founding Lennar Master Program Agreement. We added two 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.

Speaker 2

While there is currently no agreement in place between those two parties, we believe the announcement illustrates a broader strategic role Millrose Properties 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 $0.77 per diluted share, driven by higher recurring option fee income on 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 $0.80 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.

Speaker 2

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 $0.77 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.

Speaker 2

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 two 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.

Speaker 2

Our counterparties continued to perform. 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 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.

Speaker 2

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 disciplined 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.

Speaker 2

As Darren noted, the potential opportunity with Dream Finders Homes is one example of how our platform can help facilitate strategic transactions. 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 mix shift towards lower risk assets strengthens the durability of our recurring income.

Speaker 2

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'll turn the call over to Steven, who will provide you an update on the housing market and why our constructive stance has not changed.

Speaker 3

Thanks, Rob. 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.

Speaker 3

We also see a very disciplined land market, with public builders' owned and controlled lot positions trending lower for four 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 four 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.

Speaker 3

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 2025. 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.

Speaker 3

Affordability is frequently cited as the defining headwind, and at a headline level, that framing is fair. Treated as one 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. 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'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.

Speaker 3

The demographics reinforce this. Today's buyers skew older and carry more accumulated wealth, several powerful economic trends continue to support the balance sheet of the U.S. 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.

Speaker 3

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.

Speaker 4

Thank you, Steven, 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'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 $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, approximately $284 million of development loans were repaid early.

Speaker 4

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 $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 at quarter end. 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 $0.77 per share, or approximately $127.9 million in the aggregate.

Speaker 4

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.

Speaker 2

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.

Speaker 2

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.

Speaker 2

It is unquestionably a tough market, particularly at the first-time buyer segment. The builders are meeting it with the ingenuity and agile tools, including rate buydowns, 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'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 one to raise your hand. To withdraw your question, press star one 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.

Speaker 5

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? Do you foresee sort of similar additional structures with other developers going forward?

Speaker 2

Sure. It's Rob. Thank you for the question, Julien, and good morning, everyone. To your first question, yes, the yields of that multifamily product are totally consistent with the rest of our other agreements, land banking deals outside of the Lennar Master Program Agreement. Certainly accretive to our yields. As we said, something that we're 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 home building market.

Speaker 6

In terms of going forward, yeah, I think we're certainly looking forward to potentially do more of that. 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.

Speaker 2

Yeah. I'd add, Julien, to 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. Making sure we're at first protecting capital, and then getting the returns that we and our investors have come to expect. 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.

Speaker 5

Got it. Thank you. I was wondering, are you sort of setting aside deployment capacity for the proposed Dream Finders fees or deal? 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 the 33% or slightly above that sort of limit you've set?

Speaker 6

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. 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. If you go into the prepared materials, the slides that we prepared, you'll see on page nine that the average duration associated with the non-Lennar deals is certainly lower than the Lennar deals. We haven't had one builder walk away or threaten to do so.

Speaker 6

We have a lot more comfort in the consistency. We've always had comfort, we have a lot more comfort in the consistency of the timing of the cash flows. 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. That isn'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. In view of kind of some of those facts that I just spoke about, we are thinking through what is an appropriate leverage target, in the ordinary course.

Speaker 6

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 Homes and in Landsea Homes was much more developed, quick turning. 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, reserving cash to make it available, that certainly is part of our priority of capital deployment. We're definitely thinking through an eye towards capital deployment for the entire year. What we've seen in other M&A, the timing isn't certain over any month. Over the year, we have a high degree of predictability. I don't know, Rob, if there's anything you'd add.

Speaker 6

No. I think just reiterating that we had $1 billion in debt takedown proceeds including the development loan repayment this month. We've had similar sort of substantial take down 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 a, 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. That's going to inform the way we think about capital planning and leverage going forward.

Speaker 5

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.

Speaker 7

Hey, thanks, and good morning. I guess to follow up on the multifamily, is there a certain LTV that you're underwriting to? I'm just curious, you mentioned the structure a couple of times being similar. I was curious about the LTV that you're underwriting to in general, and whether the structure will have deposits, term fees, cross-collaterals, sort of similar to what you have in the home building space. Obviously, you look at some of your peers in the REIT space, the apartment REITs, they've had this preferred and In the lending business, and have had to take back a good number of assets over the last couple of years. 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.

Speaker 6

Yeah, sure, Eric. It's Rob. Happy to answer. It's focused on the land and the horizontal improvements, right? 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 Yardly business, with Taylor Morrison, we've described in 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.

Speaker 6

Ultimately, just like in our single family, bread-and-butter home building business, we're evaluating what the ultimate value of the community is, making sure there is enough development margin for the counterparty in that transaction such that they are financially incentivized to take down the land once it's fully developed from us. If for whatever reason they don't, we make sure that net of the deposit we hold from the counterparty, we feel really good about our net land basis that we would own it free and clear in that scenario. 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. We're looking forward to a lot of good things there. Yeah, totally consistent in structure with the rest of our business.

Speaker 6

Eric, it's Darren.

Speaker 6

What's up?

Speaker 6

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. Part of our due diligence is 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 intended use? We're going to be very selective as to what projects we consider in multifamily, for many of the reasons that at least the thrust of your question would suggest.

Speaker 7

Makes sense. They're all for sale, not rental, or would you consider rental as well?

Speaker 6

No, they are rental. That's JPI.

Speaker 7

They are rental. Okay. If you look at the $0.80 I think you're guiding to for quarterly AFFO run rate, can you just talk about what that implies in terms of the average Invested Capital, weighted average yield, and 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?

Speaker 6

Yeah, the way to think about that is that's just the math of if you use 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 what we're going forward. That's what we're communicating sort of the quarter end run rate. 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 development loan repayment, gives you a sense of where we are today. It doesn't take into account any information or expectation about the third quarter so far or any changes.

Speaker 7

Got it. I guess this last question, about the leverage levels. 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 leverage levels or other things that they're looking at that determine whether an investment-grade rating is appropriate? As you think through 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?

Speaker 2

Yeah. It's a really good question. The investment grade rating is important to us. It is among our priorities. We think the business itself, 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. I do think as we continue to operate the business, 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.

Speaker 2

We now have five 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. We have more insight today than we did at the time that we were spun out. We want to make sure that we're being very thoughtful, just like we are in terms of

Speaker 6

de-bottlenecking some of the systems and processes inside of the company. We're thinking about making sure that we're optimizing our leverage profile relative to the performance of the portfolio. To answer your 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 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 re-looking at our portfolio and rethinking our leverage target in view of the actual operating history we've had. Again, this operating history, though recent, has occurred, as Steven talked about, against a backdrop for the last two years of an uncertain and volatile housing market.

Speaker 6

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. We've been able to watch this portfolio behave under scrutiny.

Speaker 7

Got it. Thanks for the detail.

Operator

Your next question from the line of Craig Kucera with Lucid. Craig, your line is open. Please go ahead.

Speaker 8

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?

Speaker 6

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 debt increase assuming we didn't raise equity, given the leverage constraints that we set for ourselves. $2 billion is sort of the natural pipeline and what it would result in if we could.

Speaker 2

If we were unconstrained

Speaker 6

While on the one hand, we know we live in a finite capital world although thinking through that, particularly from a leverage perspective, as Darren alluded to. Nothing's changed about our expectations for the pipeline. We certainly have some potential lumpy M&A opportunities that we're optimistic about. It's unclear if those are going to happen. Generally speaking, pipeline is still strong. We're just seeing as much demand as ever from builders who need to maintain, even in this environment, a good multi-year land control pipeline, and plan for years out, and are looking for a capital efficiency in doing so. More and more see the value of a large institutional diversified public and transparent platform to be their partner. Nothing's changed about the general view of the pipeline.

Speaker 6

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.

Speaker 6

Maybe to just fill out what Rob said, there's more demand for capital than there is capital available. It allows us to be thoughtful and patient in deploying those dollars. We are sort of on pace organically relative to the expectations that we set. I think 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. M&A has become part of our roster and of our backlog. 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-leveraging our balance sheet, and we're not going to do anything dilutive, as we've talked about from an equity capital raise perspective.

Speaker 8

Okay, that's helpful. I found the JPI opportunity to be very interesting. 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 one-off?

Speaker 2

I think we're being opportunistic. I would hesitate to call it a core strategy at this point. We continue to be focused on being a holistic solution to homebuilders and a capital efficiency solution to homebuilders. What we are students and the ends of the single-family residential for sale market right now. We would be remiss if we didn't think about the entire residential opportunity as a ways 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.

Speaker 6

I would say at this point, we're being opportunistic. We're certainly spending more time thinking about that large addressable market. I wouldn't think of it as a wholesale strategy change in any way just yet.

Speaker 8

Yeah, that's helpful.

Speaker 6

One last point. We're seeing across the board, this is in our land banking business as much as across the entire spectrum, there is more of a need for capital today with the banks pulling back and receding from this sector. It gives us a lot more opportunity to create structures that are downside protected and produce the returns that we're looking for. I believe we're going to continue. I'm very optimistic about what's ahead of us in terms of expanding our product set to deepen our relationships with our home builder 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. I think there's absolutely an expansion of our product suite. We're in the lab tinkering today.

Speaker 6

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.

Speaker 8

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

Speaker 6

No. I think it's all very much within the residential real estate market.

Speaker 8

Okay

Speaker 6

created as a permanent capital vehicle for the benefit of the residential, mostly single family, but there is an opportunity in multifamily now. It really is meant to be an extension of the markets and the customers that we're doing business with every day.

Speaker 8

Okay, great. Just one more from 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 four or five. How should we think about that going forward?

Speaker 4

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.

Speaker 6

Yeah. When we say de-bottlenecking and optimizing, it includes every aspect of our business, taxes, cash management. 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. Taking a look at our tax reserve policy was certainly included in that.

Speaker 8

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.

Speaker 9

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 three Q and four Q.

Speaker 4

Yeah. That's right. I wouldn't draw any trends from that. There's always going to be a little bit of volatility as the mix changes around in the portfolio, 10 basis points one way or the other. I wouldn't extrapolate the trend, but yeah, you have it correct.

Speaker 9

Okay, great. I know it's 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're thinking about underwriting new opportunities given we're at kind of a 675 plus 30 or fixed?

Speaker 6

Yeah. This is Darren. I spoke about this on the last call, 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. 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 five 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 three to five years from now.

Speaker 2

The only way to really bridge that divide of near term volatility and not wanting to lose ground three to five years from now is by using more and more off balance sheet third party solutions. There's nothing to speak to in the last five weeks that has changed behavior. Our own baseline view is that rates are going to be elevated, that is what we'll be wrong. Our own view, at least, in terms of planning for our business, is that rates

Speaker 6

will be elevated into the distant future. I don't know, Steven, if there's anything you'd add.

Speaker 3

Yeah, I would just add that obviously rates have been a bit volatile lately, but that really only impacts a certain segment of the buyer profile and the consumer that's out there. There is still a vast buyer set that is less impacted by some of the volatility and the affordability constraints that the rates are causing, which we sort of alluded to in the prepared remarks. I think it's important to understand that there's different segments to the consumer out there today, and we're seeing builders adjust in real time to try to target those buyers a little bit more and be a little more flexible on the entry-level side. They're always iterating, and I don't think that that's going to change much in the short term.

Speaker 3

There's still some pretty strong demographic tailwinds and other things that we alluded to in the remarks that support the general demand for housing across the board.

Speaker 9

Okay, got it. I think that probably answers my next question, but I'm going to ask anyways, which is, I thought the underwritten gross margin of 21% that you mentioned in the prepared remarks was really interesting since it's above where most of the builders have reported so far. I'm wondering if you can expand on how they're achieving that 21% underwritten gross margin, given I would assume they're underwriting flat incentives. Is that a function of value engineering in 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. Just expanding on how we're getting to a 21% gross margin would be really helpful.

Speaker 6

Yeah. Steven, actually, why don't you start and I'll finish?

Speaker 3

Sure. Yeah. I think 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 strong counterparties. They've got the scale. They're larger builders that can demand a little bit better cost structure. We're underwriting to that. Another thing, too, is we've seen some modest improvements in incentive levels over the past 12 months or so, which is benefiting that margin as well. We've also seen a little bit of a mix shift in our underwriting in new transactions where we've got nearly 50% of the new transactions that we've had were located in the Southeast. Think North Carolina, Georgia, Tennessee.

Speaker 3

In those regions, home values have held up better, demand has held up better, and builders are able to underwrite a little bit more well there than other parts of the country, just given the current market conditions in that region. Darren, I don't know if you had anything else to add on that.

Speaker 6

Yeah. We've been underwriting to this margin profile for as long as Millrose has been public and certainly longer for Kennedy Lewis. This margin profile is something that we prioritize. 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. We wanted to make sure we were giving transparency into our underwrite, into the quality of the portfolio, into the margin profile. The home builders themselves are reworking their own business lines to debottleneck, to bring costs down. It's probably on the margin of margins, where land values are correcting and the builders can take advantage of that. Mostly it's they're taking advantage of cost deflation in other parts of their business.

Speaker 9

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.

Speaker 7

Hey, thanks for taking the follow-ups. Understood JPI all rental. I guess, are you considering sort of condo projects as well with other partners? I kind of remember I thought you were maybe doing one right now. I guess my overall question is, it sounds like the multifamily piece right now is being structured similarly in the sense that it's all land and horizontal construction costs. Perhaps differs a bit from how you're approaching BTR, but would you also consider financing the vertical construction on the multifamily side as well?

Speaker 2

Yeah. Sure. Hey, Eric. Well, we certainly considered it and if you remember, as we talked through in the past, our Yardly transaction with Taylor Morrison, that does include the vertical. To the extent the builder uses accretive work, we're happy to evaluate that and do that. Yeah, on JPI, it is multifamily. We've certainly spent a lot of time on the horizontal cost structure that's slightly unique to a single tax parcel multifamily property. Also you 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. There's puts and takes either way.

Speaker 2

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.

Speaker 6

First goal is protect the capital, make sure that we're protected from a downside, within those constraints, maximize our yield and our accretion.

Speaker 7

Got it. Last question. Is there a potential to sell off pieces of these option agreements, potentially at lower yields to enhance the yield on what you're retaining, or would that not work under your structure or make it overly complicated? Just wondering if that could be a source of capital as you expand to other partners.

Speaker 6

I don't know exactly what you're referring to, if you're saying to sell off first loss pieces or to lever it, 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, for right now, we're just using our revolver and the notes that we've raised to provide that leverage profile.

Speaker 7

Yeah. That makes sense. That was my question, was whether to sell first loss or some other piece that you felt was mispriced in the market, that makes sense. Thank you.

Speaker 6

Thank you, Eric.

Operator

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

Speaker 9

Hey, thanks for taking my follow-up, guys. I wanted to ask one on terminations. It's been great to see that there have been no terminations to date. Not a surprise either, given the structural and operational features that you've put in place to minimize the risk of terminations. Also, builders have been telling us that finished lot supply is still pretty tight. 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.

Speaker 6

Yeah. 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. We certainly think through, as I was saying in the context of JPI, but certainly for our more traditional business, what is plan B, C, and D if we do get terminations. 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. Again, we're using all of our real-time indicators.

Speaker 6

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 % gross margin, which we talked about. We benefit from a deposit. Historically, that deposit was closer to 20%-25%. Today, in our portfolio, it's closer to 10. Really the difference is just credit enhancement. We're agnostic as to if it's going to be a big deposit or people want to pull. It really depends upon do they want to sit with idle cash or not. We've already thought through, as part maybe to get to your direct answer, who builds adjacent, who else could we bring in?

Speaker 6

If it's a mid-size builder that walks away, almost unquestionably a bigger builder can build at a margin profile to make land work that maybe a mid-size builder couldn't make work. We're constantly thinking about what is our contingency plan, including today, there's a whole world of BTR and scattered site rental, 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.

Speaker 6

We've actively picked where our land is located, what communities we want to be invested in, at what margin profile, 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.

Speaker 9

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.

Speaker 2

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 quarter's conference call. Thank you.

Operator

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

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