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November 12, 2007



Reggie, I am short LEN and I think this will be a disaster but I don't get some of the things you say. (1) Earlier in your blog you once said that LEN will run out of closings in 2 Q's by taking their backlog and dividing. Huh? I don't get it. I mean yes we are seeing an atomic disaster in housing, but you are wrong if you think NO ONE is buying houses. Plus, LEN can discount the homes the way Mr. Hovnanian is doing it. It's gonna be hard and this is a reason that they are in danger of bk, but let's realize that there is a business here after all. (2) The second thing is I don't get how you can refer to reader comments as "non recourse this, non recourse that". I mean, it is NON RECOURSE. Period. In my view, a company has to disclose the JVs it invests in, and the balance sheet of this JV, and the earnings from it, this way we can start to assess whether or not it's likely to go bankrupt, which would cause a loss of the earnings stream (and possibly a writedown of the stake in the JV, which is probably worthless anyway). However, having said all that, if the debt is non recourse, that's what it is. You can't say LEN has 5.5B off-BS debt. It has 2B. That's how I see it.


Let me just make an additional point, reggie. Here is where your point might be right: if it is in LEN's interest to prop up JV's, then you can say that it has 5.5B. For example, let's say an investment bank has a hedge fund that it is ashamed to admit is failing, they will finance it to prop it up and keep up appearances. Another example: a restaurant invests in one its franchisees and one of them falters. This is a JV. They will funnel money to the entity to make things look good. So the question you need to answer is: does LEN care if these JV's go bankrupt. My guess is they don't give a S***


The backlog is the amount of potential money they have in their pipeline. Cancellations are what they lose from their backlog. Quarterly closing are how fast they can actually monetize their backlog. When the backlog drops to a fraction of their quarterly closings, they are in trouble. Suppose you sell five widgets a day (1 person each widget), and you only have 4 people left willing to buy a widget. What are you going to do tomorrow to make money?

If Len discounted homes like Mr. Hovnanian, they would have a $9 share price like Mr. Hovnanian as well. Did you go over the last set of quarterly results for Hov? Their much ballyhooed sales event didn't move that many homes, given their situation.

As for non-recourse, the exclamation should be "Its debt, period!". Like I said earlier, recourse or not only makes a difference when you consider not paying your debt. The fact that it is non-recourse doesn't mean the problems just disappear. If they renege on the debt, they lose the equity or portions thereof, the assets, or portions thereof, the related profit streams - which they book as profit in terms of equity interests on balance sheet but choose to leave the assets (weighs down financial performance metric) and liabilities (just weighs down). This just the $3.5 billion of non-recourse. The also recourse and debt that is effectively recourse, which is about 40% of the debt that they report on balance sheet. That is a lot!

I will post the numbers on Lennar soon, but I believe they are effectively insolvent in a matter of quarters. Think of financial statements in terms of reality, and not GAAP guidelines or annual reports.

Glad to have you here reading my blog!

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