Lennar Lays an Egg / Defective Homes Update from Morgan

By: Mike Shedlock | Tue, Jan 2, 2007
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Bloomberg is reporting Lennar to Post Quarterly Loss After Land Writedowns.

Jan. 2 (Bloomberg) -- Lennar Corp., the fourth-largest U.S. homebuilder, had its first quarterly loss in at least a decade after it wrote down property investments and relinquished part of its stake in a company that controls 15,000 acres in southern California.

The loss in the fiscal fourth quarter was 88 cents to $1.28 a share after a pretax charge of as much as $500 million, Miami-based Lennar said today in a statement. Quarterly profit was $3.54 a share a year earlier.

"Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery," Chief Executive Officer Stuart Miller said in the statement.

Lennar said it's taking the charge to write down land it doesn't intend to purchase. It's also writing off deposits and pre-acquisition costs for land it has under option.

Lennar will report fourth-quarter earnings on Jan. 17. In preliminary results released today, Lennar said new home orders slid 6 percent in the quarter ended Nov. 30 to 9,606 and declined 3 percent to 42,212 for fiscal 2006. The backlog of orders at Nov. 30 was valued at $4 billion, down from $6.9 billion a year earlier.

Fourth-quarter profit before the charges will be 70 cents to 75 cents a share and gross margins on home sales will be "materially lower" for the quarter and the fiscal year, Lennar said.

Lennar vs. Toll Brothers

Miller's statement "Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery" sure seems like a far cry from Robert Toll's Proclamation that things are dancing above the bottom:

"We've got an indication and it seems as though we are no longer bouncing along on the bottom as we had been in probably our most serious market, the northern Virginia, Maryland, DC suburbs and that we appear to be dancing a little bit above the bottom right now so who knows."

It will be interesting to see if Toll lays an egg in its next report as well. In the meantime inquiring minds just might be wondering about the expression "To Lay an Egg". Here goes:

History of Warnings at Lennar

CNNMoney is reporting Lennar warns on earnings.

Home builder sees no sign of market recovery, cuts fourth quarter earnings target again; write downs and asset revaluations will cause net loss.

The company says it now expects to earn between 70 to 75 cents a share in the fiscal fourth quarter, completed Nov. 30, excluding valuation adjustments and write-offs. Analysts surveyed by Briefing.com had forecast EPS of $1.07.

The company had already issued a warnings on the period in late September, when it said it expected to earn $1.00 to $1.30, rather than the $1.60 a share that was the forecast at that time.

Including those value adjustments and write-offs, Lennar said it will post a net loss per share between 88 cents to $1.28, compared to the net income of $3.54 a share a year earlier.

"While we are hopeful that low interest rates, strong employment and a healthy economy will help stimulate a recovery in 2007, we have continued to focus on strengthening our balance sheet by delivering our backlog, selling inventory aggressively and renegotiating our land positions," said a statement from CEO Stuart Miller.

Lennar could not even meet its previously lowered guidance of $1.00-$1.30. Ignoring writeoffs, Lennar only expects to post .70-.75 for the quarter. There is no realistic way to spin this as positive but that did not stop Lennar from trying.

Strategic Partnership

Consider this press release issued today by Lennar: Lennar and LNR Expand Their Strategic LandSource Partnership to Include MacFarlane Partners' Venture and CalPERS.

MIAMI, Jan. 2 /PRNewswire-FirstCall/ -- Lennar Corporation (NYSE: LEN and LEN.B), one of the nation's largest homebuilders, and LNR Property Corporation ("LNR"), one of the nation's leading real estate, finance, management and development companies, announced today that they have reached an agreement to admit a new partner into their existing strategic joint venture, LandSource Communities Development LLC ("LandSource"). The new partner is MW Housing Partners, which is co-managed by MacFarlane Partners and includes the California Public Employees' Retirement System ("CalPERS").

As of July 1, 2006, LandSource had assets with a book value of approximately $1.3 billion, with its primary investment being The Newhall Land and Farming Company ("Newhall"), which owns 15,000 acres of land in the rapidly growing Santa Clarita Valley, approximately 30 miles north of downtown Los Angeles. With 23,000 residential homesites, Newhall owns some of the last remaining large, undeveloped, but entitled, land in the greater Los Angeles area. It also owns 700 acres of commercial land and other property in the Santa Clarita Valley. Under the terms of the agreement, the LandSource assets are valued at approximately $2.6 billion, with a potential increase adjustment to that value of over $600 million.

The agreement also provides for a new non-recourse debt facility. In exchange for a 62% interest in LandSource, the MW Housing venture will contribute cash and property with a combined value of approximately $900 million. The property, which is part of an existing land bank relationship between MW Housing Partners and Lennar, is being contributed based on today's fair market value. Lennar will continue to have options to purchase those homesites at the market price at the time of the exercise.

Commenting on the transaction, Stuart Miller, President and CEO of Lennar, and Jeffrey Krasnoff, President and CEO of LNR, issued a joint statement, "We are very pleased to expand our partnership to include MacFarlane Partners and CalPERS, which will add their strong financial resources and expertise in creating one of the nation's premier land companies. LandSource has created value through the continued development of Newhall and growing its land portfolio in targeted high growth markets. Today's announcement is a validation of this value creation, as we combine our respective residential and commercial expertise with the collective expertise and capital resources of our new partner. LandSource, building on the unique talent of our Newhall team in mixed use development, will become a new strategic platform for opportunistic land acquisition and value creation."

"We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects," said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. "This is a once-in-a-lifetime opportunity that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS."

Once in a lifetime opportunity?

If this really is a "once in a lifetime opportunity" for CalPERS then why is Lennar dumping it? Ramsey Su on Silicon investor had these comments:

Nov 05 qtr, LEN earnings - 3.54
Nov 06 qtr, LEN earnings guidance - .70 to .75

Nov 05 qtr deliveries 14,403
Nov 06 qtr deliveries 14,006

It is quite obvious what happened to the margins of LEN just to keep that level of deliveries.

Land in Southern Calif, close to the major cities, is indeed in short supply. If you look at the homebuilders' profit margins during the last couple of boom years, California had always been a big, if not the biggest, contributor. One may argue that LEN needed the cash so badly that they have to give up on a prized possession? I bet you LEN can't give away a similar parcel in Texas or South Florida right now.

Of course, the attention tomorrow would be focused on this "fantastic" land deal and not the warning.

If Lennar entered this deal because they had to (they needed the cash) not because they wanted to, just what does that say about their strategic planning? Heck, what do these repeated warning for the same quarter suggest? Even if Lennar felt they had to unload the land, that does not necessarily mean that CalPERS got a good deal. It all depends on what happens to land prices headed forward. Land prices fell 18 straight years in Japan but no one seems to think they can fall even as much as 6 straight years here.

Defective Homes

Mike Morgan at Morgan Florida sent me an update last week about defective homes and it fits in nicely today.

I've received a few questions about our website www.Lennar-Homes.info, and why investors will be interested in the issues surrounding Defective Homes. The answer is quite simple, in that one of the negative residuals to the housing boom is Defective Homes and the cost to the builders. We have only concentrated on Lennar to date, but that will be expanded in Q1 to include two other public builders, and by the end of the year we anticipate a group of comprehensive websites covering all public builders.

This headache is only just starting for the builders. Take one look at what is going on in Florida, New Jersey, and North Carolina, and you will see that Housing Lemon Laws are just around the corner. The following cases are all currently active.

The Ryland case will be interesting, and devastating to the industry if they lose. In a report commissioned by State Farm Insurance, it appears the insurance industry is already making subrogation claims against Ryland, win or lose in the class action. These claims average about $20,000 each. If the entire 6,000 homes falls into this group, we're talking about $120M. Even if Ryland wins the class action, how do they explain away the problems they face with the insurance industry, when it is clear the insurance companies have already made up their minds that they are not going to foot the bill?

In regard to our Lennar website. It is only in the initial stages, and we will be expanding as soon as our non-profit status is finalized.

Mike has informed me that the legal paperwork regarding non-profit status has been sent in and that he hopes to be ready to rock and roll with more "Defective Home" ideas soon, regardless of builder. If you are personally involved in a dispute or major problem with a home builder please Email Mike Morgan at Morgan Florida.

 


 

Mike Shedlock

Author: Mike Shedlock

Mike Shedlock / Mish
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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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