Less than a decade ago, Lennar Corp.'s meteoric rise to the top tier among America's home building companies came through a hard-won deal–the May 2, 2000, purchase of U.S. Home. Arguably one of the most acquisitive companies in the business during housing's prolonged run up, it should come as no surprise that a preemptive, first-of-its-kind blockbuster divestiture deal should figure so heavily in the Miami-based No. 2-ranked home builder's fight for long-term viability amid what's likely to be a stubborn period of contraction.
Nov. 30, 2007, may well become known as the day Lennar suddenly changed the game of big-time home building–and all its rules, too. While many home building strategists continued to measure how to slow growth in their organizations, Lennar was quietly devising a way to accelerate growth's opposite. Its rationale, consistent with a deal style mastered across scores of acquisitions, joint ventures, and sales over the past decade, was simple: Keep information closely-guarded, be the first to strike, and make a splash big enough to make people's heads spin.
In a transaction consummated and announced a few ticks shy of the end of its 2007 fiscal year, Lennar dropped 11,000 lots from its balance sheet, took in a half-billion dollars in much-needed cash, set up a claim for upward of another $270 million from the Internal Revenue Service, and left a rather profitable mark on the very lots it was divesting. In a single transaction, the company sold dirt in eight states worth $1.3 billion for $525 million into a joint venture with Morgan Stanley Real Estate. Meanwhile, more regionalized Lennar land divestitures lit up the map one by one in the wake of the big deal, like aftershocks. They keep cropping up, suggesting that Lennar will continue to shed land where it can and when it can, using some newly minted internal rate of (less) return model to guide expectations.
Within the force-field of Lennar's announcements, a series of industry-wide ramifications play out:
1 Those who had been looking for the bottom of the asset value market can almost catch a glimpse. On the surface, the arrangement marks land to a market value of 40 cents on the dollar. As the first solid sales number that involved lots in a multitude of markets, the transaction has the power to potentially reset land values across the country and finally break the land price logjam that has kept sales stagnant.
2 Broader implications signal that there is confidence in the long-term viability of the real estate market as well as of land. Amid still hostile market conditions, Morgan Stanley's willingness to jump into such a venture underscores its conviction that the sharp knife of land prices may have finally hit the floor.
3 At the same time, the transaction wields the power to put some builders out of business. As book values reset along the price points of Lennar's newly adjusted rate card for land assets, builders with little cash immediately became powerless to bankers, as overnight they potentially owe more than their land holdings' adjusted worth.
4 Finally, there is the prospect of recouping tax money from the government. The deal sets the stage for Lennar to potentially pocket roughly $270 million by applying 2007 losses against record-setting profits of 2005.
"Me, Too" Deals?
On the surface, the transaction with Morgan Stanley appears as a typical Lennar move: bold, crafty, and ahead of the crowd of other big builders who stood by similarly mired in the muck of the meltdown, mouths agape, some wondering if they could mimic it. "It's something that we and everybody have been looking at and will be looking at further," Toll Brothers CEO Robert Toll said during his company's quarterly conference call shortly after the sale was announced.
But in the two weeks that followed the deal–just as Big Builder was going to press–news of additional land sales began to come to light.
With its final quarter and year-end fiscal 2007 results yet to be reported, it's unclear whether the company is merely being very aggressive and smart in its moves, or rather, is driven by an urgent need for cash to avert calamity. Still, a closer look reveals what's likely to be the makings of survival tactics that will play out iteratively over the next year toward a strategy that differs diametrically from its high-growth model of the prior decade–an operational model mapped to a much smaller scale that might allow the company to hibernate through the barren months ahead and keep the debt that is tucked away in its joint ventures from doing harm to the balance sheet.