WITH 28 ACQUISITIONS IN nine years under its belt, two costing more than $1 billion each, Lennar Corp. has emerged not only as one of America's front-running production home building concerns; it also has earned a reputation as one the industry's consummate dealmakers. The Miami-based builder certainly isn't alone among big builders in growing through acquisitions. But Lennar's creative, yet highly disciplined financial savvy is giving the nation's third largest home builder (based on closings last year) a formidable strategic advantage in the battle for dominance among America's leading home builders.
“They are accessing capital markets that other builders aren't even dreaming of,” observes Richard Thaler, an investment banker with New York-based DeutscheBank, which has more than $1 billion in investment exposure with the builder.
As one of the industry's more conspicuous consolidators, Lennar's mission is much like that of other large builders in that it strives to establish a dominant market position wherever it builds. Through mid-August, the company owned 86,000 lots and controlled 141,000. Its 65 home building divisions and 20-plus land divisions are active in 730 communities in 14 states. And with plans to close 37,000 homes this year, 43,000 in 2005, and to increase its annual closings by 12 percent to 15 percent thereafter, Lennar's expansion objectives are clear—and anything but conservative.
Lennar's financial performance through the first nine months of 2004 is also testament to that growth. The company's net income jumped 20.9 percent to $565.9 million on an 18.8 percent increase in revenue of $6.59 billion compared to the same period, which ended Aug. 31, a year earlier. Lennar, however, prefers to measure success by the stability of its balance sheet and how often it meets financial goals that include 15 percent annual-earnings-per-share growth and maintaining a debt-to-net-capital ratio of 20 percent. What distinguishes Lennar from many of its rivals, according to industry analysts, is a business model that seeks out different and even bold financing solutions to pounce on often under-appreciated business opportunities—all without tipping the company's leverage. Lennar has found a way—where other builders have not—to unlock the value of companies and properties it covets, and to lay out the risks and rewards of those acquisitions in language that investors and lenders can understand and find compelling.
Thaler notes that Lennar's business model is “fundamentally different” from those of other builders, because its operating strategy and land-finance strategy “are clearly intertwined.” Lennar's historically savvy use of debt financing and off-balance-sheet partnerships contributes significantly to its agility and credibility on Wall Street. In particular, Lennar's strategic alliance with LNR Property Corp., the development entity that Lennar spun off as a separate company in 1997—has been a powerful arrow in the builder's quiver. LNR's business expertise on the commercial real estate side has made several acquisitions far more viable for Lennar than they could be for other, more traditional builders. And when Lennar mitigates its risk through LNR, financiers and analysts don't panic, because they've seen how the entities interacted profitably on previous joint ventures.
“In the past, on big deals, the company's balance sheet was clearly an advantage for what it wanted to do,” says Robert Curran, an analyst for New York-based debt-rating agency Fitch Ratings. In August, Fitch assigned Lennar's $250 million in senior secured debt offering a triple-B rating based on the builder's “extensive balance sheet liquidity.”
FISCAL RESPONSIBILITY This balance-sheet-first philosophy, however, acts at times as a brake to Lennar's expansion accelerator, according to CFO Bruce Gross. The company adheres to a painstaking due diligence process for each potential acquisition—sometimes taking several years—to uncover hidden value or hazardous risk.
That process, though, can be executed to a fault, as Lennar found out in September when it let slip through its fingers a much-coveted piece of real estate called Fan Pier along Boston's waterfront. Less than a month after Lennar, LNR, and high-rise developer Turnberry Associates jointly agreed to pay Hyatt Development Corp. $125 million to develop this 21-acre property into a three-million-square-foot mixed-use site, the team lost its exclusivity after missing a down-payment deadline. The reason: Turnberry wanted to restructure its involvement in the site, which slowed the partners' due diligence. Despite his disappointment at finally losing Fan Pier to another local bidder, David Hall, LNR's vice president, told the Boston Business Journal that the team would have been “ill-advised” to move forward without the benefit of completed analysis.
“We're very driven by financial disciplines,” asserts Jon Jaffe, a 21-year company veteran who on Dec. 1, 2004, will become Lennar's COO. “And we're not going to get caught up in growth for growth's sake,” he says.
Those disciplines, however, have helped more than hampered Lennar's growth. And Jaffe has seen that better than most, having spearheaded some of Lennar's grandest expansion efforts. He opened the western U.S. for Lennar after its purchase of Bramalea California in 1995; he followed that with a series of coups that included Renaissance Homes, Pacific Greystone, and Stevenson Ranch. Its western region is now Lennar's leading source of operating profit, according to JP Morgan housing analyst Michael Rehaut. Jaffe's Midas-touch reputation was further enhanced after his team laid the groundwork for last year's blockbuster acquisition of Newhall Land and Farming Co., a California-based developer and builder whose assets include some of the choicest entitled land around Los Angeles.
Learn more about markets featured in this article: Los Angeles, CA.