Twenty-four days remained–six of them on weekends and two comprising the Thanksgiving holiday–until the end of Lennar's fiscal year when CEO Stuart Miller spoke to a bristly New York City audience of investors at UBS's home building and building materials conference.
"I think that there will be off-balance-sheet programs that emerge. I think that there will be a real place for them. There's going to continue to be some on-balance-sheet development of land. It's a practical necessity in some markets if you want to be in the game. There's going to be a realignment and a repositioning. Ultimately, this downturn will serve as a strong lesson for–and ingrain a bias for–maintaining a shorter-time horizon on that land position, and perhaps less of a decision to say, 'Gee, I want it all,' rather than, 'I want to parse some of it out.'"
Within three weeks of that moment, the vultures had landed. The end of the beginning of the downturn had come; what is big–and what will be big–in home building had changed.
Lennar's deal with Morgan Stanley Real Estate puts a price of 40 cents on the dollar on 11,000 lots in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada, and New Jersey. Along with the half-billion dollars in cash it gets, plus a 20 percent piece of remaining equity, Lennar keeps first dibs to build on these lots if and when demand puts them back in play for new homes, once the oversupply in the market comes back into equilibrium in a few years.
Meanwhile, Lennar's move now means that it gets to recoup tax payments versus the loss on these lots going back to 2005, a cash-generating byproduct of liquidating assets in its fiscal year ended Nov. 30.
Fittingly, as with any good business deal, what Morgan Stanley paid and what Lennar actually gets may calculate out with the same dollars in the same currency, but they're entirely different sets of values.
Lennar was the first of the biggest tier of builders to effect a massive system-wide price discount strategy more than a year ago as it tried to turn as much inventory as it could. Now, it's again first with its "de-asset-izing" move as it course-corrects for even worsening market conditions in the six to nine months ahead, recognizes that the gains that come from such dramatic tactics often come to those who move fastest and first.
Other players who execute the same tactic will probably have to pay more to extract less benefit from their me-too moves. The first-strike player makes it tough on others who will have to move quickly now based on their respective balance sheet strengths and weaknesses.
As fiscal years for home building's other power players come to an end in December and March, we'll retell the story of companies who tie their tactics to both the calendar and competitive forces. Each joint venture or vulture fund acquisition that takes place will help to set baseline prices on land values. The market is open, at least for tracts that represent anyone's best guess at what might fetch future returns. What we don't have yet is house price and absorption rate stability that will be a true indicator of what home buyers will pay for new homes on these lots. That probably won't come until many, many homes in inventory find buyers. Our story this issue on Robert Shiller could help shed some light on how and when that will occur.
Meanwhile, Lennar is a market-maker, and the consequences of its move will tighten the vice-grip on the Miami-based home builder's competition, both public and private. Land is a hard thing to concede loss on, especially when home builders know deep down that it's a scarce commodity. For now, though, the species than can thrive best off of its bounty is the vulture.