Stuart Miller
Executive Chairman at Lennar
Very good. Thank you, and good morning everyone. Thanks for joining us this morning. I'm here in Miami and joined 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 is here, Our CEO of Lennar Financial Services. Happy to have Bruce back in the seat and of course, Alex, who you just heard from; Jon Jaffe, our Co-CEO and President is on -- is out in California and on the line and will participate remotely.
As usual, I'm going to give a macro overview and strategic overview of the company. I'll be a little longer than usual. We've got some strategic matters that we want to cover. After my introductory remarks, Rick is going to walk through our markets as he did last time around. Jon is going to update supply chain cycle time and construction costs and give a little overview on land as well. I think that Rick and Jon will both talk little bit about land. As usual, Diane will give a detailed financial highlight and we'll give some rough boundaries for the first quarter to assist in looking-forward thinking and modeling and then we'll answer as many questions as we can and as usual, please limit yourselves to one question and one follow-up.
So, let me go ahead and begin by saying that once again the Lennar team has turned in excellent results for the fourth quarter and year-end 2022, which continue to enhance our positioning for evolving market conditions. Market conditions continue to deteriorate in the fourth quarter as the now well-documented interest rate driven sales slowed down and pricing correction intersected with the still stressed supply chain, high labor and material costs and elongated cycle times to make for a very complicated landscape to bring the year 2022 to a close.
The very sudden movements in interest rates experienced over the past six months had very quickly affected both affordability and consumer confidence, resulting in a very rapid change in market conditions and demand. Sales and sales prices are down materially across both the new and existing home markets and given commercial underwriting and lending criteria, new home [Phonetic] for rent properties are being curtailed as well. Our current view is that production of single-family and multifamily dwellings nationally will be down between a quarter to a third in 2023, exacerbating the national housing supply shortage. Numerically, that means that approximately 1.5 million homes produced over the past couple of years per year will drop to around 1 million homes produced.
Now, Rick is going to go through market review and market conditions across our platform in a few minutes. So, stay-tuned for that. But even as demand has cooled very quickly, the overhang of now correcting although disrupted supply chain, stubbornly high labor and materials costs and production for cycle times that have grown by over two months have created an unusual wedge that the homebuilders have been left to navigate. Jon, will give a lot more detail on that.
On a positive note, very limited new home inventory exists, limited existing homes supply exists, as existing homeowners hold on to extremely low mortgage rates. And very limited multifamily production combines with the chronic housing production shortfall over the past decade and leads the industry in the middle of what we believe will be a fairly short duration correction without an inventory overhang to resolve.
Against this backdrop, in addition to the two hurricanes that swept through Florida, the homebuilding and financial services team at Lennar have focused and have executed on the strategies that we've detailed over the past quarters as we have very quickly and efficiently adjusted our business and business model. We laid out that the Lennar strategy playbook over the past quarters and those strategies, the successes and the misses are reflected in our first quarter and year-end results and I'd like to give a brief overview.
So first, as the first playbook strategy, we detailed that we're going to continue to sell homes and adjust pricing to-market conditions and maintain reasonable volume. In fact, we relied on our proprietary dynamic pricing model, developed by our inimitable Jeff Moses to guide volume-based pricing in order to drive sales at market pricing, so that we maintain the volume that maintains our starts and sales base, so they remain in sync and drive steady production.
The result of this program is that margin as opposed to volume becomes the so-called shock absorber and fluctuates up and down like an accordion as market conditions, especially interest rates change. Accordingly, interest rate changes especially downward, potentially improve lagging margins. In the fourth quarter, we saw our margins adjust rather quickly, down some 270 basis points to 25.3% before impairment, as we used price reductions plus incentives in the form of both closing cost payments and interest rate buy downs to offset volatile interest rate and market shifts. We did this both to sell homes as well as to protect our backlog by adjusting pricing and incentives to ensure closings. While our cancellation rate of 26% is decidedly higher than the 12% last year, it has been falling from the peak of 28% reached in October and we expect it to normalize below 20% in the near future.
Also in the fourth quarter, we used our pricing strategy to, in orderly fashion maintain our volume. While our sales were still down some 15% year-over-year, that result has compared favorably to reported market conditions and enabled us to start over 68,000 homes in 2022, which is only a 1% reduction year-over-year and gives us visibility to potentially flat 2023 deliveries. While this is not intended to be a projection, it is within the broad boundaries of our outlook ahead. We derive confidence in our ability to achieve sales base at the best possible prices for more significant investment in digital marketing, which is more relevant than ever before.
Our proprietary digits platform, which we've built on a Microsoft backbone provides digital marketing insights and analytics that guide us to better execution with appropriate pricing from our dynamic pricing model. Our digital marketing team under the guidance of Ori Klein is doing some very interesting, innovative and very credible work. Our second playbook strategy was to work with our trade partners to right-size our cost structure to current market conditions. On this item, let me say that Jon will cover this in great detail shortly, but Jon, together with Rick is giving a masterclass on cost reconciliation across our platform to our production and our purchasing team as well as to our trade partners.
Make no mistake, Lennar led the way with reduction in margin, while maintaining volume and increasing market share, as the market has corrected. We expect our trade partners to work side-by-side with us and follow suit. As margins expanded in the best of times, they benefited and as margins have now contracted in the more difficult times, we are driving cost down as prices have reduced and we expect participation as well. While there is no doubt, a lag in those reductions coming through our -- there is no doubt a lag in those reductions coming through our reported numbers, there will also be no doubt a significant reduction coming period. Cost reductions will improve lagging margins.
Our third playbook, articulated strategy was to sharpen our attention on land and land acquisitions. While Rick and Jon will give additional detail on our land reviews, this has been a specific concentrated focus by all three of us, myself, Rick and Jon across the platform, working, connected and together to reconsider every land deal in our pipeline and minimize exposure to falling land values. In that regard, I dare say we have stopped the bleeding early. We have reconsidered every land deal in our pipeline, we have reconsidered land development dollars being spent, we have walked from deposits or renegotiated terms in price and we have been relentless in focusing on protecting cash and only purchasing the next strong margin at today's pricing. New land purchases will improve lagging margins.
Fortunately, we are well-positioned with well-structured contracts and shorter-term deal structures that enable our capital allocation to be micro managed constructively. We started the quarter with $2.5 billion of expected land closings, we ended the quarter with three-quarters of that spend either walked from, renegotiated to produce a responsible margin or push for reconsideration at a later time. As with our trade partners, our land partners or sellers understand that we're maintaining volume and increasing market share, while taking the first hit to our margin. They will need to work together and participate or we'll need to move on.
Our fourth playbook strategy was to manage our operating costs for our SG&A, so that even at lower gross margin we will drive a strong net margin. In as much as we have 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 efficiencies in operation, nevertheless, as average sales price has come down, the percentages won't hold without corresponding additional cuts. We also know that in more difficult times there will be an upward pressure on some of our sales and marketing costs in order to drive and find purchasers and drive new sales.
In our fourth quarter, we were able to maintain a 5.8% SG&A at the operating level and we believe if we continue to drive volume, we'll be able to contain increases and manage to a very attractive cost level. Each of our operating teams as well as our corporate teams are looking for additional efficiencies, especially now that COVID is behind us and teams are reconvening in-person in our offices and finding those inefficiencies face-to-face and together.
Our fifth playbook strategy was to maintain tight inventory control. This is exactly what drives the cash flow machine and we're focused on this part of our business every day. Both land and home inventory control is the mission control of our overall business and in our fourth quarter numbers, you can see in a 14.4% debt-to-total capitalization and a $4.6 billion cash position that our inventory is being carefully managed. Now, we know that the questions have been raised by the press and others about a mysterious 5,000 homes being sold to single-family for rent purchasers at deep discount because of dire market conditions.
The fact is that we like other builders provide a tape of homes available-for-sale to the single-family for rent buyers, so they are aware of what is available in the ordinary course of our business and we've been doing that over the past many quarters. That tape might have had completed homes and homes that are one-to-four months out from completion. Over the course of the past year and these are the facts, over the course of the past year, we have sold approximately 7% of our homes to single-family for rent purchasers including, Quarterra. That percentage is approximately the same range quarter-by-quarter and as we look ahead to 2023, we think the percentage will be roughly the same or less.
Net margins on those homes are approximately the same as homes sold to primary buyers and there is no unusual discounting or advantage. In our operating world, our focus is not on fire sales to manage inventory, instead, it all starts with the starts, sales and closings management of our business. These elements of the business are managed through and every other day management meeting where numbers are reviewed, 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 that defines expectations. This is the most carefully reviewed and managed part of our business and enabled us to maintain an extremely low inventory of completed not sold homes, which has consistently been at or under one home per community for the past years. And right now, we have approximately 900 unsold completed homes. Currently, land inventory is managed equally carefully. From the corporate office, tight oversight is maintained on the land and land development spend. Diane overseas every dollar spent on land acquisition and development dollars and maintains accountability relative to years of land owned versus control and years of land owned overall.
If we aren't hitting targets, we aren't spending money. Like with home, there are no fire sales, just careful day-to-day management. We are aware that inventory has grown through the year because of expanded cycle time due to the supply chain disruption. We also know that this inefficiency will correct over the next few quarters and will turn approximately $150 billion of inventory into additional cash and will provide the cash to pay down debt during 2024, that is on the radar. Additionally, a pause on growth this year will reduce inventory and generate additional cash over the next year as well. Because of the tight control of land and completed home inventory, our cash flow has grown pushing our balance sheet to the point where our net debt to total capital is actually negative at this point. That makes Diane happy.
The sixth playbook strategy was to continue to focus on cash flow, bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our fourth quarter results, it is mission accomplished and we are still just getting started. If we continue to execute our playbook strategies, we will continue to drive strong cash flow and even through bottom line profitability -- and even though bottom line profitability will be compressed year-over-year as prices and margins are impacted in a correcting market, our balance sheet and cash position will continue to improve. This improvement enables the flexibility to be opportunistic as market conditions stabilize, as well as opportunistic in repurchasing both stock and debt. We have tremendous optionality.
And the final playbook strategy is the one where we must report a miss. That of course being the spin of Quarterra by year end. In spite of our best efforts, in spite of my best efforts, the current market conditions are simply not favorable to our commercial asset manager spin on the year-end timeline. Not to be cliched, we just can't and don't want to fight the tape. We believe that we have a very high end public company waiting and almost ready to enter the public arena, but we're going to postpone for the time being and wait for the right timing for Quarterra deserves exactly that launch.
While I remain confident and enthusiastic that Quarterra will be spun and Lennar will become a pure-play homebuilder as promised, it will not happen by year-end and I'm not prepared to posit another date given current market uncertainties, so please be patient. So, at the end-of-the day, if you're keeping score and are considering success in difficult market conditions, I believe that we from the Lennar homebuilding team to the Lennar Financial Services team to the Quarterra team have had a truly remarkable fourth quarter and year-end 2022.
In extraordinarily difficult market conditions, we focused on strategy and we executed with precision. We ended the year with the highest revenues, the highest profit, the highest cash flow, the best balance sheet and the highest liquidity in Lennar's history. We have a plan of execution to move into the uncertainties of 2023, with a focus on maintaining volume, maximizing margin, managing inventories, driving cash flow, managing land and land spend and further enhancing our balance sheet in spite of challenging market conditions. Accordingly, we're guiding our first quarter closings to between 12,000 and 13,500 homes with a gross margin of approximately 21%, which we believe will be the lowest gross margin for the year.
Additionally, we're targeting delivery volume to be flattish for the full year as we drive volume and pick up market share and build margin through reconciliation of construction cost and land cost and adjustment to product efficiency, while carefully managing SG&A. We are prepared once again to look adversity square in the eye and stick to our strategy and pull out a big win. Simply put, that's what we expect of ourselves.
As a conclusion or an epilogue, let me add that we've come to an end of another year and we have a truly wonderful leader who will be retiring after 27 years of service. Jeff Roos, is one of our Regional Presidents, who has overseen many of our western divisions. Jeff has been an absolute warrior of Lennar over these past decades. But as with all great leaders, he leaves us with ample hand picked talent to fill the void. In fact, his people will be even better than he has been, he wants it that way. Well, I have somewhat heavy heart, I feel a great sense of pride to have worked so many years with such a talented partner.
Many of you on this call don't know, Jeff Roos and he liked it that way. Jeff is the very essence of Lennar. He is a quiet engine under the hood, never the shiny paint job. Extraordinary on the field, always a leader in execution and always willing to learn something new. You know, they say that you can't teach an old dog new tricks. Well, Jeff was always the old dog that taught us all new tricks. Off the field, Jeff is even better. He has been ever focused on making the world a better place through HomeAid or diaper drives or anything that works for community. He never stops caring, he never stops driving and you can't help but love everything that he stands for. So with that said, Jeff is a shining example of all of that drives us here at Lennar to be better and to reach higher and it is, Jeff and people just like him that make it a certainty that Lennar will continue to succeed.
So with that, let me turn over to Rick.