Lennar gets a haircut, a shave, and a mustache trim

So many things to blog about lately. The current environment is fraught with risk and opportunity, it appears they are two sides of the same coin.

Hat tip to Arun, who pointed out that Lennar has sold much more property in their "fire sale". I would like to note that, at least for the time being, these transactions should not be considered fire sales, but normal economic activity considering the macro environment.

• Lennar sells stake in SeaPort hotel development (actual numbers of the deal not revealed) and;
• A Tampa developer made the biggest land gain in its five-year history Friday, scooping up 8,300 home sites in seven counties from financially troubled Lennar Corp. The Miami-based company lost $514-million in the third quarter this year on top of a net loss of $214-million in the second quarter.

The first deal is not very descriptive, so trying to put numbers on it would be pure speculation. The second deal, we can at least guess where it puts Lennar - both of these deals are in areas that have been hard hit in the downturn. What is more important, IMO, is not so much how much land they have sold, but what the actual economic book value of their inventory is, and if it is in excess of their liabilities.

Let's take a conservative stab at it, but before we do - let's speculate. Using the numbers in the article, the Seaport hotel was a $129 million development (hard to put a figure on the retail and commercial since I don't know the area and am too lazy to look it up), just by running a simplistic per unit breakdown on the dollar size of the project given. Applying the 50% haircut that Morgan Stanley gave, that would approximate (or speculate) that Lennar raised about $65 million (plus some value for the commercial portion of the mixed use that even I wouldn't hazard a wild guess) in that sale. Using the same off the cuff calculation for the Tampa sale, Lennar raised about $453 million. Now, I know (and you should accept) that these are probably some fairly rough and inaccurate numbers, but I am trying to guesstimate what their current debt to enterprise value is. Applying the rough 50% valuation haircut that I came up with in the last post, Lennar has impaired its assets by an additional $518 million dollars (remember the MS deal). This means to me that, for valuation purposes, we should be subtracting about an additional billion dollars from Lennar's book value. A simpler way to look at it is to halve the value that you see as inventory on Lennar's balance sheet, and substitute cash in for inventory where they made a sale. It is overly simplistic, but it does give you a guideline. Lennar should now have cash to solidly service debt for a year. The caveat is, any smart lender should realize that the collateral ain't getting any more valuable and is not going to stop depreciating any time soon either. I would snatch my credit back, if I were them.

Using the new valuation levels, I am sure Lennar is now tripping their net worth covenants considering how much debt they are carrying off balance sheet (at least a billion, full recourse) - in other words, they are effectively balance sheet insolvent. I am not confident that the lenders calculate Lennar's debt to asset ratio accurately, though. Many seem to have missed the off balance sheet stuff. I guess that's why Lennar put it off balance sheet, duh!

As far as the insolvency goes, we will know for sure when they file their 8k. I know my shorts aren't going anywhere.

The funny thing is that Lennar, and the entire homebuilding sector, shot up in price about 3% yesterday. Remember Enron!!! The macro environment is horrible and getting worse for these companies. The development in the monoline industry that I have been crowing about for a couple of months now threatens to virtually shut down the mortgage industry for the time being. If you think it was hard to get a loan before... In about a week I will start revealing my short positions in the commercial real estate industry, and boy is it a eye opener. I will create a members only portion of the blog to allow real time access to my research, so the subscribing members do not have to wait. I should have that done by the end of next week.

For those who don't normally follow my blog, here is the Lennar backgrounder, which I feel is quite useful for any who have an economic interest in this company or any homebuilder.

Comments

[CapitalGain]

Regarding the future US housing market prospects, you may find this analysis useful:

http://tinyurl.com/yu44b3

"This means the builders have two problems over the next few years: 1) too much inventory, and 2) demand will be significantly lower over the next few years than the 1995-2005 period, and even when the homeownership rate stabilizes and the inventory is reduced, demand (excluding speculation) will only be about 2/3 of the 1995-2005 period."

Quite a drastic change to their business prospects going forward!

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Hat tip to Arun, who pointed out that Lennar has sold much more property in their "fire sale". I would like to note that, at least for the time being, these transactions should not be considered fire sales, but normal economic activity considering the macro environment.