Does Lennar's Huge Discount Indicate U.S. Land is Overpriced?

Dec. 04, 2007 11:07 PM ETLennar Corporation (LEN)4 Comments
TraderMark profile picture

Interesting story here from While I don't think land is truly 60% overvalued - when desperate sellers meet buyers, these buyers generally get good prices. But land is overpriced, and probably at a 20-35% rate in many places that saw huge run ups. Keep in mind this is not 'housing' - just pure land. And as always, in the end deep pockets win. So let's review, Fed prints new money, hands it to banks, banks buy distressed assets on the cheap, banks wait 3-5 years, and flip the asset for nice profit, we all win. Wait, the banks win. "We" get devalued dollars and inflation. Oh well, at least bankers win! America, for the 2%, by the 2%. Rah Rah.

Now if we could all go to Bernanke and cry, we made very bad errors in judgment, and we are too big to fail, so please give us some money so we can shore up our balance sheet, and then we get a bag of cash handed to us - then I would not be complaining. But somehow I don't think you can go to your regional Fed bank and get quite the same 'perks' the big boys do.

p.s. did I mentioned that Lennar (NYSE:LEN) is actually one of the more stable home builders? Just imagine what is going on at Hovnanian (HOV) and Beazer (BZH) homes. I continue to say, (if I could) I'd be short - a handful (or a bushel) of these will be bankrupt in the coming quarters/year or two. And you will make 100% with patience. They are not too big to fail.... nor do they have big brother watching their backs (and filling their back pocket with newly printed dollars).

In the end the banks will win and once we get through this 'dislocation' (fancy word for years of stupidity, greed, and bad decisions that cause hell for the rest of us normal people), the financials will be a good buy. Homebuilders? The ones (one?) that remain, check back around 2010.

  • Lennar's (LEN) sale of a chunk of its land portfolio at a steep discount boosts liquidity for the homebuilder, but it also points to troubling signs about the stock's valuation. The company sold its land to Morgan Stanley (MS ) at a 60% discount to book value. That raises the question: What if all of Lennar's land is worth 60% less than what is stated in the company's financials? If that's the case, Lennar's stock is wildly overpriced
  • The Morgan Stanley deal highlights how much land values are plummeting across the country. The discount falls within the range at which builders are shopping deals to real estate vulture funds, sources say.
  • KB Home (KBH) and D.R. Horton (DHI) are also said to be searching for similar deals to the one Lennar has pulled off, one industry source says.
  • The agreement, announced late Friday, is structured as a joint venture in which Lennar will keep a 20% ownership stake. The two parties will jointly acquire, develop and sell the properties, which consist of 11,000 home sites in 32 communities in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.
  • The properties, which include raw land and partially developed home sites, carried a book value of $1.3 billion and were sold for $525 million, Lennar said. Since the properties are being sold at a loss, the deal will likely create tax write-offs for the builder
  • John Peshkin, CEO of the real estate investing firm Starwood Land Ventures, told last month that finished home sites and raw land are being sold by homebuilders for 50% to 75% discounts off peak values from 2005. (meaning a lot of people bought very overinflated homes)
  • While the deal surely creates liquidity for Lennar, it also raises the question of how much investors can trust homebuilder balance sheets. "How can they sell land for 60% less than what they said it was fairly valued two months ago?" asks one homebuilder analyst, who declined to be named. "It raises an accounting issue," the analyst says. "Auditors need to come in and take a close look at what assumptions builders are using."
  • Management teams are given a lot of discretion in determining whether land and other housing inventories are required to be impaired each quarter. In theory, auditors are eyeing the builders' assumptions, but the impairment models remain a black box for investors. (sound familiar? Sort of like level 3 assets in the banks? )

If you want to read some accounting terminology and the potential book value this implies for Lennar, please click on the link - I know it's probably too boring for some, but essentially if this 60% discount is reflective of Lennar's entire base of business, then Lennar is overpriced by at least two-thirds. And again, its one of the "good guys" in the sector.

As I keep saying (and this point gets lost from time to time in between Fed cuts and this talk of bailout or that talk of subprime solution) we are just getting this party started. I have moved us up from the top of the first inning to the bottom of the first inning in this correction, as of last week. I will know it's close to the end when no one wants to buy a home because "all they do is go down" and aside from San Francisco and New York, a 'normal' person with a 'normal' job can actually afford the median house with a 6% fixed mortgage in the major urban markets.

We are not even close. Keep in mind, we haven't even entered a recession yet - all this is happening with the economy 'booming' (if you believe the government reports). What would happen if we actually slowed down to 1% GDP growth or (gasp) went negative? I know recessions have been outlawed in the country but just asking....

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Mark will be launching a mutual fund summer 2010. He is a self taught private investor who operates the website Fund My Mutual Fund (; a daily mix of market, economic, and stock specific commentary. Fascinated by the market since an early age, he discovered mutual funds as a teenager in the 80s and moved to equities by the mid 90s. The origin of the website is/was to leverage the power of the internet in developing a transparent track record to attract investors for his potential "long/short" mutual fund. His equity focus is identifying secular growth trends and the companies most likely to benefit from these macro trends. Stocks are identified through fundamental analysis, although basic technical analysis is used in determining entry and exit points. You can receive Trader Mark's latest posts daily by subscribing free via RSS reader ( or subscribing free via email ( With a degree in economics from the University of Michigan, a broader understanding of the economy as a whole, along with interpreting investor psychology, is also a major interest for Mark.

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