This week, the Miami-based builder dropped another big announcement. It’s forming and closing a $1.1 billion equity fund, Lennar Multifamily Venture, which will develop, lease-up and hold class-A multifamily communities across the country.
Lennar is investing $504 million in the fund while global sovereign and institutional investors will provide the balance of the equity. The venture is targeting 50% leverage and will have a three-year investment period and an eight-year term.
The firm will focus on developing in the Top 25 markets around the country in a variety of product types, including garden, mid-rise, and high-rise properties. It will hold the properties for a consistent stream of cash flow, rather than sell them off in a merchant-developer model.
While a number of observers in the apartment world think valuations are getting inflated, a number of Lennar’s analysts seem to think the upside is good in the apartment world.
“In our view, this structure should allow Lennar to monetize a portion of an asset's value without having to sell assets,” wrote Jade J. Rahmani, research analyst at Keefe, Bruyette & Woods. “In some respects, this structure can be viewed as a form of non-recourse leverage with the potential to produce superior equity returns on Lennar's investment.”
Lennar will contribute 19 undeveloped assets, which constitute 6,120 apartments at a development cost of $2.1 billion, to the venture. The company will keep properties already built or under development, including two completed communities and 24 communities under construction totaling 7,100 apartments at a development cost of $1.7 billion.
“Lennar Multifamily will earn asset management fees from the venture fund, a promote upon the lease-up and stabilization of the communities as well as retain an ownership interest in the income producing assets of the venture going forward,” J.P. Morgan analyst Michael Rehaut said in the note.
Doing some basic math, Alex Barron, senior research analyst
for Housing Research Center, thinks the revenue from the venture will offset
the revenue lost in the Five Point IPO.
“If the $2.1 billion portfolio yields a 10% on cost, the rental revenues would be $210 million. If we assume a 60% operating margin and 10% overhead, the pretax margin would be about $105 million. Lennar would get 45% of this income or about $48M," Barron wrote. "So in our view, this income stream would basically replace the income stream lost from the Five Points land sales.”
After the move, Rehaut put out a note calling the decision a “positive outcome” for Lennar’s multifamily unit.
Barron also used the word “positive” in his commentary. “We view this development as a positive one with a potentially bright future that could eventually be spun off as well once it’s mature,” Barron says. “We believe this cycle is different. It seems that affording a single family home will be more difficult than in the past, so many would-be first time buyers will be forced to rent a lot longer. We expect demand for multifamily housing will remain strong and on-par with single family homes.”
Though he chose different wording, Rahmani liked the deal, as well. “In conjunction with the recent Five Point announcement about a potential IPO, we believe this announcement demonstrates the continued incubation of Lennar's ancillary businesses and plan to create shareholder value through their maturation,” he wrote.
With the announcement, the only remaining mystery is the fate of Rialto, the last of Lennar’s main ancillary businesses. Rehaut believes something will happen there over the next two or three quarters.