Stuart Miller
Executive Chairman and Co-Chief Executive Officer at Lennar
Very good, and good morning, everybody, and thank you for joining today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; Bruce Gross -- and Bruce Gross, our CEO of Lennar Financial Services; and a few others are here as well.
As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, update in construction cost, cycle time and some of our land strategy and position. As usual, Diane's going to give a detailed financial highlight along with some limited guidance for our fourth quarter and full year-end 2024. And then, of course, we'll have question-and-answer. As usual, I'd like to ask that you please limit yourself to one question and one follow-up so that we can accommodate as many as possible.
So let me go ahead and begin. Overall, the economic environment remains very constructive for homebuilders. Demand remains very strong and the migration to lower interest rates will further activate that demand. Lower interest rates will enhance affordability, which will enable many more families to access and attain homeownership at the entry level, while growing families will be able to unlock value from existing homes, enabling them to move up to more bedrooms and more living space.
More listings for existing homes will provide supply of entry-level homes while driving more demand for move-up product. The dynamic of lower interest rates is likely to accelerate demand for both new and existing homes while expanding access to homeownership. Of course, affordability has been a limiting factor for demand and access to home ownership to-date. Inflation and interest rates have hindered the ability of average families to accumulate a down payment or to qualify for mortgage. Higher interest rates have also locked households in lower interest rate mortgages and curtailed the natural move up as families expand and need more space. Rate buydowns and incentives have enabled demand to access the market to-date.
Additionally, across the business landscape, narratives around challenged -- narratives around challenged consumer confidence have peppered earnings calls. Lower rates and controlled inflation will likely boost that confidence. Consumers remain employed, they are generally confident that they will remain employed, and they generally believe that their compensation will rise. This is most often the foundation of a very strong housing market, and we believe that, while confidence will ebb and flow, lower rates will stabilize confidence and the consumer will prioritize shelter and purchase as affordability enables them to do so.
We firmly believe that lower rates and controlled inflation will build affordability, enabling more households to access either first-time homeownership or move-up purchase. While strong demand enabled by incentives and mortgage rate buydowns has driven the new home market over the past two years, we fully expect an even stronger and more broad-based demand cycle as rates move lower.
While demand has been and should remain strong, the supply of homes remains constrained. The well-documented chronic housing shortage is a result of years of underproduction. This shortage has been exacerbated by continuing shortfalls in production driven by restrictive land permitting and higher impact fees at local levels and higher construction costs across the housing landscape. This week's housing starts print at 1.36 million [Phonetic] is a continuation of the shortfall in production that is needed for the current population and immigration, let alone catching up on the shortage.
Mayors and Governors across the country have become acutely aware of the housing shortage and shortfall in their respective geographies. Many have been pounding the table about the need for affordable housing, attainable housing, and workforce housing in their markets. Awareness has begun to give way to the first signs of action and, more recently, even the national narrative has begun to acknowledge the need for programs that activate supply. Greater supply and greater access to homeownership enables the upward mobility and generational wealth-building that has long been associated with building the middle-class through homeownership.
It seems that as we begin to focus on solutions, strong demand and strong need will further illuminate the need for supply and intensified narratives will pave the way to activate greater production. On a final note, immigration has been an additional interesting factor in the housing landscape. On one hand, the influx of immigrant population has expanded the labor pool and, therefore, offset the pressure on construction cost increases. On the other hand, the increase in population requires more supply of dwellings to house that growing population.
Without politicizing this issue at this rather sensitive time, the new immigrant population will add to demand while, at the same time, help to control production costs. This configuration is an overall positive for the new homebuilders and it adds to our optimism as we look ahead. Overall, while there will be seasonality, incentives, and perhaps some adjustments along the way, we are very optimistic that the road ahead appears very positive for our homebuilding business.
Against that backdrop, as you can see from our third quarter results, we are adhering to our operating strategy focused on volume, while we are sprinting towards the completion of our 5-year marathon of migrating our operating platform from an asset-heavy model to a land-light, asset-light, just-in-time finished homesite delivery model. We have executed that migration without breaking stride -- without breaking the stride of delivering consistent and growing starts, sales and closings, and while driving the cash flow and bottom line profitability that market conditions enable.
We have literally reorganized the company while we have operated day-to-day and quarter-to-quarter with consistent focus on bottom line results. I want to emphasize that our North Star has been exactly this focus: on delivering growing volume with consistent cash flow and bottom line results while migrating to an asset-light model. This predictable volume and growth has been and will be the key to recasting our business model.
First, it has enabled improving operating efficiencies and construction costs, cycle time, consumer -- customer acquisition costs and SG&A. Second, it has driven consistent and dependable cash flow and bottom line results. And third, it has enabled the consistent and predictable takedown of just-in-time delivered fully-developed homesites that has attracted capital to the structured land banking partnerships that has driven the nearly $20 billion of transactions that have enabled our land-light transformation to-date.
Since 2020 when we began our financial and operating transformation, the results and comparisons have been rather dramatic and are worthy of some reflection. Since 2020 when we began this journey, we have reduced our year supply of land owned from 3-year supply to an expected 1.1 year at the end of this year. We have increased our controlled homesites from 43% controlled to 81% controlled expected at the end of the year. And we have increased our inventory turn from under a 1 times turn to approximately 1.6 times turn. While our deliveries have gone from approximately 53,000 to a projected 80,500 to 81,000 for a 53% growth rate, our total owned inventory has actually remained flat.
We are clearly doing a lot more with a lot less as our return on inventory has grown from 16% in 2020 to a forecasted 30% plus at year-end this year. But perhaps even more importantly, we have paid down approximately $4.9 billion of debt. By year-end, we will have repurchased approximately 50 million shares of stock for approximately $5.7 billion. And by year-end, we will have distributed approximately $1.9 billion in dividends since 2020. And after all of that, we have a debt-to-total capital ratio of 7.6%, down from approximately 25% in 2020. And currently, we have $4 billion of cash-on-book.
So how did we do that? Well, first, we consistently adhere to our strategy that starts with the results like our third quarter, focused on growth and volume. And second, we attracted capital with our consistent volume and built capital and operating infrastructure that produces -- that purchases and develops land and delivers fully-developed homesites on a just-in-time basis for about one-half of our needed homesites. And now, and third, we will complete this transaction for the other one-half of our land needs and enhance what we have started with our spinoff Melrose.
Let me break this down. First of all, we are very pleased with our third quarter results as they represent another consistent and strategic quarter of operating results and execution for Lennar. The market for new homes remained consistent with strong demand challenged by affordability. As mortgage rates remained higher around 7% through the first half of our quarter, we added volume with starts, while we incentivized sales to enable affordability as we know that consistent volume and resulting operating efficiencies will continue to attract capital to our asset-light strategy, which will be our greatest strength as interest rates decline.
In our third quarter, we increased starts by 8% year-over-year to almost 20,250. We increased new orders by 5% year-over-year to 20,000 -- almost 20,600. And we increased deliveries by 16% year-over-year to just over 21,500. As we have focused on volume, however, we have hit the bump of some communities selling out and closing out faster than expected and others facing entitlement and development delays to expected start dates. As community count fell, we adjusted and pushed volume with greater absorption levels in existing communities, which naturally impacted our margin.
We still expect to deliver between 80,500 and 81,000 homes in 2024, more than a 10% increase over 2023. We also expect to continue into 2025 with an expected 10% growth rate as we increased community count somewhat in the third quarter to 1,283 communities, and we expect to be above 1,400 communities by the year -- by year-end '24. We expect the impact of the community count lag to correct over the next couple of quarters.
During the quarter, sales incentives rose to just over 10% as interest rates remained high and we addressed affordability and the community count lag. As an offset, we were able to reduce construction costs and cycle time, and Jon will detail that shortly. And we reduced our customer acquisition costs in our SG&A to 6.7% versus an expected 7.3% as we leveraged our volume to increase efficiencies in our operating platform. While our gross margins came in lower than we expected at 22.5%, our net margin was higher than expected at 15.8%, driven by operating efficiencies.
And we ended the quarter with earnings per share, excluding onetime items, of $3.90. As we look ahead to the fourth quarter, given the seasonality and customers adjusting to a changing interest rate environment, we expect our gross margin to remain flat as customers build confidence in the changing economic and interest rate landscape. We also expect to see further improvement in our operating efficiencies. As we have driven production pace in sync with sales pace, we have used our margin as a point of adjustment to enable consistent production as market conditions have continued to adjust.
Our strategy has enabled us to repurchase another 3,400,000 shares of stock for $519 million and end the quarter with $4 billion of cash on book and a 7.6% debt-to-total capital ratio. We have driven excellent operating results to-date, and we continue to be excellently positioned as a company from balance sheet to operating strategy, to execution to be able to adjust and address the market as it unfolds for the remainder of 2024 and beyond.
So with the growing -- with the growth and production strategy driving our core business, we embarked on a program to develop a structured and durable land strategies model to systemically purchase and develop land with an option program to purchase fully-developed homesites just in time and as needed. While we had always executed option land deals with third-party developers, and we still do, those deals were not always available, and there were simply no developers in many of our markets.
We knew that we could only become structurally and durably land-light and asset-light by both negotiating option deals with landowners and developers and also creating structured land option contract with private equity capital or permanent capital. Our drive to build an asset-light manufacturing model has been a 5-year marathon that has required a slow but steady attraction of capital to the concept, supported by an operational plumbing system to support the flow of capital and the delivery of homesites.
Additionally, there needed to be a fiduciary for that capital that would oversee the generation of attractive returns to capital at market competitive risk-adjusted returns while also allowing for appropriate profitability for the manufacturer, namely us. Additionally, the notion of land risk needed to be reconsidered. Not all land has the same risk. Short-term land, which is entitled and mostly developed, is less risky than unentitled farmland. Mixed risk profiles have historically and would always price to the most risky part of the pool.
Accordingly, we have worked with a series of private equity partners to create homogeneous risk profile land assets. These assets are priced for their risk profile and are professionally managed through a homesite purchase platform which we call The Hopper. The Hopper is where land is acquired, held and developed and ultimately delivered just in time on a rolling option basis, with contractually controlled and limited risk to the manufacturer homebuilder as homes are ready to be started.
Over time, the management of these land relationships has become second nature to our division management and has actually driven greater efficiency and effectiveness in the management of our land assets. The assignment of risk profile defines the cost of capital. The orchestration of just-in-time delivery of homes becomes as visible and critical as the delivery of lumber and appliances. And the process is becoming increasingly automated for efficiency. But by driving volume through these programs, we have gained advantage insights into the unique value that these structures are now bringing to the overall company
Aside from the financial improvements outlined earlier, five additional insights immediately come to mind. First, as capital markets become familiar and comfortable with a term-based risk, more capital comes to that understood [Phonetic] rent, and that expands the capital that is available for these types of terms of land. Second, capital markets get comfortable with a particular risk profile and the cost of capital can go down as capital is matched with associated risks.
Third, the availability of strategic capital for smaller M&A transactions does not tie up corporate capital while home production is ramped up, and this promotes growth strategies. Fourth, M&A transactions can be absorbed with fewer complicated accounting implications. And fifth, organic growth in existing markets and into new markets can be facilitated with limited balance sheet impact where there's no existing land developers.
As I mentioned in our last call, I do want to specifically highlight our unique and very important relationship with TPG, Angelo Gordon and Ryan Mollett. We began this journey together back in 2020, and we learned together that we're significantly better for having endured the bumps and bruises of learning and growing. They have come to -- they continue to be our single biggest land partner, and we look forward to much more learnings and growing as we grow into the future.
Bottom line, our asset-light, land-light strategy is evolving, and we are getting better at understanding all the benefits. Finally, in the very near future, the spin-off, which we call Melrose, will generally complete this now almost 5-year migration to an asset-light operating model. Not surprisingly, we have received a lot of questions about the planned spinoff we announced during the second quarter earnings call. We're still going through the SEC confidential review process, so I'm limited in what I can say about the spin-off. However, I can tell you a bit a little bit about what it will entail and how it will affect Lennar.
We have formed a company called Melrose Properties, Inc. which we expect to qualify as a Real Estate Investment Trust, or REIT, Melrose will acquire and develop land for Lennar and other homebuilders as -- and will deliver fully-developed homesites under a land option contract. The acquisition, development and delivery of homesites will be similar to other partners as partnerships that I've just described a little earlier. The REIT structure, however, is unique and will be detailed in an S-11 SEC registration statement when it is made public soon.
We are going to contribute to Melrose in exchange for its stock essentially all of our undeveloped, partially developed and some of our fully developed land along with cash. The stock will be distributed as a stock dividend of Melrose stock to Lennar shareholders and it will accordingly reduce inventory on Lennar's books. That capital as it cycles within Melrose will continue to be permanent, dependable capital available to Lennar for future land options as further described in the S-11 registration statement when it is made public.
Melrose will be responsible for advancing the capital for developing the land contributed, using Lennar as a contractor for consistent execution. And Lennar will have option contracts entitling it to repurchase finished homesites on a just-in-time basis and as needs -- as it needs them for homebuilding activities. Proceeds from the repurchased finished homesites will be reinvested by Melrose in new land and development transactions for Lennar.
Additionally, after the spinoff, the new company would be another additive bucket of capital consistent and compatible with other relationships that have existed and will continue to thrive alongside Lennar. Of course, the completion of our spin will drive significantly higher returns on inventory and equity as both inventory and equity are reduced by the amount of assets contributed to Melrose in exchange for stock. Given Lennar's balance sheet strength with a debt-to-total capital ratio of 7.6%, Lennar's balance sheet will remain very strong after the spinoff with, we believe, consistent earnings and cash flow to continue to pay down debt and repurchase stock.
Because Lennar's inventory is constantly changing, we don't know exactly how much land Lennar will contribute to Melrose, but we expect that it will be land and cash with a book value of between $6 billion and $8 billion. And we expect that Melrose will seek to enter into land transactions with other builders as well as an independent company. Since the land and cash contributed to Melrose will be debt-free, Melrose will be completely independent as a company with zero Lennar ownership and will be responsible for arranging credit facilities and sources of any debt or equity financing it needs or wants to support its own activities.
Lennar will have option purchase arrangements to purchase back finished homesites on a just-in-time basis. Unlike other land companies that rely on land appreciation for returns, Melrose will receive contractual option fees for maintaining options in effect. It will use these fees to pay its expenses and to make regular distributions to stockholders. In addition to option fees, Melrose will also receive the return of invested capital associated with the option exercises.
Unlike traditional private equity-based land banking funds, Melrose will not be required to distribute or return invested capital to investors. Instead, Melrose will repeatedly reinvest the invested capital as it is returned in future land transactions. Therefore, Melrose will be for Lennar, and probably other homebuilders essentially, a self-renewing permanent source of land acquisitions and development capital. Now while I'd like to go into more detail about the planned spinoff, as I noted earlier, we're still limited in what we can say until our S-11 SEC registration statement is made public, so more information should become publicly available very soon.
So in conclusion, let me say that this is a very exciting time for Lennar. At Lennar, we're continuing to upgrade the Lennar financial and operating platform as we drive consistent production and sales. Our third quarter 2024 has been another strong strategic and operational success for our company as we focus on driving consistent volume and growth, adjust community count for that growth, and complete our company's financial and operational restructure. We are, in fact, nearing the end of a 5-year marathon that will have restructured our entire operating platform for long-term success and greater returns on capital and equity.
We have continued to drive production to meet the housing shortage that we know persists across the market. With that said, as interest rates subside and normalize, and now that the Fed has boldly begun to cut rates, we believe that pent-up demand will be activated, and we are well-prepared with growing community count and growing volume. Strong pent-up demand has found ways to access the housing market at higher interest rates.
As rates drift down, giving consistent execution, we are extremely well-positioned for even greater success as strong demand for affordable offerings continues to seek short supply in a more affordable interest rate environment. Perhaps most importantly, our strong balance sheet affords us flexibility and opportunity to consider and execute upon thoughtful growth for our future. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high returns on capital and equity.
We will also continue to focus on our pure-play business model and reduce exposure to noncore assets. We'll continue to drive just-in-time homesite delivery and an asset-light balance sheet, and we'll continue to allocate capital to growth, debt retirement and stock repurchases as appropriate. As we complete our asset-light transformation, we will continue to execute in the short-term while we return capital to our shareholders through dividend and stock buyback, while we also pursue strategic growth.
As we look ahead to completing a successful 2024, we're well-positioned for and expect to see much more of the same in the years ahead. We are confident that, by design, we will continue to grow, perform and drive Lennar to new levels of consistent and predictable performance. For now, we are guiding to 22,500 to 23,000 closings next quarter with a margin that is flat with the third quarter.
And we expect to deliver approximately 80,500 to 81,000 homes this year. We also expect to repurchase in excess of $2 billion of stock this year as we continue to drive very strong cash flow. We look forward to a strong finish to 2024. And for that, I want to thank the extraordinary associates of Lennar for their tremendous focus, effort and talent.
And with that, let me turn it over to Jon.
