Lennar and LNR Relinquish Their Stake in Joint Venture

By Janet Morrissey
From

Lennar Corp. Chief Executive Stuart Miller is seeing no signs that the deteriorating home-building market has bottomed, and Lennar expects to take land-related writedowns of between $400 million and $500 million in its fiscal fourth quarter to reflect the weak conditions.

"Market conditions continued to weaken throughout the fourth quarter, and we have not yet seen tangible evidence of a market recovery," said Mr. Miller, in a statement.

At the same time, the company slashed its exposure to the troubled California market, where market conditions have been deteriorating at a fast clip. Lennar, along with its partner LNR Property Corp., agreed to sell a 62% stake in their LandSource joint venture, whose primary investment, Newhall Land and Farming, owns 15,000 acres of land in the Santa Clarita Valley of California. Lennar and LNR will each receive $660 million for the stake from the new partner, MW Housing. Lennar will continue to get management fees and retain a 19% stake in the partnership.

"I think it sends a signal that they don't want to have their capital at risk in Southern California for the next few years," said Raymond James analyst Rick Murray. He sees the sale as a sign that the company doesn't believe that a rebound in California will happen in the near future.

Mr. Murray adds that it is a win-win situation for Lennar.

"It looks, on the surface, to be a fantastic deal for Lennar," said Mr. Murray. "The company is effectively selling a 62% interest and recovering basically all of the capital that it originally put into the deal when it acquired Newhall." As a result, Lennar will continue to hold a 19% interest and collect management fees on the venture "and have no capital at risk," he said. Mr. Murray doesn't hold shares in Lennar, and his firm hasn't had an investment-banking relationship with the company in the past year.

Lennar, based in Miami, also offered its preliminary results for the fiscal fourth quarter, which ended Nov. 30.

The builder's orders fell 6% in the latest quarter, which is better than many of its rivals, who have been experiencing declines of 20% to 40%. However, the small order decline reflects aggressive price slashing and incentives, not improved demand.

Lennar has acknowledged from the start of the housing slowdown that it has resorted to price slashing and other incentives to move sales. It adopted this strategy early on based on its belief that selling homes and maintaining good liquidity was more important than keeping house prices up during the slowdown.

"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 Mr. Miller. "We ended the 2006 fiscal year with zero outstanding on our $2.7 billion revolving credit facility and over $600 million of cash on the balance sheet."

The price discounting and incentives took a toll on the company's gross profit margins, which were "materially lower" in the quarter, he said.

Lennar expects to report earnings in the range of 70 cents to 75 cents a share. However, the company will take a charge in the range of $400 million to $500 million, in land-related writedowns. When this is factored in, the company will post a loss of between 88 cents and $1.28 a share. Thomson First Call currently lists the company's operating earnings, before charges, of $1.07, down 70% from a year earlier.

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