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Lennar trims inventory, sells land

The developer could become a 'near-assetless home builder.'

December 04, 2007|From the Associated Press

MIAMI — Lennar Corp. has sold land in eight states to Morgan Stanley Real Estate at about 40 cents on the dollar, giving the home builder a $525-million influx of cash as it continues to pare down inventory in the face of the housing crisis.

While analysts noted the deal would result in future charges for the Miami-based builder, investors were heartened by the sale, sending Lennar's stock up 86 cents Monday to $16.70.

Lennar said late Friday that it formed a land investment venture with Morgan Stanley Real Estate to acquire, develop, manage and sell residential real estate, with Lennar selling properties valued at $1.3 billion to the venture for $525 million.

The properties include about 11,000 homesites in 32 communities nationally, consisting of raw land and both partially and fully developed homesites in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey.

As of Sept. 30, the acquired properties had a book value of about $1.3 billion for Lennar, one of the nation's largest home builders. Lennar has said it was working to convert land and new-home inventory into cash.

The deal generates immediate cash for Miami-based Lennar and is a continuation of the company's ambitious strategy of becoming a "near-assetless home builder" that builds homes and controls land but does not own it, Wachovia Capital Markets analyst Carl Reichardt wrote in a report Monday.

"Such business models tend to post higher returns on capital, inventory turns and free cash flow relative to peers," the report said. In the near term, however, the bold strategy comes in "a far second to market conditions in housing that continue to wither," such as low margins, bloated inventories and falling prices, he wrote.

Lennar will book a loss of about $3.09 a share from the sale in the fourth quarter and its net book inventory value would decline about 20%, Reichardt said.

Wachovia lowered its fourth-quarter estimate for Lennar to a loss of $4.15 a share, compared with its previous estimate of a loss of $1.01. Wachovia also adjusted its full-year 2007 estimate from a loss of $5.37 a share to a loss of $8.50.

JPMorgan research analyst Michael Rehaut wrote that the $775-million loss on the deal was a "net negative" for Lennar and the home-building industry because it pointed to more impairment charges on assets such as land into 2008.

Lennar will hold a 20% ownership stake and 50% voting rights in the new venture, manage its operations and receive fees for its services. Lennar also signed option agreements and rights of first offer giving it the opportunity to purchase certain finished homesites at current market values from the investment venture.

Rehaut pointed to both the options and the possibility of receiving a "disproportionate" share of the venture's distributions should it surpass financial targets as positives for Lennar.

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