Stuart Miller
Executive Chairman at Lennar
Very good. Thank you, and good morning, everyone. Sorry about the delay. We had a lot of people joining, wanted to make sure people had an opportunity to get in.
I'm in Dallas today, together with Jon Jaffe, our Co-CEO and President. And we're joined remotely from Miami by Rick Beckwitt, our Co-CEO and Co-President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and Bruce Gross, our CEO of Lennar Financial Services. As I said, they are all in Miami, so there will be a bit of coordination here.
As usual, I'm going to go ahead and give a macro and strategic overview of the company. After my introductory remarks, Rick is going to walk through our markets around the country, comment on our land position. Then Jon is going to update supply chain, cycle time and construction costs. And as usual, Diane will give a detailed financial highlight, along with some limited guidance for the third quarter to assist in forward thinking and some guidance for the year. And then we'll answer questions as many as we can. As usual, please limit yourself to one question and one follow-up so we can get as many in as possible.
So let me go ahead and begin by saying that we are quite pleased to report that the Lennar team has remained focused on production and pace, cash flow, inventory turns and return on capital, and we have again produced strong and consistent results for the quarter. Our second quarter results are consistent with the stabilization we have seen in the current economic environment as well as consistent adherence to our core operating strategies that we've discussed on prior quarterly conference calls.
As it relates to Homebuilding, the economic environment has stabilized as customers have adjusted to and accepted higher-for-longer interest rates. The supply chain chaos has normalized, inventories have remained low, and the supply of housing across the country is in very limited supply.
This environment seems to represent a new normal that is formed in the wake of the Federal Reserve's aggressive interest rate hikes starting last year. While persistent inflation remains in the system, aggressive rate hikes have given way to moderated and measured rate movements, allowing the market to adjust in orderly fashion. The strong demand for housing that had been curtailed by sticker shock and affordability challenges, has returned, while the housing market adjusted prices, incentives, including rate buydowns and production costs in order to enable customers to afford needed shelter.
And even while interest rates and affordability were primary headwinds to demand, the well-documented chronic housing supply shortage has kept inventory levels very low, which has continued to propel customers to stretch their finances for needed housing, as incentives and price reductions combined to spark sales activity.
The net price of homes has moderated through price reductions, together with the use of interest rate buydowns and other incentives. And the net average sales price has stabilized and not gone higher, nor lower for that matter, even as demand has returned. We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% on home sales from the peak of approximately $500,000 in 2022 to approximately $450,000 now, and we expect that, that pricing is going to remain constant throughout the year.
I would note additionally that through our Multifamily apartment division, we are also seeing that rental rates have moderated. Given our extensive experience in the Multifamily apartment market, along with our for sale and for-rent housing business, we see that there is general downward pressure on rents as many markets have become somewhat overbuilt, and there is additional inventory being completed and coming online. This inventory will complete over the next 1.5 years. While rents won't likely drop significantly, they are not likely to grow very much either, and remember that rentals and rent equivalents make up a significant part of the CPI calculation.
Overall, we believe that the housing market has leveled. And while net average sales prices are lower, cancellations have been normalizing and margins have bottomed and are recovering as cost reductions and value engineering provide an offset to the price reductions.
Looking ahead, we continue to believe that the market and the economy will remain constructive for homebuilders as pent-up demand continues to come to market and consume affordable offerings. Additionally, we believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance. The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve.
And note that even when existing homes with low interest mortgages that are not currently trading do come to the market and add to supply, the sellers will also need a place to move. And that creates a net zero to overall dwellings, in addition to supply and in addition to demand and, therefore, still a housing shortage.
Bottom line, supply is short, demand is returning to affordable offerings and builders will need to produce more homes to fill the void. Against this backdrop, the Lennar team has remained consistent in our commitment to strategies that we articulated as rates began to climb over a year ago. Let me do a quick review as these strategies explain both what we have accomplished as well as what we expect to accomplish throughout the remainder of the year.
First, we said then, as we say now, that we maintain volume and production as our constant and margin as our shock absorber, and we manage our business with certainty through volatility, staying focused on production, inventory turn, cash flow and return on assets. Accordingly, we maintained volume, keeping our production machine working efficiently while rationalizing costs.
In the second quarter, our sales team engaged our digital marketing platform in conjunction with our dynamic pricing model to continue to drive sales volume at market pricing in order to maintain consistent production levels and improve our inventory turn. We affectionately call this configuration, the Lennar machine, and it is designed to produce consistent sales pace at pricing that enables consistency as the market adjusts. Although it is not perfect yet, the Lennar machine drove new order volume to 17,885 new orders, exceeding last year's volume by 1%, and this enabled our production group to operate with predictability and consistency.
Additionally, we efficiently backfilled cancellations in the quarter, which have now dropped to some 13.5%, enabling our deliveries to exceed expectation at 17,074 deliveries, and that was up 3% over last year. If by chance, by the way, any of you happen to be in Miami, come on by and ask to see the Lennar machine in action. I think you'll get a better sense of our strategy, and you just might start to imagine where the often talked-about AI might find its way into the sometimes-dodgy homebuilding industry and improve productivity. And to this end, we have a new and exciting Chief Technology Officer at Lennar named Scott Spradley. Welcome aboard, Scott. Let's get to work.
We've continued to focus on selling homes at market-clearing prices, reducing margin when conditions weaken and improving margin as conditions level and improve. Accordingly, our margins bottomed in the first quarter at 21.2%. Then, as the market leveled this past quarter, we saw margin improvement to 22.5%, and we're expecting further improvement next quarter to 23.5% to 24% and further improvement beyond that, of course, depending on market conditions. Through all phases of the market cycle, we are consistently producing strong cash flow.
The elements of execution are working extremely well and improving with the Lennar machine, and we've gained confidence in our ability to now guide to increased volume for the year of 68,000 to 70,000 deliveries with strong margins and strong cash flow.
Our second strategy has been to work with our trade partners to rightsize our cost structure to the current sales price environment while we continue to drive our cycle time to pre-supply chain crisis levels. Jon will cover this strategy in more detail shortly, but Jon and Rick have been focused across our platform with our production and our purchasing teams as well as our trade partners. Considerable results are reflected both on the margin improvement and in the number of homes that we -- that were construction-ready and available for delivery.
On the margin front, since Lennar led the way with the reduction in margin, while maintaining volume and increasing market share as the market corrected in the wake of an industry-wide reduction in starts, we engaged our trade partners to work side-by-side with us to help find efficiencies in production, to rightsize their margins as well and to work side-by-side in driving efficiencies on the site. As margin expanded in the best of times, they benefited. As margins have now contracted in the more difficult times, we all understand the benefits of predictability and consistency that derives from consistent volume and scale.
Cycle time continues to be a work in progress. While we continue to make improvement, we improved from 219 days last quarter to 215 this quarter, this is truly like fixing a plane that is in flight as progress is slow and difficult to measure as products change. Nevertheless, we're making slow-but-steady progress as improvement will help reduce inventory turn, which now stands at 1.2 versus 1.1 last year.
Our third strategy is to sharpen our attention on land and land acquisitions as well as on land and land bank strategy. While Rick will give additional detail on land, this has been a specific concentrated focus by all three of us, myself, Rick and Jon, across the platform working connected and together to refine our approach to reducing land exposure and becoming increasingly asset-light. We've made significant progress in reducing land held on our balance sheet with now 70% of our land controlled and only 30% owned. As with our trade partners, our land partners or sellers have become strategic partners in maintaining volume and increasing market share while helping to rationalize cost.
Our fourth playbook strategy was to manage our operating cost or our SG&A so that even at lower gross margin, we will drive a strong net margin. While we've been driving our SG&A down over the past years quarter-by-quarter to new record lows, and many of those changes, although not all, are hardwired into permanent inefficiencies in operations, there are some components that have grown as we've had to address more difficult market conditions. Examples, of course, are realtor costs and marketing expenses, which have had to expand as customer acquisition has become more challenging. Nevertheless, we were able to achieve a respectable 6.7% SG&A this quarter, which resulted in a strong net margin of 15.8% at the net.
We know that in more difficult times, there is, and should be, upward pressure on sales and marketing costs in order to drive and find purchasers and drive new sales. We believe, however, if we continue to drive volume, we'll be able to constrain increases and manage to a very attractive cost level and net margin.
Our fifth playbook strategy was to maintain tight inventory control. And the Lennar machine of digital marketing, sales management and dynamic pricing has materially improved inventory control by enabling a focus on selling homes in inventory, focusing maximum attention on underperforming communities and bringing attention to product plans that are simply just not selling. Clearing the homes that are complete and closable rather than selling homes that are many quarters in the future is exactly what drives cash flow, and we're focused on this part of our business every day.
Both land and home inventory control is mission central for our overall business. And in our second quarter numbers, you can see in our continuing quarterly improvement in our now 13.3% debt-to-total capital -- capitalization ratio, down from 14.2% last quarter, and our $4 billion cash position, that our inventory and our balance sheet is being carefully managed to provide excellent liquidity and flexibility for our future.
These elements of the business continue to be managed through every other day management meetings where numbers are reviewed at the regional and divisional levels by the entire management team. Starts, sales and closings are maintained in a controlled balance with the end result of volume with defined expectations.
The sixth playbook strategy was to continue to focus on cash flow and bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our second quarter results, we not only accomplished excellent cash flow and bottom-line results, but we repurchased $208 million of stock and we also repurchased approximately $158 million of senior debt due in fiscal 2024. We expect to continue to generate considerable earnings and cash flow. And accordingly, we'll continue to retire debt and purchase stock opportunistically.
Let me say in conclusion that our second quarter of 2023 has been an excellent quarter for Lennar. We saw market conditions level and stabilize, at least for now, and we executed on our core strategies. We are extremely well positioned to navigate the uncertainties of the current market. We engaged the difficulties of the past year with a consistent strategy that promoted certainty of execution throughout the company. When market conditions were difficult and uncertain, Lennar associates knew their mission. Similarly, as the market has leveled, Lennar associates know mission and exactly how to execute.
Our strategy is well known and understood through our division offices, and we have a plan that -- we have a plan as the inevitable cycles of our industry ebb and flow. We focus on maintaining volume while we price our homes to drive a consistent pace. We work with our trade base to manage cost and inefficiencies -- and efficiencies. We manage both our land and our production inventories to drive cash flow and returns on investment. We focused our asset-light model in order to drive balance sheet efficiency and drive return on investment. Finally, we fortify our balance sheet to have liquidity for strength and flexibility.
Knowing what to do and executing per plan has driven this quarter's success and continues to guide us into the next quarter and beyond. We are confident that we will continue to perform and drive Lennar to new levels of performance.
Thank you. And now let me turn over to Rick.
