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Will the commercial real estate market fall? Of course it will.

Required reading for this article: The very first paragraph of the very first post I made on this blog and "the Great Global Macro Experiment".

Of course commercial real estate is going to fall. Why? For the exact same reason residential real estate is falling. But, there hasn't been an oversupply of commercial real estate, you say. Well, the oversupply is not the core reason why residential is falling right now. Residential RE's problem is that easy, cheap money brought upon wreckless, imprudent speculation from players who were not well versed in the real estate game - and even those who should have known better. The current oversupply is a byproduct of that liquidity induced speculation. Why split hairs? Because the devil is in the details. The downfall of CRE is the rampant speculation that caused many to significantly overpay for assets that are quite illiquid and take significant expertise and time to improve (or even sell), even incrementally. Not only did they overpay, but they applied significant leverage as well, much more than the industry norm.

A Quick Commercial Real Estate Primer: Pricing Commercial Real Estate

There are several ways to price and value CRE, but the simplest and most straight forward is the capitalization rate (cap rate).

The cap rate is simply net operating income/price. The result is a yield that you can use to compare to other investments in order gauge relative price/return - such as the 10 yr. note yielding 4.114%. For instance, I buy a building for $100,000 and it throws off $10,000 after all operating expenses. $10,000/$100,000 = .10 or 10% = the cap rate. Thus this building is priced at a 10% cap rate, or priced by the seller to give the buyer a 10% return, unleveraged. This 10% return priced into the building allows a 589 basis point risk premia over the 10 yr treasury. Why, you ask? Because the office building is much riskier, being very illiquid, taking many months or years to close on and sell. The office building inherently has risk of litigation, operational risk, and market risk. It also requires a modicum of operational expertise, and in addition there is credit risk (through your lessees(?) So, as you can see, the risk premia is well deserved.

Now, many (in order to juice the return a bit) apply leverage through mortgages, bank loans, etc. to spice up the return, albeit at the risk of higher volatility of cash flows and the possibility of running negative cash flow in tight years. Assume, I used 30% of my own monies ($30,000) to buy this building and borrowed $70,000 for the rest. I now get that same $10,000 net operating income off of a $30,000 cash outlay, vs a $10,000 cash outlay. So now I yield 33% return instead of a 10% return due to leverage. Of course my astute readers realize that the cost of this leverage was not factored in. Let's assume the debt service for this loan is $4,900 per year. I must deduct that interest and principal repayment from my operating profit. This is reality. Thus, my leveraged yield is really something akin to 17%. Still not bad, and still better than 10%.

Toll Brothers numbers deteriorating rapidly

Keep in mind that this is one of the three best run of all the public homebuilders (NVR, TOL, and MDC), and they have what I consider the most respectable, straightforward and honest CEO in the business. This is at least from what I have heard him say in the press and conference calls - no BS, no contradictions, and fully admits the current RE situation - despite the fact his company is one of the best positioned, he says the future looks dire. Hovnanian's CEO on the other hand, whose company's financials are quite bad, has called a bottom on many an occasion and has shown that he was not even aware of a market top, at the market top - Credibility is the Key to Success for a CEO – Hovnanian has Lost that Key: A letter to Mr. Hovnanian  (notice the difference in share price between TOL and HOV). Despite my appreciation for Toll's CEO, they have reported some pretty bad numbers. They are still kicking out positive cash flow, but they are losing a fortune on their inventory. I am sure they will be negative cash flow by the end of '08.

I say this because this portends what I have been alleging for some time now - this may be the demise of the majority of the big public home builders. The binging on debt at the top of the market is, well... bad for business. I am not going to prognosticate who will make it and who will not, but I can tell you it will be a rough ride for all, and quite a few will go belly up.

From the WSJ.com

Toll Brothers Swings to Loss
On Land Value Write-Downs

By NICHOLAS HATCHER and KATHY SHWIFF
December 6, 2007 5:29 a.m.

Toll Brothers Inc. Thursday said it swung to a fiscal fourth-quarter loss of $81.8 million, or 52 cents a share, from a year-earlier profit of $173.8 million, or $1.07 a share, due to more write-downs of land values amid the continuing housing downturn.

Results for the quarter ended Oct. 31 included pretax write-downs of $314.9 million, or $1.22 a share. Year-earlier results included $115 million, or 42 cents a share, in land-related write-downs.

Excluding write-downs, Toll Brothers earned 72 cents a share, compared with $1.49 a share a year earlier.

The Huntington Valley, Pa., luxury-home builder said total revenue fell 35% to $1.17 billion from $1.81 billion.

On average, analysts polled by Thomson Financial expected a loss of 77 cents a share on revenue of $1.17 billion.

Backlog as of Oct. 31 was $2.85 billion, down 36% from $4.49 billion.

Toll Brothers said it isn't providing forecasts for fiscal 2008 earnings, but predicts revenue to be below that of fiscal 2007.

Toll's shares closed Wednesday at $20.72.

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.

Lennar's 50% haircut does not make them look any better

Now that I have had a chance to actually go through what Lennar's transaction is about, I have a lot more to say. Here goes...

From WSJ.com:

Lennar Corp. has sold about 11,000 home sites to a venture mostly owned by the real-estate arm of Morgan Stanley for $525 million, a large land sale that signals that investors have begun to pounce on bargain deals.

The sites -- in 32 communities in areas hit hard by the housing downturn -- were valued on Lennar's books at $1.3 billion as of Sept. 30. The low price the venture paid is a vivid sign of how land values have plummeted with the downturn, precipitated by defaults on subprime mortgages and tightening credit that have led to a broader slowdown in sales.

I could have sworn Lennar's CEO was just in the news saying they were going to mothball properties (sit on them) until the market turns. Maybe I was imagining it. My Voodoo post alleged Lennar was borderline insolvent. This recent news item simply reinforces that, and brings them closer to that insolvency. The assets that I used for that calculation have now been devalued by 50%, although some of it has been replaced by cash which Lennar is in desperate need of. Hence, they have now just about arrived at full balance sheet insolvency, yet have pushed cash flow insolvency back another $525 million. I got the 50% number in lieu of the 60% number published in the media because Lennar recieved 20% equity ownership in the venture that they sold the company to, and retained 50% voting rights and rights of first refusal for reacquisition at market prices, which should have an optionality value of about 3%.

BUTTTTT!!! This is the kicker, now we can mark their current inventory holdings to market, at about 50% of what was reported in their financial statements (see the links below for detail on how to see through this). Not to pick on Lennar, the other builders are holding the same inventory, depending on geograpic location, of course. Running this through my fully consolidated Lennar model (the one built for the Voodoo post that consolidated a lot of the hidden off balance sheet debt and assets), let's see what we get...

First off, we apply our market mark of 50% to raw land, work in process, an investment in unconsolidated entities (we'll put a much smaller mark on the finished sites, but valuation looks bearish in many areas). We also put the mark on goodwill (which in this situation is really Bull@#$@), and we'll leave the other assets category alone for the most part to give them the benefit of the doubt. Financial assets (mortgages, Lennar did $10.5 billion last year) in the categories of "held for sale", "held for investment" and "held to maturity" (notice how this number increased, denoting a problem selling them) will get the same haircut E-trade got, which admittedely is a gross generalization, but if anything is conservative since the E-trade MBS assets were likely far superior to Lennar's (who assuredely got quite aggressive pushing mortgages to move their difficult inventory) with an average FICO of 720 and 50% of them rated AA or higher.

The result??? For Q307 we have $6,277,501,000 in total assets and $5,315,821,000 in total liabilities. The net equity divided by total shares outstanding gives us a book value per share of $6 (hint: the builders have been trading at a deep discount to book value - Shhh! Keep this on the down low). For the next fiscal quarter, using the model's projections, you get negative equity, or insolvency as I predicted in the voodoo post. The good (okay, the better) news is that Lennar has pushed off cash flow insolvency for a year and marginally improved their Z scores with this deal. According to the new cash infused Z scores, they have bought themselves an extra year before bankruptcy. Since it appears many home builder investors either don't know about Lennar's off balance sheet shenanigan's and inventory valuation games or don't care, they may actually get away with trading at $15 to $20 per share while actually being insolvent. Hey, Enron got away with it at $90 per share, at least for a while.

For those who haven't been following Lennar in my blog, here is a quick update on their situation in full and explicit detail (for those that thought the Voodoo post was too bearish, recent events bring much more to light):

• Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth
• Straight Talk From the ex-Homebuilder CFO: Yes.. straight from the Lennar CEOs mouth... land has zero value...
• Straight Talk From the Homebuilder CFO: The tricks builders use to disguise the true losses on their book value
• Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
• Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II
• Straight Talk From the Homebuilder CFO: How independent are the independent auditors?

Lennar takes a 60% hair cut to unload properties.

From WSJ.com:

Lennar Corp. has sold about 11,000 home sites to a venture mostly owned by the real-estate arm of Morgan Stanley for $525 million, a large land sale that signals that investors have begun to pounce on bargain deals.

The sites -- in 32 communities in areas hit hard by the housing downturn -- were valued on Lennar's books at $1.3 billion as of Sept. 30. The low price the venture paid is a vivid sign of how land values have plummeted with the downturn, precipitated by defaults on subprime mortgages and tightening credit that have led to a broader slowdown in sales.

I could have sworn Lennar's CEO was just in the news saying they were going to mothball properties (sit on them) until the market turns. Maybe I was imagining it. My Voodoo post alleged Lennar was borderline insolvent. This recent news item simply reinforces that, and brings them closer to that insolvency. The assets that I used for that calculation have now been but by $775 million, albeit they have been replaced by cash which Lennar is in desperate need of. Hence, they are closer to balance sheet insolvency, yet have pushed cash flow insolvency back another $525 million.

For those who haven't been following Lennar in my blog, here is a quick update on their situation:

• Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth
• Straight Talk From the ex-Homebuilder CFO: Yes.. straight from the Lennar CEOs mouth... land has zero value...
• Straight Talk From the Homebuilder CFO: The tricks builders use to disguise the true losses on their book value
• Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt I
• Straight Talk From the Homebuilder CFO: The Coming Land Recession, Pt II
• Straight Talk From the Homebuilder CFO: How independent are the independent auditors?

Ryland’s off balance sheet ventures, consolidated and fully updated

I have updated my analysis on Ryland to include a full consolidation of off balance sheet vehicles and a more complete run down of their cash situation. They are one of the cleanest builders once it comes to JVs, with off balance sheet debt having a minimal impact on their financial situation. Unfortunately, that financial situation still has a very negative outlook with the company struggling for cash, and coming closing to tripping covenants, renegotiating said covenants, then coming right back to the point where they will trip them again -while attempting to manage debt by paying down cheaper long term debt with more expensive short term debt. This is all a result of the horrendous macro environment they are working in, and the management's selling of shares into a corporate buyback program doesn't exactly invoke confidence in the alignment of management and shareholder's interests. I calculate they will trip existing covenants this upcoming fiscal year and run out of cash shortly thereafter, prompting a need to borrow even more. Download the research report update on the Ryland Group here, in pdf and/or continue on for the highlights in html.

Key Highlights

Declining homebuilding margins: Ryland's homebuilding gross margins are expected to be under continued downward pressure amid declining home prices and sales volumes off deteriorating homebuilding sector in the United States. This coupled with rising inventory impairment charges and increased price concessions and sales incentives to foster sales has resulted in even a more difficult operating environment for Ryland. The company reported negative gross margins of 1.2% and 0.3% in 2Q2007 and 3Q2007, respectively, with the margins not expected to turn positive in the next couple of years. We expect full year 2007 gross margins to be 1.9%, and believe the downward trend would continue with the expected negative gross margins of 3.5% and 2.8% in 2008 and 2009, respectively.

Inventory impairment: As a result of declining home values, Ryland recorded an inventory valuation adjustment (downwards) of $128.1 million in 3Q2007, representing a negative earnings impact of $3.05 per share. In midst of declining home prices, the company is expected to book an inventory impairment charge of $438.5 million and $317.4 million for 2007 and 2008, respectively. However, we believe Ryland is strategically better placed vis-à-vis its peers with regard to inventory holdings in the worst hit markets in the United States. Owing to its strategy of geographical diversification as evident by the fact that not more than 10% of the company's capital is allocated to any single of the 28 markets it operates in, Ryland had limited exposure to the most disturbed housing markets. In the most overheated US markets, including California, Phoenix and Fort Meyers, Ryland had only 12.0%, 2.6% and 1.6% of its total assets as on June 30, 2007, respectively. As a result, Ryland's inventory impairment charge as a percentage of inventories for the 3QFY2007 was 5.4% against an average of 8.0% for its peer group. For the purpose of our analysis we have taken Ryland's peer group to include Lennar Corp, KB Home, Dr. Horton Inc, Pulte Homes Inc, Hovnanian Enterprises Inc, Beazer Home, MDC Holdings Inc and Sparkassen Immobilien.

Mounting troubles in Financial Services: Increasing interest costs on warehouse lines of credit off rising spreads resulting from tightening of lending standards, and growing difficulties in resale of mortgages in the secondary market pose a challenge for most US homebuilders offering mortgage financing to home buyers. Ryland's mortgage financing business has been impacted by the currently prevailing tough credit conditions with the company's mortgage origination capture rate falling to 77.7% in 3Q2007 from 82.2% in 3Q2006. The company's ability to sell majority of its mortgages under a no-recourse agreement to a third-party financing company has also been affected with its principal buyer, Countrywide Financing, running into financial troubles. Apart from compressed margins, this may translate into Ryland having to hold a larger proportion of its mortgages on its balance sheet, with all associated risks of defaults.

Limited exposure to JV liabilities: Ryland's total exposure towards debt through unconsolidated entities is among the lowest in the industry. As of September 30, 2007, Ryland participated in 11 joint ventures with about $30.4 million investments in unconsolidated entities and $41.7 million representing the company's share in the total joint venture debt. With relatively lower concern over hidden liabilities associated with the company, investors and creditors could place higher confidence under the present difficult housing scenario in the United States.

Higher cancellation rates: The recent quarters have witnessed cancellation rates of the homebuilding companies increased to a significant level, driven by tightening lending standards and persisting negative consumer sentiments. Ryland's 3Q2007 cancellation rate was 43.0%, up from 34.3% in 2Q2007. We expect this to increase further to average at 47.5% for 2007 and 39.9% for 2008. Faced with higher cancellation rates, Ryland faces the pressure of offering price discounts and incentives to dispose for cancelled housing units which could further strain the company's margins. The company has initiated efforts to reduce its inventory levels and is cutting down on its land holdings with its total land lots under control as of September 30, 2007 standing at 45,254, a 32.4% decline over the previous year. The company's owned lots (63% of the total lots) declined 14.2% y-o-y while its option lots (37% of the total lots) fell 50.4%.

Disappointing 3Q2007 results: Ryland's 3Q2007 revenues declined 35.2% to $732.3 million against $1,130.9 million in 3Q2006 off a 32.3% decline in deliveries to 2,495 units and a 2.7% decline in average sales price to $284,000. Including inventory valuation adjustments and write-offs of $128.1 million, Ryland reported negative gross margin of 0.3% versus gross margin of 22.5% in 3Q2006. Ryland net loss was $54.7 million or $1.30 per share against net earnings of $87.9 million or $1.97 per share in 3Q2006.

Possibility of downgraded credit ratings: Responding to concerns about the company's ability to reduce its inventory levels and generate positive cash flow, S&P changed its outlook for Ryland in November 2007 from stable to negative, rating the company at BBB-minus. Moody's has also announced it may downgrade its rating for Ryland's senior unsecured debt rating to junk from Baa currently.

Refinancing long-term debt with short-term debt: During 3Q2007, Ryland pre-paid $75 million of senior debt financing partly by drawing $42 million from its revolving credit facility. Of late Ryland has been aggressively utilizing its borrowings under revolving credit facility and has drawn down $63 million, $11 million and $42 million in 1Q2007, 2Q2007 and 3Q2007, respectively, bringing its aggregate borrowing under the revolving credit facility to $117 million (of its total borrowing limit of $750 million). As the company is scheduled to repay another long-term debt installment of $75 million in 2Q2008, we expect company's utilization under its revolving credit facility to increase to $217 million by the end of 2008. This refinancing would entail increased interest costs for Ryland as the company finds itself hard tied to repay its short-term credit line borrowings which carry higher costs vis-à-vis long-term finance. Further, as Ryland faces negative operating cash flow of $505.2 million in 2009, we expect the company to drawdown additionally under its credit line raising its total drawdown to $717 million by the end of 2009.

Increased cost of financing: In view of deteriorating financial condition of the company, we believe Ryland would not be able to uphold conditions set forth in its debt covenants starting 4Q2008 with a leverage ratio of 47.9% (against prescribed leverage ratio of 47.5%). As the company undertakes further borrowing under its revolving credit facility, Ryland's leverage ratio is expected to increase to 66.3% in 2009 (against prescribed limit of 37.5%), and to 85.0% and 93.3%, in 2011 and 2012, respectively. With increased use of short-term borrowing and widening gap between Ryland's leverage ratio and prescribed limits, we envisage increase in financing cost for Ryland. We expect Ryland's effective interest rate to increase from 4.4% in 2007 to 5.6% in 2008. For 2009, 2010 and 2011, we expect Ryland's effective interest rate to increase to 6.4%, 6.6% and 6.8%, respectively.

Negative management outlook: Since August 2007, insiders have been net sellers, selling approximately 0.49 million shares or 1.2% of outstanding shares worth $15.5 million, reflecting the management's reduced confidence on the company's prospects in the near term.

Voodoo, Zombies, Lennar’s Off Balance Sheet Accounting and Other Things of Mystery & Myth

Before we get started with my dark missive, let's clarify the title with a few definitions and a brief history lesson:

Voodoo Accounting - Any form of accounting that does not follow principles of conservatism. While there are many methods by which financial statements can be fudged, it always comes down to inflating revenue or hiding expenses. Any method that boosts profitability through accounting tricks eventually catches up with the company. As soon as it does "poof", past profits disappear like magic. (Hence the name "voodoo accounting"). My calculation of Lennar's fully consolidated financial statements show that about 40% of its full recourse debt lies off balance sheet.

Zombie - Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to the high costs associated with certain operations. Most analysts expect zombie companies to be unable to meet their financial obligations. Also known as the "living dead" or "zombie stocks".

Insolvency - a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities.

Lennar Corporation - a company that I am short that is:

1. borderline insolvent;;
2. makes use of voodoo accounting to book profits from assets held off balance (to boost performance metrics) and conceals significant debt off balance sheet as well (to health metrics);
3. is operating at negative margins;
4. significantly discounting an exorbitant amount of inventory that is extremely overvalued in a highly unfavorable macro environment that is getting worse, not better.

Enron - The Enron scandal was a financial scandal that was revealed in late 2001. After a series of revelations involving irregular accounting procedures bordering on fraud, perpetrated throughout the 1990s, involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing the largest bankruptcy in history by mid-November 2001. Enron filed for bankruptcy on December 2, 2001.

As the scandal was revealed, Enron shares dropped from over US$90.00 to just pennies. Enron's plunge occurred after it was revealed that much of its profits and revenue were the result of deals with special purpose entities (limited partnerships which it controlled). The result was that many of Enron's debts and the losses that it suffered were not reported in its financial statements. In addition, the scandal caused the dissolution of Arthur Andersen, which at the time was one of the world's top five accounting firms.

Historical dictionary ends here, Dark Missive restarts...

Unfortunately, it appears that I have reached formatting limits of the blogging mechanism that I am leasing, so the charts may be a little difficult to read. Here is a .pdf verstheion of the analysis portion of this blog post (the part without my smart ass opinions) which should be more legible for those who have a problem reading the html blog version below. Feel free to distribute it at will. 

Now, to the point - Lennar is leveraged to the hilt. They have a significant amount of debt, a murderous macro environment, a dead business model, and cut throat competition. They also have a lot of secrets hidden off balance sheet. I will leave the research report below untouched, and simply add some highlights here (due to my inability to post the edits).

Now, after that brief history and vocabulary lesson, I need someone like Stephen Kim from Citibank to issue another fundamentally silly, yet overly bullish report on the homebuilders again so I can strengthen my short position on Lennar. Before the pundits and legal eagles come after me, let it be known that I am not accusing Lennar of fraud or wrongdoing, but I am accusing them of underperformance and the use of off balance sheet vehicles to conceal assets, debt, and risk from investors. What's the difference, you ask? Well, there is reality in the accounting sense, and economic reality. Lennar has $5.5 billion of off balance sheet debt, more than a billion of that fully recourse or otherwise holding the company directly liable. They have not violated GAAP rules, to my knowledge. But, the economic reality is that debt is debt, liabilities are liabilities and ROI and ROA are real measures of performance. Despite the fact that LEN's books are kosher from an accounting perspective belies the fact that they are highly misleading from an economic perspective, which is the perspective that rewards the investor.

To put this into perspective, notice that a proper forensic consolidation of Lennar's full recourse debt (and debt that can attach to the parent company assets through contractual means) shows that Lennar carries about half of its debt, and probably even more of its total liabilities off balance sheet and does not report on it. That is scary for a company that is writing down assets by the billions and is facing sequential quarterly losses in a negative macro environment amongst intense competition. As mentioned in the parenthetical, I have been very, very conservative in this forensic examination. Absolutely no non-recourse debt is involved (I had $3.5 billion of non-recourse to choose from, and it still draws debt service and encumbers assets). My models are flexible enough to granularly segregate the various tranches of debt and include them at will.

Properly including contractually enforceable and full recourse debt shows an extremely high probability of bankruptcy in 8 quarters. The currently published probability is in the high 80% range, though to be conservative the graph states 72%.

Including JV's
Debt Rating  (Including JV's)	2005	2006	2007E	2008E	2009E	2010E	2011E	2012E
Working Capital / Total Assets	0.55	0.55	0.50	0.47	0.39	0.35	0.27	0.22
Retained Earnings / Total Assets	0.32	0.37	0.32	0.28	0.22	0.13	0.05	(0.02)
EBIT (trailing 12 months) / Total Assets	0.16	0.07	(0.14)	(0.12)	(0.14)	(0.17)	(0.16)	(0.13)
MV of Equity / BV of Total Liabilities	1.26	0.50	0.86	0.91	0.91	0.88	0.88	0.81
Sales (trailing 12 months) / Total Assets	1.11	1.31	0.91	0.68	0.67	0.73	0.82	0.88
Z-score ( Including JV's )	3.50	3.03	2.02	1.77	1.52	1.30	1.23	1.18
Debt rating	CCC+	CCC	CCC-	CCC-	D	D	D	D

In my opinion, and according to some extremely thorough research, Lennar should have been rated as deep junk as far back as 2005. It's debt to enterprise value, debt to equity, debt to capitalization, and practically any other metric that measures debt or earnings quality looks dismal, indeed.

I am sure many of you are saying that they just have to last a few quarter to grow out of this…

This graph of gross margins looks more like a Stephen King animated horror graphic than a financial projection, but it is highly justified (see the report below). Lennar will probably not see positive numbers until after 2012.

Now, on to the formal analysis:

It appears as if Tousa has stopped trading permanently

It was last sighted at 16 cents. Lev has filed. Reference the warnings about Tousa earlier in this blog. I am working on a piece now about a very large builder who should be going down the penny stock route as well. I'll try to get it up tonight.

A Sneak Peek at the Next Lennar Analysis

I know I said I would have the Lennar report by last weekend, but it has been a monumental task to sift through the mish-mash that was passing as disclosure. I will probably post it tomorrow, or the day after. Here is a sneak peak of what I will focus on.

I have been a little critical of the ratings agencies, and I don't think I have been unfair. Look below to see what I think this formerly investment grade company should have been rated since '05, after consolidating JV's and off balance sheet debt. I know many will say non-recourse this, minority ownership that, blah, blah, blah. Listen, if you are going to book the profits from a vehicle, you should book the liability from said vehicle too. It's real simple. If you can take loss from investment in, or debt towards, a vehicle, it should be reported. I guess those smartest guys in the room at Enron taught the rating agency guys and sell side analyst community very little. Hey, what do I know, I am just a lone, unknown Internet blogger.

Fully Consolidated Bankruptcy Scoring, Including Off Balance Sheet Vehicles
	2005	2006	2007E	2008E
Z-score ( Including JV's )	2.50	2.18	1.59	1.48
Reggie's Debt rating	CCC	CCC	CC	CC

Remember, a score of 1.8 or lower indicates a 72% probability of bankruptcy in 8 quarters.

Now, even as an unconsolidated, standalone entity, Lennar does not look like a good credit risk. Fully consolidated, it is time to pull debt our of Lennar before its too late. Remember, nearly a billion dollars of off balance sheet debt is full recourse, a quarter billion of off balance sheet debt is recourse through reimbursement agreements, $676 million in joint and several recourse off balance sheet debt, plus of course $3.7 billion in non-recourse debt, odd balance sheet. Then there is $2.5 billion in on balance sheet long term debt. Keep in mind that this company's revenues are forecast to be about $6.7 billion (with nearly a billion dollars in annual losses) and its equity market is only $2.7 billion. Despite that, momentum traders have turned this into a commoditized trading vehicle that ignores the fundamentals - pushing the stock up significantly over the last two days, if fundamentals ever came into play to begin with. These guys are trading about $2 worth of debt for every $1 of stock they buy and sell.

Much, much more to follow. See also Lennar Comes Clean! $5.5 billion of off balance sheet debt

Market data of for Levitt has been halted

This was another company on our bankruptcy list. LEV is in some serious financial trouble. They are the ones that created Levittown in LI, NY and have been around for a while. Rumor has it that they not only halted developments in Florida, but had to hire security so unpaid subcontractors would not attempt to remove objects from the development site.