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Lennar Launches Real Estate Venture With Morgan Stanley

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Sarasota Herald Tribune / Wire Reports

Published: December 3, 2007

Home builder Lennar Corp. formed a land investment venture with Morgan Stanley Real Estate to acquire, develop, manage and sell residential real estate, with Lennar selling properties valued at $1.3 billion to the venture for $525 million.

The acquired properties include about 11,000 homesites in 32 communities throughout the country, consisting of raw land as well as partially and fully developed homesites in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.

As of Sept. 30, the acquired properties had a book value of about $1.3 billion for one of the nation's largest home builders.

The deal generates immediate cash for Miami-based Lennar and is a continuation of the company's strategy of seeking to become a "near assetless homebuilder," Wachovia Capital Markets analyst Carl Reichardt wrote in a Monday report.

"Such business models tend to post higher returns on capital, inventory turns and free cash flow relative to peers," the report said.

In the near term, however, the bold strategy comes in "a far second to market conditions in housing that continue to wither," such as low margins, bloated inventories and falling prices.

Lennar, like most home builders, has been struggling in the anemic market for new homes. The company has cut its work force in Southwest Florida by 150 workers since the beginning of the year to a pre-boom level of about 300.

The Miami company said that it will book a loss of about $3.09 per share from the land sale in the fourth quarter and its net book inventory value would decline about 20 percent, Reichardt wrote.

Wachovia lowered its fourth-quarter earnings per share estimate for Lennar to a loss of $4.15, compared to its previous estimates of a loss of $1.01. Wachovia also adjusted its full-year 2007 earnings per share estimate from a loss of $5.37 to a loss of $8.50.

JP Morgan research analyst Michael Rehaut wrote that the $775 million loss on the deal as a "net negative" for Lennar and the homebuilding industry because it points to more impairment charges on assets such as land into 2008.

"We believe the loss on the sale is a major negative, as it shows charges are far from over," Rehaut wrote.

In September, Lennar reported its biggest quarterly loss in the company's 53-year history, as tough times in the national housing market led to drops in sales prices and home deliveries, as well as heavy charges to write down land values. Lennar has cut its work force by 35 percent this year.

Lennar will hold a 20 percent ownership stake and 50 percent voting rights in the new venture, manage its operations and receive fees for its services.

The Miami company also signed option agreements and rights of first offer giving it the opportunity to purchase certain finished homesites at current market values from the investment venture.

"The combined expertise and resources provided by the Lennar/Morgan Stanley team will allow us to maximize the value of this portfolio and provide a footprint to capitalize on inefficiencies in today's residential real estate market," said Stuart Miller, president and chief executive of Lennar. "This transaction provides us with increased liquidity and flexibility at an opportune time."

Citigroup Global Markets Realty Corp. acted as sole lead arranger for the acquisition financing to the investment venture.

Morgan Stanley acted as financial adviser to Morgan Stanley Real Estate.

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