Stuart Miller
Executive Chairman and Co-Chief Executive Officer at Lennar
Very good. Thank you, and good morning, everyone, and thanks for joining us this morning. Pardon me, I've got a bit of a cold, so you'll hear that in my voice. I cough a little. So today, I'm in Miami, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; Dave Collins, who you just heard from, our Controller and Vice President; and Bruce Gross, our CEO of Lennar Financial Services. We're all here in Miami together.
As usual, I'm going to give a macro and strategic overview of the Company and our performance. After my introductory remarks, Jon is going to give some color on overall market conditions. He is going to comment on our land position and then he is going to give an operational overview, updating supply chain, cycle time and construction costs. And as usual, Diane is going to give a detailed financial highlight, along with some limited guidance for the fourth quarter and year-end 2023 to assist in forward-thinking and modeling. And then, we'll answer as many questions as we can, and please limit yourself to one question and one follow-up as usual.
Now, as you all know, since our last earnings call, Rick Beckwitt retired effective the end of the third quarter. Rick began his 17 years with Lennar at the very beginning of the Great Recession, as it's called, in 2006. He rejoined an industry that was operating at the top of its game and was prepared to reach for even higher heights. Rick found himself, however, in an industry that was caught in a changing and devolving economic environment that altered expectations and aspirations. Rick jumped in at Lennar and treated problems as his own side-by-side with the rest of the team. And over the next years, he worked as part of the team fixing what was broken and righting what was upside-down. He became best partners with me and with Jon Jaffe, and together, we navigated difficult times. We positioned Lennar for future success and began anew to reach for new heights, and we achieved the extraordinary.
All of us at Lennar appreciate Rick's service and partnership. We all benefited from his experience in the industry, his natural intellect and the camaraderie that we all shared. We all reach that inevitable moment of retirement, but it is uncommon for that moment to coincide with the timing when the Company is well prepared as well. This is that real moment. As a team of three, Rick, Jon and I worked together and as partners with the rest of the Lennar operating leaders to lift and position Lennar for leadership in the industry. Lennar today is both organized and positioned financially to move forward with a smaller organization structure and more efficient overhead. Rick completed 17 years of service and retired as Co-CEO and President.
Rick, I know you're out there. I know you're on the call and listening because I know you just can't help yourself. I hope you're preparing to sharpen your golf game or building some wood cabinet in Maine. Rest assured that all is well and stable, and we are executing as expected here at Lennar.
So now, let me turn to the business at hand and talk about the business of Lennar and how we are performing, as well as how we are positioned for our future. So let me begin by saying that we're pleased to report that the Lennar team has remained focused on balancing and maintaining production and sales pace, reducing cycle time and increasing cash flow, improving inventory turn and driving strong bottom line. And we have again produced a strong and consistent result for the quarter. Our third quarter results reflect consistent adherence to the core operating strategies that we have detailed in prior quarters against the backdrop of an evolving macroeconomic environment and a constructively configured housing landscape.
As I noted in our press release, the macroeconomic environment is constructive relative to the housing -- homebuilding market, and it has certainly stabilized relative to the aggressive interest rate climb that defined the environment last year. It seems that we have entered a phase of more measured adjustments in order to curtail inflation, while the Fed shrinks its balance sheet by approximately $100 billion per month and engages other mechanisms to reduce capital in the market. Over time, these steps will hopefully bring inflation to desired levels. 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 a more orderly fashion. And while the Fed is working to reduce overall capital levels, the elimination of sharp turns and aggressive moves is generally constructive to consumers finding access to enough capital for their necessities, and housing is a necessity.
Against that backdrop, the current housing market is generally defined by a very short supply of affordable products and strong demand for affordable products. The consumers have now adjusted to an excessive "higher for longer' interest rates and are willing to purchase or rent what they can afford. The consumer is employed and is confident they will remain employed and likely with a higher wage. Higher rates, with need driving demand and housing in short supply, is the new normal, and the consumer understands that the cost of housing will likely continue to be higher.
Generally speaking, strong demand for housing has returned within the limits of affordability. The market has attracted consumers by adjusting prices, increasing incentives, including rate buy-downs, and driving down production costs in order to enable consumers to afford needed shelter, and customers have responded. The net price of homes has moderated, and the net average sales prices have stabilized. We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% from the peak of approximately $500,000 in 2022 to approximately $448,000 now, and we expect that pricing to remain fairly constant.
Concurrently, multi-family rental rates have also moderated. Two years of 500,000 apartment starts per year are now being delivered and creating supply increases, and in some geographies, excess supply which are moderating rental rates. While we expect a sharp drop-off in new starts this year, we don't expect that rents will drop too significantly, but they are not likely to grow very much either in the foreseeable future. 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 stabilized, as cost reductions and value engineering provide an offset to the price reductions. Additionally, we believe that the new supply of homes will be limited as developed land is scarce and increasingly more expensive to develop. This will continue to limit available inventory and maintain supply-demand imbalance. Bottom line, the economy is constructive, housing supply is short and limited, demand has returned to affordable offerings, and builders will need to continue to produce more homes to fill the void.
So against that backdrop, the Lennar team has remained focused on our core strategies that are driving our company forward. First, we continue to remain production and volume focused with a primary focus on driving production efficiency, driving higher inventory turn, driving higher cash flow and strong margins, and while focusing on return on assets. At the same time, we maintain a carefully matched sales pace, using our digital marketing and dynamic pricing machine to keep production pace and sales pace closely matched.
In our third quarter, we started 18,675 homes, while we sold 19,666 homes, and we delivered 18,559 homes, or an 8% increase over the last year. Our starts pace for the quarter was 4.9 homes per community per month, while our sales pace was 5.2 homes per community per month. While these numbers don't fit perfectly together, they are getting closer every quarter, and we're operating our platform more tightly than ever and by careful design. Our digital marketing and dynamic pricing machine helps drive our net sales pace to exceed our available starts, enabling us to backfill cancellations, which ran last quarter at a 3.3% rate. And we maintain a very controlled inventory level as a result, and that is just over one home per community. This has driven the confidence to continue a consistent start pace that enables operating efficiency.
With this focus, we've continued to sell homes at current market prices, improving margins as conditions improve and reducing margins when necessary. Accordingly, our margins bottomed in the first quarter of this year at 21.2%. And as the market has improved, margins have recovered to now 24.4% this quarter, and we're expecting flat to modest improvement next quarter with a range of 24.4% to 24.6%. Of course, through all phases of the market cycle, we are consistently producing very strong cash flow. These elements of execution are working extremely well and improving. And accordingly, we've gained confidence in our ability to now guide to increased volume for the year of almost 71,000 to almost 72,000 deliveries with strong margins and strong cash flow.
Next strategy, we've continued to work with our trade partners to maintain our now properly configured cost structure relative to the current sales price environment, while we continue to drive cycle time to pre-supply chain crisis levels. Jon will cover these production components in more detail shortly, but Jon and our purchasing team have been laser-focused across the platform. We were quick to reduce cost as the market corrected, and we have held costs down as the market has stabilized. And considerable success in this area is reflected in our margin improvement and as well as in the number of homes we will construct -- that were construction-ready and available for delivery this quarter.
Our third strategy has been to sharpen our attention on land and land acquisitions, as well as land and land bank strategy. While Jon will give additional detail on land, this has been a specific concentrated focus across the platform in every division to refine our approach to reducing land exposure and continuing to become increasingly asset-light. We've made some significant progress in reducing land held on balance sheet with now just 1.5 years owned and 73% of our land controlled. We have made exceptional progress in creating a materially more efficient manufacturing platform. Accordingly, our land programs and partners have become strategic partners in maintaining volume and increasing market share, while helping to rationalize costs.
Our fourth core focus and strategy has been to manage our operating costs or our SG&A so that even at lower gross margins, we will continue to 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 operation, there are some components that have grown as we've seen in this quarter, and we've had to address interest rate movements -- as we have had to address interest rate movements and sometimes more difficult market conditions. Examples are realtor costs and marketing expenses, which have had to expand as customer acquisition and engagement have become sometimes more challenging. Both of these areas saw increases in our third quarter numbers. Nevertheless, we were able to achieve a very respectable 7% SG&A this quarter, which is higher than last quarter's 6.7%. But it nevertheless results in a strong net margin of 17.4%, which is up from 15.8% last quarter.
We've continued to streamline our business even as we grow so that we can accomplish more with less. And as an example, many have asked if we'll need to replace Rick as he's now retired. And the answer simply is, no, because we've built systems that are now in place that enable us to operate in ways today that would not have worked in past years.
Our fifth playbook strategy was to maintain tight inventory control in order to control our asset base. 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 and plans that are not selling as expected. 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, higher inventory turns and higher returns on assets, and we're focused on this part of the business every day. Both land and home inventory control is the mission control of our overall business.
And in our third quarter numbers, you can see continuing quarterly improvement in our now 11.5% debt-to-total capitalization, down from 13.3% last quarter and down from 15% last year this time. Additionally, with our $3.9 billion cash position, our net-debt to total capital is actually negative, and our balance sheet is being carefully managed to provide extraordinary liquidity and flexibility. These elements of the business continue to be managed through an every other day management meetings where the numbers are reviewed at the regional and divisional levels by the entire management team. Sales, starts and closings are maintained and controlled, balanced and fixed [Phonetic], 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 third quarter results, not only did we accomplish excellent cash flow and bottom line results earning over $1.1 billion or $3.87 per share, but we used cash to repurchase $366 million of stock and we also repaid approximately $475 million of senior debt. 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 third quarter 2023 has been another excellent quarter for Lennar. We saw overall market conditions remain constructive for our industry, as aggressive interest rate moves subsided and the new-normal-defined expectations. Additionally, the housing market has continued to be defined by housing shortage and generally strong demand that is prepared to transact. Accordingly, we executed on our core strategies against the economic and industry backdrop. Given consistent execution, we are extremely well positioned for continued success, as strong demand for affordable offering continues to see [Phonetic] the current short supply. We expect to finish out this year strong, and we also expect to enter 2024 with a 10% initial growth expectation, and we're very well positioned to achieve that level.
We engaged the changing tides of the past year with a consistent strategy that enabled certainty of execution throughout our company. The strategy is well-known and understood throughout our division offices, and we have a simple and consistent model of execution. We focus on maintaining volume, while we price our homes to drive match pace. We work with our trade base to manage costs and efficiencies and adjust our product offering to meet the market. We manage both land and our production inventories to drive efficiency, cash flow and returns on our asset base. We focus on land-light model in order to drive balance sheet efficiency. 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 ensures consistent success for the foreseeable future. As we look ahead to a successful fourth quarter and year-end 2023 and into 2024, we are positioned for and expect to see much of the same as we go forward. We are confident that we'll continue to grow, perform and drive Lennar to new levels of performance.
Thank you. And with that, let me turn it over to Jon.
