Deal Overview
On September 20, 2024, Lennar Corporation (NASDAQ: LEN, $180.45; Market Capitalization: $48.6 billion), one of the largest homebuilders in the US, announced its intention to spin off some of its land banking assets. The spin-off, named Millrose Properties Inc. (Millrose), is anticipated to qualify as a Real Estate Investment Trust (REIT), which will acquire and develop land for Lennar and other home builders, providing fully developed homesites through land option contracts.
Post transaction completion, Millrose (SpinCo) is expected to have an asset base of $6.0-$8.0 billion with no debt. The new entity will focus on acquiring, developing, and managing land for residential and commercial purposes. It will also provide land options to Lennar and other homebuilders. Under this arrangement, Lennar will have option purchase agreements to purchase back finished homesites on a just-in-time basis. Meanwhile, Lennar (RemainCo) will focus on being a pure-play homebuilder specializing in the construction and sale of homes, primarily focusing on entry-level and first-time buyers, supported with an asset-light, land-light strategy.
Lennar is expected to contribute all its undeveloped, partially developed, and some fully developed land and cash to Millrose in exchange for its stock. This will then be distributed as a stock dividend to Lennar shareholders. As these contributions will be debt-free, Millrose will operate as an independent REIT with no equity ties to Lennar. The spin-off underscores Lennar’s shift toward an asset-light, land-light business model, a direction the home builder has been moving since 2020. Previously, on March 17, 2021, Lennar had announced its plans to consider spinning off some of its ancillary business divisions to become a focused, pure-play homebuilding and allied financial services company. Later, on July 29, 2022, the spin-off was named Quarterra Multifamily (QMF), which focused on developing, owning, and managing the multifamily, single family rental, and land development strategies on behalf of institutional partners. However, due to unfavorable market conditions, the spin-off was postponed.
Additional details about Millrose Properties, including its REIT structure and timeline for the spin-off completion, are unavailable. The transaction is still going through a confidential review process with the SEC, so additional disclosures will be available once the S-11 SEC registration statement is made public.
Deal Rationale
Lennar Corporation is among the leading builders of quality homes for all generations. Its operating segments include Homebuilding operations, Financial Services, Multifamily, and Lennar Other. The company’s management intends to transform it into a pure-play, asset-light homebuilder. This vision includes the development of a “just-in-time” homesite delivery program, where land is held and developed by third-party entities until Lennar is ready to build. This approach reflects a culmination of nearly a decade-long strategic pivot towards a more streamlined, homebuilder-centric model. It aims to enhance cash flow, reduce capital expenditure, and improve returns on invested equity.
For the last several years, the company has been reducing its reliance on land it owns and increasing its access to land through options and joint ventures. As of September 30, 2024, 81.0% of its total homesites were controlled through options with land banks, land sellers and joint ventures, compared to 73.0% as of September 30, 2023. Management believes that operating as a pure-play homebuilder and financial services company could simplify its structure and enhance value for its shareholders. The company is currently looking at approximately a $6.0 billion to $8.0 billion of land that it expects to spin-off into a new public company with no associated debt. The spin-off highlights Lennar’s transition to a business model with reduced exposure to the high carrying costs related to land assets. This protects the company from potential market downturns that could devalue these holdings.
As per management, the spin-off would be a way to have a consistent source of funding as the company moves to a “land light” construction model. It is also expected to help Lennar shift from relying on private equity to fund the land acquisition and development operations. This move underscores a broader trend towards the ”asset-light” business model, which is now widely being adopted by major homebuilding enterprises, public and private. The proposed spin-off could also drive a re-rating for Lennar (RemainCo) over time, as the market assesses the company’s new profile when the spin is completed. By reducing the opacity associated with land speculation and focusing on core homebuilding operations, Lennar aims to create a more transparent and predictable business model. This transparency is expected to unlock new shareholder value as investors gain clearer insights into the company’s operational efficiency and financial health.
In the rapidly evolving, volatile, and unpredictable US residential construction and real estate development market, Lennar’s announcement to spin off a substantial portion of its land holdings marks a significant strategic shift. These steps are expected to streamline Lennar’s operations, improve cash flow, and reduce financial risk, positioning the company for sustained growth. On the other hand, the transaction should enable Millrose to raise third-party capital to support its ongoing land development operations. The company will generate returns primarily through option fees rather than relying on land appreciation, adding stability to its income streams and plans to reinvest proceeds from land transactions into new land and development projects, maintaining a continuous investment cycle without the need to return capital to investors.
Lennar Corporation is one of the largest homebuilders in the US. The company originates residential and commercial mortgage loans, provides title insurance and closing services, and develops multifamily rental properties. Additionally, it sponsors and manages funds and joint ventures focused on developing and owning multifamily rental properties and a fund dedicated to single-family rental properties. Lennar is also invested in companies that leverage technology to enhance the homebuilding industry and various aspects of real estate-related financial services.
Homebuilding
Lennar’s homebuilding operations are spread wide across the real-estate space, including the purchase, development, and sale of residential land and the construction and sale of single-family attached and detached homes. The company’s target customer base includes first-time, move-up, active adult, and luxury homebuyers. The offerings are spread across many locations, ranging from suburban golf course communities to urban infill communities. The company leverages its “Everything’s Included” marketing program to include luxury items as part of its standard model offerings at competitive prices to differentiate from competitors. Further, the company has built-in wireless capability, home automation and solar power facilities to improve its brand value and ability to generate traffic and subsequent sales. The company leverages its flexible operating structure to make decisions based on localized homebuilding conditions and customer tastes and preferences with oversight from a centralized management structure. The company generally acquired or obtained options to acquire land for developing and constructing homes that it sells to homebuyers. However, it is now accelerating its land light strategy by reducing its supply of homesites and expanding the portion of land controlled through joint ventures and options. As of September 30, 2024, 81.0% of its total homesites were controlled through options with land banks, land sellers and joint ventures, compared to 73.0% as of September 30, 2023.
Financial Services
Lennar’s Financial Services operations are bifurcated through functionality in Residential Mortgage Financing, Title, Insurance & Closing Services and Commercial Mortgage Origination. Under Residential Mortgage Financing, the company offers conforming conventional, FHA-insured and VA-guaranteed residential mortgage loan products and other home mortgage products. The company provides these offerings through its financial services subsidiary, Lennar Mortgage, in a majority of the states where the company has its homebuilding operations. The company sells off substantially all residential mortgage loans that it originates in the secondary mortgage market, generally on a servicing released, non-recourse basis. Lennar is also licensed to provide title insurance and closing services for residential and commercial transactions across 41 states to its homebuyers and others.
Lennar’s LMF Commercial subsidiary originates and sells into securitizations’ first mortgage loans that are secured by income-generating commercial properties. The loans generally are between $5.0 million to $50.0 million each. LMF Commercial also originates floating rate loans secured by commercial real estate properties. The company has been increasingly incorporating technology to automate processes within its mortgage loan origination, allowing it to increase the number of digital closings, featuring digital document signing and digital notarization.
Multifamily Operations
Lennar’s Multifamily business manages and holds interests in long-term funds that develop multifamily communities, aiming to retain them as rental income-generating assets. These communities feature a diverse mix of conventional garden, mid-rise, and high-rise properties in urban and suburban areas near major employment centres. Most offer a variety of studio, one, two, and three-bedroom homes. As of September 30, 2024, the Multifamily business managed funds and ventures with a pipeline of 52 potential future developments, either owned, under contract or subject to letters of intent, with anticipated development costs totaling approximately $6.8 billion across several states.
Lennar Other
This segment comprises of investments by Lennar in companies involved in technology initiatives that help it enhance the homebuying experience and reduce SG&A expenses. These Strategic technology investments include Blend Labs (digital lending platform developer for fast-tracking the consumer finance process), Doma Holdings (predictive analytics platform for title insurers), and Opendoor (enables streamlining of home buying and selling process), among others.
3Q24 results
Total revenue increased 7.9% YoY to $9.4 billion (+2.3% vs. consensus), led by 8.7% YoY growth in the Homebuilding segment to $9.0 billion and a 2.7% YoY growth in the Financial services segment to $273.3 million. Multifamily segment revenue declined 32.0% YoY to $93.4 million due to a decrease in general contractor and management fee income. Lennar Other segment revenue declined 50.8% YoY to $3.6 million. EBIT grew 1.5% YoY to $1.6 billion (+14.1% vs. consensus), while the corresponding margin contracted ~104 bps to 16.5%, impacted by a decline in the operating earnings of the homebuilding segment due to a decline in the average sale prices during the quarter. Net earnings attributable to shareholders grew 4.8% YoY to $1.2 billion (+17.0% vs. consensus), while the corresponding margin contracted ~36 bps to 12.3%. Basic and Diluted earnings per share stood at $4.26 (3Q23: $3.87), beating the consensus by 16.6%. For the Homebuilding segment, the 15.9% YoY rise in home deliveries fueled the 8.7% rise in revenue to $9.0 billion, partly impacted by a 5.8% decline in average sales price. Gross margin contracted by ~190bps YoY to 22.5% (3Q23: 24.4%), due to a drop in revenue per square foot and rising land costs, partially balanced by lower material costs due to reduced construction expenses. Operating earnings declined by 1.1% to $1.5 billion. For the Financial Services segment, operating earnings declined by 2.7% YoY to $144.0 million (3Q23: $148.0 million), primarily due to lower lock volume and margin in the mortgage business, partially offset by higher volume in the title business because of increased deliveries YoY.
FY23 results
Total revenue increased 1.7% YOY to $34.2 billion (+2.1% vs. consensus), led by 2.2% YoY growth in the Homebuilding segment to $32.7 billion, supported by 20.6% YoY growth in the Financial Services segment to $976.9 million. Multifamily segment revenue declined 33.7% YoY to $573.5 million, and Lennar Other segment revenue declined 50.4% YoY to $22.0 million. EBIT declined 13.6% YoY to $5.4 billion (+2.0% vs consensus), and the corresponding margin contracted ~281 bps to 15.9%, impacted by a decline in the operating earnings of the homebuilding segment by 18.1% YoY due to a decrease in the average sale prices during the year. Net earnings attributable to shareholders declined 14.6% YoY to $3.9 billion (+1.7% vs. consensus), and the corresponding margin contracted ~220 bps to 11.5%. Diluted earnings per share stood at $13.73 (FY22: $15.72), beating the consensus by 1.3%.
For the Homebuilding segment, the 10.1% YoY rise in home deliveries fueled the 2.2% rise in revenue to $32.7 billion, negatively impacted by a 7.1% decline in average sales price. Gross margin contracted by ~420bps YoY to 23.3% (FY22: 27.5%), because of a decrease in average sales price, which was partially offset by a decrease in costs per square foot due to a reduction in construction cost expenses. Operating earnings declined by 18.4% to $5.5 billion.
Operating earnings for the Financial Services segment grew by 32.8% YoY to $507.1 million (FY22: $381.9 million), driven by higher profits per locked loan in the mortgage business due to increased lock volume, and higher profitability in the title business from increased volume and productivity supported by ongoing technology initiatives.
Company Description
Lennar Corporation (Parent)
Lennar Corporation (LEN), founded in 1954, is a leading homebuilder headquartered in Miami, Florida. Lennar’s operating segments comprise Homebuilding operations, Financial Services, Multifamily and Lennar Other. The Homebuilding segment primarily includes the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land. The Financial Services segment provides mortgage financing, title insurance and closing services primarily for buyers of Lennar’s homes and, through LMF Commercial subsidiary. The Multifamily segment develops high-quality multifamily rental properties and the Lennar Other segment comprises of investment in technology initiatives directly or indirectly related to improving its business. As of November 30, 2023, Lennar employs approximately 12,284 people.
Millrose Properties Inc. (Spin-Off)
Millrose Properties will focus on acquiring, developing, and managing land for residential and commercial purposes. It will also provide Lennar and other homebuilders with land options through land option contracts. It is anticipated to qualify as a Real Estate Investment Trust (REIT). The size of the unit is expected to be $6-8 billion by asset base, with no debt.