Lennar Spin-off (Non-core assets) Notes

September 18, 2023 Update

Commentary on Quarterra spin-off from Sept 2023 earnings call:

December 15, 2022 Update

On it’s December 2022 conference call, Lennar delayed the spin-off indefinitely:

January 27, 2022 Update

Home-building stocks have been hit lately as investors worry that the recent rise in 30-year mortgage rates to about 3.5% from 3% will hurt sales. There might be some impact from higher rates but the industry is benefiting from favorable demographics and affordability which could mean years of robust sales.

Lennar , at $95, trades for about six times projected earnings of $16 a share in its fiscal year ending in November.

The company has ramped up its stock buybacks lately, highlighting the industry’s financial strength. Investors can buy the company’s supervoting class B stock at around $80, a 15% discount to the more liquid A shares. Barron’s has written that the B shares are the best way to play Lennar.

Home-building bull Stephen Kim, an analyst at Evercore ISI, sees the stock benefiting from a planned 2022 spinoff of non-core multifamily and single-family rental businesses. He has a price target of $179.

 

January 6, 2022 Update

  • Lennar shared more information on its spin-off during its conference call (December 16, 2021)
  • Lennar becoming a pure-play Homebuilder and spinning Financial Services, Technology, and Multifamily (some uncertainty about what will be spun off)
  • For reference for year ended revenue, November 30 Homebuilding was $25b, and Financial Services and Multifamily comprise $1.5b
  • Expected to complete spin in Q2 or Q3 2022
  • Confidential Form 10 to be filed at end of January or beginning of February with a name and management team in place, Matt Zames (former JP Morgan COO) is acting as advisor to SpinCo strategy
  • Lennar expects to offload $5-$6b in assets to SpinCo

And finally, 2021 has, in fact, been a year of focus on the strategy of becoming a pure-play homebuilding company. We have been hard at work refining our SpinCo that I’ve described in the past.

As you can see from our balance sheet and cash flow, the case for SpinCo has become more compelling with each quarter’s successes. We have excess capacity and balance sheet to spin our well-established ancillary businesses, and we expect to complete a tax-free spin by the second or third quarter of 2022.

To that end, in November, we took our first significant in-depth to complete the spin by formally filing a request for a private letter ruling from the IRS. We are getting very close to being prepared with defined business lines, a refined business plan and a balance sheet. We expect to file our at-first confidential Form 10 by the end of January or beginning of February, at which time we expect to have a name other than SpinCo and a management team in place.

Someone had asked about the time we have taken to disclose greater detail. The fact is we’re building a durable and sustainable public company that has to hit the ground running on day 1. To that end, Matt Zames as senior adviser to the company has been focusing on the configuration and execution of our SpinCo strategy. In addition to and supporting that, Jeff McCall, and a sequestered team of senior internal leaders, have modeled various configurations with different asset composition that have focused on getting both the program and the story right for the public markets.

We have concluded that the Spin Company will be an asset-light asset management business that will have a limited balance sheet. Many of the assets that we targeted for spin originally will be either part of the limited balance sheet of SpinCo or will be monetized in the form of assets under management housed within the private equity verticals in or have been or will be resolved or monetized in other ways.

The monetization has been and will be completed over the next year or so, and the cash proceeds will be deployed in Lennar to fortify our balance sheet or to continue to buy back stock on an opportunistic basis, and Lennar — and when our stock is on sale, like today, we’ll be purchasing. Three core verticals have been identified and business planned for the spin, and they are multifamily, single-family for rent and land strategies.

Each of these verticals already have raised third-party capital and our active asset managers. LMC, our multifamily platform has approximately $9 billion of gross capital under management and is raising its third fund.

LSFR, our growing single-family for rent platform currently manages approximately $1.5 billion of equity already raised. And our land strategies platform is still being refined for SpinCo and will provide more detail in the near future. The remaining Lennar Corporation will drive higher returns on our assets and equity base and the spin will not result in a material reduction of either our bottom line or our earnings per share as we project them.

Truman Patterson

Stuart, in your prepared remarks, I believe you were talking about the SpinCo being somewhat asset-light. And I think you even mentioned potentially liquidating a portion of it. Is the asset spin still going to be about $5 billion to $6 billion. And then in tandem with that, you’re targeting 65% option land by the end of this year. Where do you think this could go after the spin, 80% plus? And with that, I’m kind of thinking just longer term over the next 2, 3 years, I mean, is there any possibility maybe you’re getting maybe 80%, 90% option land?

Stuart Miller

So we’re going to take that in stride, and let the — let’s play that out over time. I don’t want to get out over my skis. Your first question relative to the SpinCo, we have been — look, you have to — as we configured SpinCo, we’ve gone back and forth on an asset-heavier, asset-lighter approach.

We think that in terms of defining the company going forward, our best program going forward is an asset-light approach to SpinCo. That means that many of the assets that we targeted at the outset will end up either an AUM or we will liquidate an orderly course on the Lennar book.

It’s still the same basic configuration of asset base. We’ve just been — it’s all been about turning assets into cash and deploying the cash or deploying the assets so that we lighten up our inventory and we end up with a spun ancillary business program that enables that pure-play focus on homebuilding and financial services.

So it’s kind of a zero-sum game. The asset base is still the same. It’s just where the asset is going to fall. It’s going to fall balance sheet, AUM or liquidation and all of it’s going to basically solve to the same equation.

March 18, 2021 Update

  • Lennar announced during its conference call (there was no mention of it in the press release).
  • The businesses that will be spun off with include the Lennar Mortgage Finance business and its technology investments.
  • The entity that will be spun off will include $3BN to $5BN in assets with no debt.
  • It’s unclear exactly what will be included (I don’t think Lennar has 100% certainty) but here’s what was mentioned during the conference call:

As noted in past conference calls, we have been working on strategies to better position our multi-family business called LMC, along with our now maturing SFR or Single-Family for Rent business that Rick will talk about in a minute.

Additionally, we have a dynamic and growing land program and land management business. We have also LMF, Lennar Mortgage Finance, our commercial mortgage business, another excellent business. And finally, we have a growing technology investment business which is part of LENx. We’ve concluded that the best way to enhance corporate value is to have Lennar standalone as a pure play homebuilder and financial services company and to enable these blue chip businesses to thrive and excel independently.

Therefore, we are working to construct a tax free spin-off of all or parts of these ongoing businesses in a unified company. This Spinco may contain all or part of the assets of these businesses together with certain land assets and programs, as well as part of our LENx investment business. The expected size of the spun enterprise would be between $3 billion and $5 billion in asset base with no debt, which our balance sheet can comfortably accommodate.

The remaining Lennar would see almost no loss of operating income from this spin-off and will continue to have a very liquid balance sheet. The standalone company would ultimately drive income from significant asset management fees. The Spinco will be focused on building an active asset management business that raises third-party capital to support ongoing business verticals included in land – including land development.

The company will become an active asset and property management company. The backbone for the company will be LMC’s operating platform together with the LMV structures. This resolution is no longer a long-term strategy, but it is immediate as we focus on driving higher return with less noise in our numbers from lumpy profits and losses, which will increase visibility for the capital markets into our core operations.

Expect to hear a lot more about the spin over the next quarters as our thinking matures. Today, we can only give a brief sketch of the future of this program. I know you will thirst for more detail, but we are not in a position to give it at this time. But we did feel that it was time to share our thinking with the investment world as we work to fill out the detail and build a new company.