Prepared remarks
Thank you for standing by, and welcome to Lennar's Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for the reading of the forward-looking statement.
Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.
I would now like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.
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, 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, an update on construction costs, cycle time, and some of our land strategy and position. As usual, Diane is going to give a detailed financial highlight, along with some limited guidance for our fourth quarter and full year year-end 2024. And then, of course, we'll have a question-and-answer session. 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.
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, enabling many more families to access and attain homeownership at the entry level, while growing families can unlock value from existing homes, allowing 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 products. 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 homeownership to date. Inflation and interest rates have hindered the ability of average families to accumulate a down payment or to qualify for mortgages.
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. Rates buydowns and incentives have allowed demand to access the market to date. Additionally, across the business landscape, 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 purchasing 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 a 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, higher impact fees at local levels, and rising construction costs across the housing landscape. This week's housing starts print at 1.36 million is a continuation of the shortfall in production 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 emphasizing 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 started to acknowledge the need for programs that activate supply. Greater supply and greater access to homeownership enable upward mobility and generational wealth building, which have historically 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 requirement for supply, and intensified narratives will pave the way to activate greater production. On a final note, immigration has been an 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 helping 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 sprinting towards the completion of our five-year marathon of migrating our operating platform from an asset-heavy model to a land-light, asset-light, just-in-time finished home site delivery model.
We have executed that migration 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. Since 2020, when we began our financial and operating transformation, the results have been rather dramatic and are worthy of some reflection. We have reduced our years supply of land owned from three years' 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 year-end. Our inventory turn has improved from under 1 time to approximately 1.6 turns. 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.
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 distributed approximately $1.9 billion in dividends since 2020. 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 our books. Our strategy starts with results like our third quarter, focused on growth and volume. We attract capital with our consistent volume and build capital and operating infrastructure that purchases and develops land, delivering fully developed homesites on a just-in-time basis for about half of our needed homesites. 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 high around 7% through the first half of our quarter, we added volume with starts while incentivizing sales to enable affordability, knowing that consistent volume and resulting operating efficiencies will continue to attract capital to our asset-light strategy. In our third quarter, we increased starts by 8% year-over-year to almost 20,250, increased new orders by 5% year-over-year to almost 20,600, and increased deliveries by 16% year-over-year to just over 21,500. As we focused on volume, however, we encountered some communities selling out and closing out faster than expected while others faced 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, expecting to be above 1,400 communities by year-end 2024. We expect the impact of 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 community count lag. We managed to reduce construction costs and cycle time, and Jon will detail that shortly. During the third quarter, we reduced customer acquisition cost and 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 margin 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 one-time items, of $3.90.
As we look ahead to the fourth quarter, given 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 3.4 million shares of stock for $519 million and end the quarter with $4 billion of cash on our books and a 7.6% debt to total capital ratio. We have driven excellent operating results to date and continue to be excellently positioned as a company from balance sheet to operating strategy, execution, and we can continue to adjust and address the market as it unfolds for the remainder of 2024 and beyond.
We embarked on a program to develop a structured and durable land strategies model to systematically 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 we could only become structurally and durably land-light and asset-light by negotiating option deals with landowners and developers and creating structured land option contracts with private equity capital or permanent capital. Our drive to build an asset-light manufacturing model has been a five-year marathon requiring the 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 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 priced 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, 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 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 increasingly automated for efficiency. By driving volume through these programs, we have gained advantaged insights into the unique value these structures are now bringing to the overall company. Aside from the financial improvements outlined earlier, five additional insights come to mind. First, as capital markets become familiar and comfortable with a term-based risk, more capital comes to that understood risk, expanding the capital available for these types of terms of land. Second, capital markets get comfortable with a particular risk profile and the cost of capital can decrease as capital is matched with associated risk. Third, the availability of strategic capital for smaller M&A transactions does not tie up corporate capital while home production is ramped up, promoting 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 are no existing land developers. I want to specifically highlight our relationship with TPG Angelo Gordon and Ryan Mollett. We began our journey together back in 2020 and learned together that we're significantly better for having endured the bumps and bruises of learning and growing. They have become our single biggest land partner, and we look forward to much more learning 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. In the very near future, the spin-off, which we call Millrose, will complete this almost five-year migration to an asset-light operating model.
Not surprisingly, we've received many questions about the planned spin-off we announced during the second quarter earnings call. We are 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 about what it will entail and how it will affect Lennar. We have formed a company called Millrose Properties Inc., which we expect to qualify as a Real Estate Investment Trust (REIT). Millrose will acquire and develop land for Lennar and other homebuilders and deliver fully-developed homesites under a land option contract. The acquisition, development, and delivery of homesites will be similar to the partnerships I described earlier. The REIT structure is unique and will be detailed in the S-11 SEC registration statement when it is made public soon. We will contribute to Millrose 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 Millrose stock to Lennar shareholders and will accordingly reduce inventory on Lennar's books. That capital, as it cycles within Millrose, will continue to be dependable capital available to Lennar for future land options as described in the S-11 registration statement when it is made public. Millrose will advance 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 as needed for homebuilding activities. Proceeds from the repurchased finished homesites will be reinvested by Millrose in new land and development transactions for Lennar. Additionally, after the spin-off, 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.
The completion of our spin will drive significantly higher returns on inventory and equity, as both inventory and equity will be reduced by the amount of assets contributed to Millrose 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 post-spin with consistent earnings and cash flow to continue to pay down debt and repurchase stock. While we don't know exactly how much land Lennar will contribute to Millrose, we expect that it will be land and cash with a book value of between $6 billion and $8 billion. Millrose will seek to enter into land transactions with other builders as an independent company. The land and cash contributed to Millrose will be debt-free. Millrose will be independent as a company with zero Lennar ownership and responsible for arranging credit facilities and sources of any debt or equity financing it needs or wants to support its 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, Millrose will receive contractual option fees for maintaining options, which it will use to pay expenses and make regular distributions to stockholders. Millrose will also receive the return of invested capital related to option exercises and will not be required to distribute or return invested capital to investors. Instead, Millrose will reinvest the invested capital as it is returned in future land transactions. Millrose will be for Lennar and probably other homebuilders essentially a self-renewing permanent source of land acquisition and development capital. While I would like to discuss the planned spin-off in more detail, we are still limited until our S-11 registration statement is made public, so more information should become publicly available soon.
In conclusion, this is a very exciting time for 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, adjusting community count for that growth, and completing our company's financial and operational restructure. We are nearing the end of a five-year marathon that will restructure 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. As interest rates subside and normalize, we believe that pent-up demand will be activated, and we are well-prepared with growing community count and volume. Strong pent-up demand has found ways to access the housing market at higher interest rates.
As rates decline, given 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. Most importantly, our strong balance sheet affords us flexibility and opportunity to consider and execute thoughtful growth for our future. 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 focus on our pure-play business model and reduce exposure to non-core assets. We'll continue to drive just-in-time homesite delivery and maintain an asset-light balance sheet while continually allocating capital to growth, debt retirement, and stock buybacks, as appropriate. As we complete our asset-light transformation, we will execute in the short term while returning capital to our shareholders through dividends and stock buybacks, while also pursuing strategic growth.
As we look ahead to a successful 2024, we're well-positioned and expect 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 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 strong cash flow. We look forward to a strong finish to 2024 and want to thank the extraordinary associates of Lennar for their tremendous focus, effort, and talent. Let me turn it over to Jon.
Good morning. As you heard from Stuart, our operational teams at Lennar continue to focus on executing our operating strategies while responding in real-time to market fluctuations throughout the quarter. This intense focus creates a continuous learning and refinement loop, which continuously improves the execution of these strategies. I will discuss our third-quarter performance and cost reduction, cycle time reduction, and improved asset-light land position. Our focus on improvement begins with sales pace. Knowing we can produce a rate of sales by design creates confidence for the production side of the business. We work on improving the Lennar Machine to produce the needed volume of high-quality leads. This starts at the top of the funnel with testing the effectiveness of targeting through various sources such as SEM or social media, and messaging through rate and payment or lifestyle, all the way through to the ultimate result of a purchase and sale agreement.
Every day our divisions learn from their engagement with the Lennar Machine, adjusting and testing new tactics. This by-design approach drives efficiency and customer acquisition costs while improving the customer experience. We utilize incentives and interest rate buydowns as needed to address affordability and consumer confidence challenges in order to achieve the desired sales pace. Our third-quarter sales pace of 5.5 homes per community per month matched our start pace of 5.4. The resulting confidence from consistently producing the desired sales pace enables planning for an even flow start pace and related production levels. Our goal of the manufacturing process derives from this predictability, driving improvements in direct construction costs and cycle time. All participants in our operations, trade partners, and supply chain partners benefit from this predictability along with our high volume.
This manufacturing approach, along with the maximized efficiencies of our operational strategy, will allow us to continue driving down costs and cycle time into 2025. In the third quarter, our construction cost decreased sequentially from Q2 by over 1% and on a year-over-year basis by over 6%. Accomplishing a 6% cost reduction during the inflationary environment of the past year demonstrates the effectiveness of our strategy and affirms the benefits of our builder-of-choice approach. This manufacturing strategy resulted in continued significant gains in cycle time. In our third quarter, cycle time decreased by 10 days sequentially from Q2 down to 140 calendar days on average for single-family homes, which is a 23% decrease year-over-year and a material contributor to our inventory churn improvement. Next, I'll discuss the execution of our land-light strategy. In the third quarter, we continued to effectively work with our strategic land developers and landbank partners, where they purchased land on our behalf and then delivered just-in-time finished homesites to our homebuilding machine.
In the third quarter, about 82% of our $2 billion or approximately 17,000 homesites acquired were finished homesites purchased from these various land structures. Our landbanks acquired about 15,000 homesites for around $800 million in land acquisition and a commitment of about $650 million in land development. With a focus on being asset-light, our supply of owned homesites decreased to 1.1 years from 1.5 years, and the controlled homesite percentage increased to 81% from 73% year-over-year. These improvements in the execution of our operating strategies enable reduced cycle time and less land owned, resulting in improved inventory churn, which now stands at 1.6 versus 1.4 last year, a 14% increase. As in prior quarters, the third quarter showed continued progress in the execution of each of these strategies that Stuart and I reviewed. We started with a focus on the Lennar marketing and sales machine, leading to even flow manufacturing-light production and asset-light land strategies.
We focused on improving and connecting these strategies together, driving even more consistency and improvement. In our third quarter, as interest rates fluctuated and consumers felt the pressure of inflation, we managed nimbly with the aid of new technology-driven tools in the form of real-time data dashboards. The consistent digestion and critical review of the data allows for quick action and improved execution. I want to thank the associates for their commitment to implementing and executing these strategies. Now, I'd like to turn it over to Diane.
Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of insight regarding our homebuilding performance. I will spend a few minutes on the results of our other business segments, highlight our balance sheet, and provide guidance for Q4. Starting with Financial Services, our team had operating earnings of $144 million for the third quarter. Earnings were fairly consistent with the prior year. While we had lower lock volume and net secondary margins in our mortgage business, this was partially offset by higher delivery volume and lower costs in our title business. Our Financial Services team is dedicated to providing a great customer experience for each homebuyer and has created true partnerships with our homebuilding teams. Moving into Multifamily, our Multifamily segment had operating earnings of $79 million for the quarter. The primary driver of earnings was the gain on sale of assets in our LMV Fund I. In the third quarter, we closed about 70% of the anticipated sales, recording a net gain of $179 million and receiving about $140 million in cash.
We expect most remaining assets to be sold in the fourth quarter. A second component for the quarter was a $90 million write-down of non-core assets held on our books as we focus on immediately monetizing these assets. This is consistent with our pure-play asset-light strategy and the ultimate goal of increasing returns. So, turning to the balance sheet, we adhered to our strategy of maximizing return on inventory by turning inventory at the appropriate market margin. The results drove cash flow and ended the quarter with $4 billion of cash and no borrowings on our $2.2 billion revolving credit facility, providing total liquidity of $6.2 billion. Our continued focus on balance sheet efficiency and reducing capital investment made significant progress on our goal of becoming land-light. At quarter-end, our years owned improved to 1.1 years from 1.5 years in the prior year, and our homesites controlled increased to 81% from 73% in the prior year, our lowest years owned and highest controlled percentage in our history.
At quarter-end, we owned 87,000 homesites and controlled 369,000 homesites for a total of 456,000 homesites. We believe this portfolio provides a strong competitive position to continue to grow market share efficiently. We spent $2 billion on land purchases this quarter; however, over 80% were finished homesites where vertical construction will soon begin. This is consistent with our manufacturing model of buying land on a just-in-time basis, which is less capital intensive. Approximately 64% of homes closed during the quarter were from our third-party land structures when we purchased those homesites on a finished basis. As we continue to reduce ownership in land and purchase homesites on a just-in-time basis, our earnings should more consistently approximate cash flow, and over time, it is our goal to align capital return to shareholders more closely with that cash flow. Our inventory turn was 1.6 times, up from 1.4 times last year, and our return on inventory was 31.3%, up 324 basis points from last year.
During the quarter and consistent with our production focus, we started about 20,200 homes and ended the quarter with about 40,000 homes in inventory. This inventory number includes approximately 1,750 homes that were completed unsold, which is slightly more than one home per community as we successfully managed our finished inventory levels. Our next debt maturity is not until May 2025. We continue to benefit from our previous paydowns of senior notes and strong earnings generation, which brought our debt to total capital down to 7.6% at quarter-end, our lowest ever and a strong improvement from 11.5% in the prior year. This significant decrease in leverage is one of the factors that allowed us to receive an upgrade in our debt ratings from Fitch from BBB to BBB+. We are pleased to achieve this accomplishment that recognizes the strength of our balance sheet and operating platform. Consistent with our commitment to increasing shareholder returns, we repurchased 3.4 million outstanding shares for $519 million.
Additionally, we paid total dividends in this quarter of $136 million. Finally, our stockholders' equity increased to over $27 billion, and our book value per share increased to just over $101. In summary, our strong balance sheet, liquidity, and low leverage provide us significant confidence and financial flexibility as we move through the remainder of 2024 and beyond. Now I’d like to provide some guidance estimates for Q4. Starting with new orders, we expect Q4 new orders to be in the range of 19,000 to 19,300 homes, which approximates 10% year-over-year growth. We also anticipate our year-end community count to be about 10% to 12% greater than last year. We expect our Q4 deliveries to be in the range of 22,500 to 23,000 homes, with an average sales price of about $425,000, as we continue to price the market to reach affordability. Our Q4 gross margins are expected to be flat with Q3, and our SG&A to be in the range of 6.7% to 6.8%, with estimates dependent on market conditions.
For the combined homebuilding joint venture land sales and other categories, we expect to generate earnings of about $25 million, and approximately $140 million in Financial Services earnings. We expect to break even in our Multifamily business. Our Q4 corporate G&A should be about 1.7% of total revenues, and our charitable foundation contribution will be based on $1,000 per home delivered. We expect our Q4 tax rate to be approximately 24.25%, and the weighted average share count should be approximately 267 million shares. On a combined basis, these estimates should produce an EPS range of approximately $4.10 to $4.25 per share for the quarter. With that, we are still targeting a minimum of $2 billion of share repurchases for fiscal 2024. Let me turn it over to the operator.
Questions and answers
Thank you. We will now start our question-and-answer session. Our first question comes from Alan Ratner with Zelman & Associates. Your line is open.
Hey, guys. Good morning. Wow, thank you for all of that detail. Still digesting everything, Stuart, but sounds like you guys have definitely been busy and...
It's a lot to take in; no questions.
Yeah. So, I guess, recognizing you might be limited on what you could say on Millrose, just because you gave some color there, I'll start on that front. I'm curious as you kind of went through this process or are going through the process and maybe comparing and contrasting the various structures you've had over the years on the land side and kind of come up with how you envision Millrose going forward. One of the things you mentioned that sounds a little bit different is just the fees that the business or the company will earn on these option deals. From your perspective as the manufacturer and builder, what margin impact would you expect that to have relative to the current land banking structures you currently have? Is it going to be materially different? It sounds like it might be more beneficial to Millrose or at least more predictable to them, if you will, but I might be misinterpreting that.
Within the boundaries of what I can and can't say, let me answer this way, Alan. It's a good question. Millrose can be viewed as a mirror image of our other structures. The single biggest differential is the capital component, which is a permanent capital structure versus one where capital has to be raised repeatedly. We structured it as a REIT as I said, and it's structured through being a public company as permanent capital that is not returned. Aside from that, as we look at what we've done with the first half, it's more or less half of our developed homesites used in production as we've migrated over the years, and we expect the impact to be relatively similar. It has been a relatively small impact on our margin because of how we've managed land and our overall business. Can I point to specifics? It's not quite that linear, but we think the impact will be relatively small.
I understand, and I find that information useful. I'm looking forward to seeing everything develop. Regarding the gross margin, I anticipate there will be many inquiries on this topic. Compared to where you stood three or six months ago, you are forecasting a more significant increase this year instead of a flat trend in gross margin. I'm interested in learning what surprised you compared to your expectations from three months ago. It appears that rates have decreased by about 100 basis points since June. August seemed to perform well based on some macro data and feedback from other builders, yet you are projecting a lower margin in Q4 than you previously indicated. What led to that change?
First of all, let's start by recognizing that rates did not start coming down until later into our quarter. For much of the first half, rates were sticky up at around 7%. That created a challenging affordability cloud over the market. Consumer confidence was slow to kick in as rates dropped over the second part of the quarter. That stickiness has been a differentiating factor and that is market-driven. There's a confluence within our environment of managing the relationship between our reduced cycle times and the fall-off of community count, and some communities not coming on as quickly as we hoped. And the need to maintain volume at a time when interest rates were high and consumer confidence was wavering, drove our margins. That's been the differentiating factor as we've continued to migrate our operations. We think it will self-correct over the next quarters, leading to a greater good.
Appreciate it. Thanks for all the info.
Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is open.
Yeah, thanks a lot, guys. It's obvious you've been busy this summer. I wanted to piggyback a little bit on your most recent answer to Alan. With respect to volume growth, you guided to 10% volume growth next year, but I think you just indicated that some of this is to ensure smooth progress towards your restructuring. While maintaining volume, could you talk about what you think is the proper long-term rate of growth for Lennar? Is it dependent upon a specific rate of national housing starts growth or mortgage rates staying below a certain level? What does that look like?
Currently, we're solving to a 10% steady-state growth rate. Part of that relates to our land strategy, which is focused on our asset-light model. The more we are focused on an asset-light model, the more we see a combination of organic growth and strategic growth facilitated by how we will configure our operations going forward. We're looking at a steady state of about 10%. Nationally, we are supply constrained, and the market needs additional homes, especially as interest rates trend down. We think our position facilitates growth in production levels. The recent print of 1.36 million seems light and doesn't look like we're catching up on supply. We're building a model that will participate in growing a healthier housing market.
That's fair enough. The second half of my question relates to operating margins. It seems based on your guidance that you're coming in a little north of 13% this year, which is quite a bit below some of your bigger cap peers. Why do you think this is the case, and is this level in line with where you think your long-term operating profitability will be?
The busy summer has focused on the operations and efficiencies we inject as we migrate our business to asset-light. We are growing volume to build efficiencies in execution and driving a net margin that should eventually grow as we fully adopt our asset-light approach. I can't lay out specificity on the pathway, but we believe our operating margins will grow over time.
Great. We'll be waiting for that. Appreciate all the color in the meantime. Thanks, guys.
Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Your line is open.
Yes, thank you, everyone. Thanks for taking the questions. So, Stuart, given the commentary you gave around the strategic shift and Jon's comments on operational improvements, can you talk a bit about the upside to those inventory turns, and what that means for the cash generation of the business as we think about next year?
We've seen a kick in efficiency over the past few years. Improving our inventory turn accelerates cash flow and enables us to run our business more effectively. It takes time to get all divisions operating in consistent flow, but we're doing just that. We think, over time, it will trend significantly higher. We aim for cash flow generation to equal net earnings, helping us support debt maturity and allow for shareholder returns.
As we've said, the goal is for cash flow generation to equal net earnings. Our debt maturity ladder has been reducing with paydowns and no refinancing, providing a significant amount of cash to be deployed back to shareholders.
Okay. And given you ended the quarter with $4 billion cash on the balance sheet, how do you think about the amount of cash you need to hold going forward?
As I've said in past calls, we've kept more cash than needed as we evolve our business program, especially considering how Millrose will be structured. People have asked if we’re holding too much cash. We're holding that as 'safety stock' while we refine our strategy. It's not needed for operations but is important as we move forward.
I appreciate that color. Thank you, and good luck with everything.
Thank you.
Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.
Good afternoon, Stuart. Wanted to delve deeper into the land spin. I know you're limited on what you can say, but there are many details we're interested in. In your discussions last quarter, you mentioned $6 billion to $8 billion of land. The language this quarter was $6 billion to $8 billion of land and cash. Can you provide any rough sense of how much the cash portion will represent? Also, will this affect your cost structure at all?
The transition from $6 billion to $8 billion of land and cash hasn't changed; there will always be a cash component, but until we finalize what that looks like, the numbers are dynamic. There's a strategic component to consider, but I can't divulge specifics until the S-11 is filed. The movement of personnel relative to the spin-off will be limited, and the impact on SG&A will only be in relation to efficiencies in how we run our business.
As we contribute our assets to Millrose, that will be in exchange for Millrose stock, but Lennar will not hold that stock; it will be a stock dividend distributed to our shareholders.
That's very helpful. I appreciate it. Secondly, I just wasn't fully grasping the answer earlier on the gross margin question. Can you clarify what changed in the last 90 days? It seems to be a difference in magnitude. Is there any kind of temporary nature to it given some of the factors around Millrose?
It all melds into one narrative; our margin story arises from the factors of interest rates remaining high impacting affordability, consumer confidence wane, and managing community count’s drop. That's been the differentiating factor in our continual migration of operations. We focused on generating consistent volume and using our margin as a buffer. It's a complex situation, and it's not linear, leading to this dynamic change.
I appreciate it. Thank you.
Thank you. Our next question comes from Trevor Allinson with Wolfe Research. Your line is open.
Hey, good afternoon. Thank you for taking my questions. I want to follow up on SG&A. You had great SG&A control in the quarter. Can you talk about the changes you're making with brokers? Are you moving to flat fees or adjusting the rates paid, any net impacts from those?
We respect realtors and recognize their contributions, but we're focused on decreasing unnecessary costs that add to home prices. We’re working with realtors to maintain reasonable costs for effective engagement. Our volume remains stable with improved digital marketing efforts while accommodating lower-priced homes. We strive to remove costs that are not relevant to effective realtor engagement.
Okay. And given the current election cycle, housing has garnered a lot of attention politically. There are proposals on the supply side as well as a proposal for buyers in terms of downpayment assistance. Can you talk about your thoughts on the down assistance proposal? Are you seeing downpayments primarily as a key headwind to homeownership or is it primarily DTIs? What demand impact would you expect if this assistance were implemented?
Downpayment remains a hurdle for average families looking to acquire their first home. There are many proposals, but we need to ensure not to return to a 'no down payment' stance. It's vital to maintain a durable housing market. We must consider the balance between supply and demand amidst inflation. It's encouraging to see policymakers focusing on creating a healthier housing market.
Thank you. I appreciate your views. Good luck moving forward.
Thank you. And we will take one more question.
And our last question comes from John Lovallo with UBS. Your line is open.
Thanks for fitting me in here. I wanted to dovetail off of Trevor's question. SG&A as a percentage of sales was 70 basis points below your outlook, on a slight revenue beat versus expectations. Was the pullback on brokers incremental? Is that the driver? Does the lack of broker use compared to competitors mean fewer folks coming through your communities, hence needing more incentives to drive volume?
It is counterintuitive that we have not seen a reduction in traffic. What we've done to decrease our realtor costs is not new; this has been ongoing through our marketing and sales initiatives. There's been no reduction in traffic as we maintain our volumes and accommodate lower-priced homes through improved digital marketing programs. We're trying to capture the active engagement of realtors while cutting unnecessary costs.
That's helpful. Thank you.
Thanks for joining our earnings call today. We appreciate everyone's attention and look forward to continuing to detail our progress as we move forward. We'll see you at the end of the year.
Thank you. That concludes today's conference. You may all disconnect at this time.