Analysts Fret Over Lennar's New Start-Up

Homebuilder Lennar (LEN) reports success in reducing its share of joint ventures significantly. JV's have been a source of consternation for Lennar's investors, particularly in light of spectacular failures such as LandSource and other struggling ventures like Lennar's Mare Island project.

The builder plans to take advantage of dislocation in the land market by creating a separate entity with separate funds to buy land on the cheap. This way the company can focus on homebuilding alone. However, analysts fear that this is a redux of the separate LNR entity that Lennar created in the 90s and which caused the company a great deal of grief until they finally spun it off.

Some key quotes from Lennar Corp.’s Q408 conference call:

New ventures:

We have launched a program to raise independent capital to combine with this team, to deal with the significant asset dislocation that has occurred.

Q: During the early to mid 90s, a lot of investors were challenged by that more heavy land intensive part of the [separate LNR] business… There was somewhat of a valuation discount in your stock and eventually that was one of the reasons you decided to spin it out separately. What are you thinking currently in terms of this second revisiting of this strategy? Are you going to keep it in-house and build it up and eventually spin it out?

A: We have learned that… it is more efficient to raise capital outside the company and to build more of a segregated program that has most of its capital coming from outside sources. So, it will not be the same program that we embarked on, as we built LNR.

Our primary focus within the company and with the company assets is going to be purely on the manufacturing machine, with very limited commitments to land assets because we simply will not have to.

Q: Would this fund only be looking at land and moving forward or do you envision it taking it off of your current balance sheet, away from your operations now.

A: we are going to burn through the legacy land that we own. I think it makes it very complicated to try to sell to a new fund. So, the way that we are structuring is that the assets that we own within the company will be self liquidating.

Q: You know how happy I was when you got rid of [LNR]. But what you are talking about is going back and having joint ventures on your future land buy... and yet you say it is not going to be a JV. And you are going to have management fees and so forth. This sounds awfully much like a son of LNR.

A: Remember LNR generated a lot of profit for the company and a lot of value creation for the shareholders. So it is that component of it that I would like to do all over again... The difference in structure is that we are not going to do a series of ventures in the company here... This is a fund where all of those activities will happen within that fund structure and it will be isolated with a discreet investment from the company and that is the company's involvement investment in its entirety. The management will be self contained and it will grow and produce more of a passive profitability for the company. And that is about as far as I can go right now.

Q: Obviously you are talking about a lot less commercial activity than you had in LNR. But with the land you buy, you obviously generate some commercial properties off of these purchases.

A: Yes, but we do that anyway even inside Lennar. The bottom-line is right now if we look ahead to the next quarter, two quarters, three quarters, I think that the commercial opportunity anyway is not going to be ripening for some time to come. The residential dislocation is going to mature first. And so, you can expect that this program will have virtually no commercial components whatsoever… It will own its own JVs. We do not anticipate moving anything from the existing corporate books into this fund.

Let’s not forget, Lennar still has a lot of land:

Our inventory levels are down approximately $250 million sequentially from our third quarter, to $3.8 billion excluding consolidated inventory not owned.

Additionally, our land development spend was reduced significantly and looking forward should continue to be minimal, due to our focus on purchasing finished homesites only, when needed under our land light strategy. The finished homes and construction in progress inventory was reduced sequentially from $2.2 billion to $2.1 billion and land under development including option deposits, was also reduced sequentially from $1.8 billion to $1.7 billion.

They've reduced land spend, but not entirely:

Q: Your lot count is up a few thousand over the last couple of quarters. I wanted to get a sense of these lots that are coming on to your balance sheet.

A: The reason why [lots] are up a little bit over last year is, we have taken advantage of strategic purchases over the last year from joint ventures that we are unwinding, where we like the land and we were getting the homesites at a very attractive price.

JV’s:

From the peak of 270 in 2006, we dissolved about 100 joint ventures this year, and that is leaving 116 joint ventures left at the end of the fourth quarter. Of these remaining joint ventures, only 41 have recourse debt, 27 have non-recourse debt, and 48 have no debt at all. We continue to make significant progress with reducing maximum recourse indebtedness with our unconsolidated JVs, which has been reduced now by 71% to $520 million at the end of the year, since the peak of $1.8 billion at the end of 2006.

Q: There are 27 joint ventures with non-recourse debt. What is the total non-recourse debt today and how much of the total debt that is off-balance sheet is non-recourse with completion guarantees associated with it and letters of credit? An update of the off-balance sheet debt on top of the $2.544 billion you have on balance sheet please?

The non-recourse number… is about $3.2 billion… And with completion guarantees that number is now down to approximately $800 million.

Q: That will be $800 million of the $3.2 billion?

A: That is correct. And again, we have not had to make any payments under completion guarantees.

Comments

[t-bird:]

Judy,
Would appreciate your thoughts as to the real estate market over the next 24 mos. Note that I did not mention only for '09 as the market will take many more mos. to stabilize than many expect. Remember, it took years to get to this point and the prospect of Uncle Sugar (Fed) making all correct will not be instantaneous.

I am involved in Real Estate and believe the second half of '09 will bring an increase in sales. Only problem is that home values will continue to decline for several more years...

Jan 01 10:09 AM

[notsosmart:]

12 mos of inventory.does that tell you & lennar anything? think for yourself.

Jan 01 11:59 AM

[notsosmart:]

worried-just avoid this stock.is that simple?

Jan 01 02:20 PM

[SA Editor J...:]

Dear T-Bird,

I'm happy to try and answer your question, but I would probably need a little more specificity. What aspect of real estate? Homebuilders? Regional or local real estate? Price? Sales? Outlook? etc...
But I'll tell you, from what you've written, I would probably be more interested in what you think about real estate!
It sounds like you've got a sense of how you think the market is going. Since you are in real estate, I'm sure investors would like to hear from an industry insider. All I can speak about is what I read. Facts on the ground, so to speak, would likely be much more informative.
If you don't care to opine, I'm happy to oblige, just need a bit more guidance.
ATB,
Judy

Jan 03 04:53 PM