As the business of building homes stays stuck in neutral, Lennar Corp. continues to invest in its other business: mining distressed land and loans for profit.
The Miami-based public builder announced Friday that it has bought roughly $740 million worth of repossessed real estate and loans that have gone sideways in separate transactions with three large financial institutions. (Lennar did not name the institutions.)
Lennar also didn't say what it paid for the grab bag of loans and land that got caught in the housing crash, mentioning only that it purchased the assets through its Rialto subsidiary with a combination of cash and senior unsecured financing from one of the selling financial institutions.
Most of the assets are 397 non-performing loans with a total balance of approximately $529 million that were made for residential and commercial land buys, as well as for development and construction costs.
The rest consists of 306 real estate assets with an appraised value of roughly $211 million. The assets include land, lots, and single-family and multifamily residential communities at varying stages of completion. The assets are in 17 states, primarily in the mid-Atlantic and Southeast. The combined portfolio is 65% residential and 35% commercial.
This is Lennar's first major purchase from the private sector. In February, Rialto formed a public-private partnership with the Federal Deposit Insurance Corp. (FDIC) to buy and then manage $3.05 billion in distressed real estate loans.
"We worked hand-in-hand with three large financial institutions to help them maximize the value of their distressed assets, while creating an excellent investment opportunity for our shareholders," Lennar CEO Stuart Miller said in a news release announcing the new purchases. "Our unique ability to underwrite both non-performing loans and REO made Lennar the perfect buyer for these assets. Our Rialto subsidiary is extremely well positioned to manage, work through, and add value to the loan portfolio and our core home building operation is poised to benefit from many of the residential REO assets."
Miller said he expects the new purchases to begin netting earnings in 2011. The FDIC investment has already contributed to Lennar's bottom line, bringing in $7.7 million in its third quarter of this year, according to recent company reports. So far, Lennar is retrieving 90 cents on every dollar of distressed assets in that portfolio.
"We have methodically put together a machine over the last two years now in the Rialto program that allows us to invest in spaces where other builders are not able to," he said in a recent call with analysts. "This is a process that is labor- and experience-intensive. It costs money. The barriers to entry are big, yet the returns are outsized."
Of the publicly held large home builders, only Toll Brothers has joined Lennar in the market of mining distressed assets.
Rialto is also contributing to Lennar's profits in another way by providing the builder with a pipeline of lots at low prices that, because they aren't sold in the open market, Lennar is able to buy free from brokers and competitive bidders. Of the 3,003 lots the builder bought in its third quarter, 1,500 came through Rialto, Miller said during the September conference call.
Since this new batch of assets was bought from private financial institutions, versus the ones it bought in partnership with the FDIC last February, Lennar should be free to keep the best assets in the portfolio for itself. Under the FDIC deal, Rialto would need approval from the FDIC to sell assets to Lennar, said analyst Carl E. Reichardt Jr. in a note Friday morning assessing the recent purchase.
"While details are scarce, we view these transactions more favorably than LEN's ... deal with the FDIC in February," Reichardt wrote.
Market analyst Jay McCanless of Guggenheim Securities also had good things to say about the deal. "We do believe this transaction is positive because it provides Lennar an alternative potential stream of revenue and profits besides the traditional home building business," he wrote in a Friday morning note. "We anticipate Rialto and Lennar are investigating additional transactions with other private parties, and we believe future similar announcements to today's could be likely."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.
Learn more about markets featured in this article: Miami, FL.