Stuart Miller
Executive Chairman at Lennar
Very good. Good morning, everyone. Thanks for joining us. This morning, I'm here in Miami, joined by Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and of course, Alex, who you just heard from. Jon Jaffe and Rick Beckwitt, our Co-CEOs and Co-Presidents, are on the line also, but they will be participating remotely for the Q&A.
As usual, I'm going to give a macro overview and strategic Lennar plan. After my introductory remarks, Rick is going to talk about our markets around the country; Jon will update on supply chain, construction costs and land strategy; and as usual, Diane will give a detailed financial highlight. And we'll give some rough boundaries for the fourth quarter to assist in go-forward thinking and modeling. And then, we'll answer as many questions as we can. And as usual, please limit to one question and one follow-up.
So, let me begin and start by saying that once again, the Lennar team has turned in an excellent third quarter results, which continues to enhance our positioning for the evolving market conditions. Throughout our third quarter, we continued to manage the still constrained supply chain and workforce and delivered over 17,200 homes with a gross margin of 29.2% and a net margin of 23.5%.
These deliveries continue to drive very strong cash flow and bottom line earnings as we continue to refine our already efficient operations with SG&A of 5.8% or a 120-basis-point improvement over last year. With strong bottom line earnings of $1.47 billion or $5.03 per diluted share driving strong cash flow, we've continued to fortify our balance sheet. After paying down $575 million of maturing senior debt without replacement, we ended the quarter with $1.3 billion of cash, nothing drawn on our revolver and a 15% debt to total capitalization ratio as compared to 21.2% last year.
As a matter of careful capital allocation this quarter, given current market conditions, we chose not to repurchase stock in favor of early retirement of debt. As we've continued to drive strong closings and performance, we are well prepared to handle the current market conditions. In addition to the well-documented supply chain constraints and limited workforce slowing production, housing has now been considerably impacted by the more than doubling of mortgage rates over the past months and therefore, the doubling of monthly payment costs and reduction of housing affordability.
The housing market has continued to weaken as expected in response to the Fed's too late but now very rapid and aggressive reaction to inflation. Homebuilding finds itself once again at the forefront of all that is happening in the economy, and the Fed's use of its interest rate tool to curtail inflation is certainly having the desired effect on the for-sale housing market.
The market is now adjusting. The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand. Part of the pullback is driven by simple affordability, and part of the pullback is driven by the psychology of the sudden and aggressive interest rate hike causing either monthly payments figure shock or a sense of having missed the boat.
The Fed Chair's additional increase of 75 basis points of the Fed funds rate yesterday, together with an articulated determination to do more, suggests that even more challenges lie ahead. While demand has cooled at once high price -- at once high pricing level, demand for shelter still exists where price intersects with current interest rates to produce an affordable monthly payment.
There is still a housing shortage across the country, especially workforce housing, and household formation has continued to rise. There's still very limited inventory, and there's very little exposure to traditional inventory overhangs like foreclosures and speculators.
Additionally, buyers are still seeking shelter from inflationary pressures on rentals as scarce rentals and increased demand from those who would otherwise purchase drive and keep rents higher. As we bring prices down and incentives up, demand is still there. And these fundamentals give us assurance that while there is short- and medium-term reconciliation, the long-term prospects for housing continue to be strong.
Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down payments and have attractive credit scores and can qualify. With higher rates, prices must be adjusted downward in incentives used to find the market or sales just drop off.
Accordingly, we have carefully managed sales price and our pace through the third quarter exactly as we said we would last quarter. Although our sales are down 12% from last year's levels, we have focused our management's attention on finding pricing levels that attract demand.
Each market is different in as much as it is an art and not a science, our efforts have slightly lagged our goal of matching our sales pace with our start pace, but we feel certain that we will find pricing and accelerate that pace in the near future.
In a few minutes, Rick is going to give a more detailed overall market review that will give a more comprehensive snapshot of what we've seen in our markets across the country. Along with bringing home sales price down, we are also laser-focused on bringing down production costs as well. We are working with our vast network of trade partners to recognize that the world has changed, and we all have to work together to keep the machine working.
In fact, last night, I returned from a two-day extraordinary supply chain conference that was hosted by our purchasing leadership group, led by Kemp Gillis. Trade partners and Lennar division leaders convened to work together to attack costs, find efficiencies and adjust to current market conditions. Rick and Jon will drive continued and focused attention on this critical initiative.
And as the market recalibrates, land costs will have to adjust as well. Accordingly, we are reviewing and re-underwriting every land deal in our pipeline to the current market conditions. In time, new land deals will have different pricing that will be properly sized to the home sales prices.
Overall, these are the trends as we see them. And while we can choose to fight against the trends, the reality is that the market has been changing, and we are getting ahead of it by making all necessary adjustments.
Last quarter, we laid out our simple strategy playbook going forward. Let me review and add a few items. We're going to keep it simple and focused and adhere to this core strategy.
First, as I said last quarter, we're going to continue to sell homes, adjust pricing to market conditions and maintain reasonable volume. We have discussed over the past years that we have a strong -- that we have a housing shortage across the country. We will continue to build even as prices adjust in order to fill that shortfall and provide much-needed workforce housing.
As we have noted many times in the past, whether the market is improving or declining, we employ our dynamic pricing model week by week to price product to current market conditions in order to maximize pricing and margin while we maintain a very carefully and [Phonetic] limited inventory level. As the market moves, that is how we will continue to be responsive.
Second, we are going to work with our trade partners, as I've said, to rightsize our cost structure to current market conditions as well.
Third, we will and have sharpened our attention on land acquisitions. We are being extremely selective on new land acquisitions and new communities. We have re-reviewed and re-underwritten every land deal in our pipeline, and we are re-underwriting to current market conditions.
Capital allocation is being micromanaged as every dollar invested in land must compete against repurchasing our own stock as we seek to maximize total shareholder value and return. In sync with selling homes, we will continue to improve our cost of doing business by focusing on and reducing SG&A. We have seen quarter-over-quarter improvement in our SG&A over the past years. And we expect to drive efficiencies through technology and process improvement to offset market adjustments where possible while we leverage our extraordinary management team across the country.
Next, we will maintain tight inventory control. We are aware that our inventory levels are up 20% year-over-year. This increase is mostly a function of growth, supply chain dysfunction and expanded cycle time. As our growth rate is reduced to 0 and our cycle times revert to normal, our inventory should shrink and should generate sizable cash flow in the future. Our commitment to sales pace will ensure that we will not create standing inventory in its place.
Next, we'll continue to focus on cash flow and bottom line to protect and enhance our already extraordinary balance sheet. And finally, we will conclude our long-planned and awaited spin-off by year-end. Recent back-and-forth questions with the SEC could push the final date by a month or so, but Quarterra will be listed very soon. Of course, prior to the spin, we will have a comprehensive company overview and conference call to introduce the new management team and to further detail the financial elements of the company. Stay tuned.
As we have continued to refine and finalize the three verticals of our spin company, we will spin a mature asset management company into the public market along with billions of dollars of assets under management that we previously held on Lennar's books.
Lennar will be a pure-play homebuilding company with a simple mandate to build and sell homes that delight our customers while we drive and maximize shareholder value.
The final spin of our new company, Quarterra, will trade under the stock symbol Q, and will have -- as noted before, will be an asset-light asset management business that will have a limited balance sheet. We are very excited about the prospects for Quarterra as this is our second spin in our history, and we have great confidence for its prospects for the future.
So let me conclude by saying that while the market is shifting and adjusting to a new higher interest rate environment, we at Lennar are prepared. We have been here before, and we have navigated adversity.
We have a seasoned team that knows exactly what to do and how to do it. Every member of the Lennar management team is fully aligned and working in a coordinated way. We are extremely well positioned financially, organizationally and technologically to thrive and to succeed in these conditions.
We recognize that interest rates are rising, inflation continues to be a legitimate threat and important parts of the economy are slowing. We know that the Fed is determined to curtail inflation, and this will take some time. But we also know how to adjust to the market -- to these market changes, and we are making those adjustments.
As we look to the remainder of 2022, we recognize there are challenges in the market that we must carefully regard, expect that we will meet the challenges and that we will continue to adjust to maximize opportunity and drive Lennar into an ever better future.
With that, let me turn over to Rick.
