Builder bets on recovery by purchasing stake in loan portfolios at a discount;
Home builder Lennar Corp. has struck a deal with the Federal Deposit Insurance Corp. that could help the firm replay its success investing in troubled loans during the last major real estate crisis.
Market Watch
Investors bid up the company's shares Thursday but some experts cautioned it may be harder to make the numbers work in the current downturn.
Lennar has positioned itself to benefit further from a real estate recovery through a distressed-land transaction with the FDIC to purchase a 40% stake in bank loans with a combined unpaid balance of about $3 billion.
Late Wednesday, the Miami-based company said it closed transactions with the FDIC to buy two portfolios of loans for $243 million.
Lennar subsidiary Rialto Capital Advisors will conduct the daily management and workout of the portfolios, the company said.
Lennar has purchased a 40% interest in the loan portfolios, while the FDIC is keeping the remaining 60% equity interest. The FDIC provided $627 million of financing at no interest for seven years.
With FDIC kicking in about $365 million in equity, Wall Street analysts pegged the portfolios' overall purchase price at $1.22 billion, or 40 cents on the dollar.
The portfolios include about 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.
"Acquiring and working out distressed real estate loans was a large and extremely profitable part of our business during the last major real estate down cycle in the early 1990s," said Lennar Chief Executive Stuart Miller in a prepared statement.
The builder has been preparing to invest in distressed loans for two years, and it takes "great pride in understanding market cycles and identifying the opportune point of entry," Miller said.
"Our strong cash position and proven track record in this area enables us to capitalize on this market cycle and create long-term value for our shareholders," said the CEO, adding the company expects the deal will be accretive to 2010 earnings.
Deutsche Bank analyst Nishu Sood said Lennar is the first builder to do a major distressed land deal in the housing bust.
"Given Lennar's history of timely strategic decision making, we think investors will give management the benefit of the doubt," the analyst wrote in a note Thursday. "This is appropriate, but at the same time we think there are long-term risks given the unusually severe nature of this cycle."
Shares of Lennar, which in recent years has faced investor worries over its exposure to joint ventures, were up about 8% in afternoon trading Thursday.
"Comparisons abound among both investors and builders between the current period of distress and the early 1990s," Sood said. "If the recovery path of the housing market is similar to the mid- to late-1990s current distressed deals like Lennar/FDIC will look brilliant in hindsight."
However, the analyst worried that the comparison may not be so easy.
"The early 1990s downturn was more typical historically speaking (i.e. V-shaped) and led into an unprecedented 14-year mortgage credit driven upturn," Sood wrote. "This housing downturn by contrast has done nothing but bust historical paradigms. We think this elevates the risk of large distressed deals relative to the early 1990s."
Lennar has purchased a stake in acquisition, development and construction loans, about 70% of which are residential, and the remaining commercial. They are mostly concentrated in Georgia, Nevada and Arizona. In late January, Lennar announced plans to enter the Atlanta market.
J.P. Morgan analyst Michael Rehaut said while 90% of the portfolio is nonperforming, "we believe experience of Lennar's Rialto team managing the portfolio, and the extensive due diligence performed, should result in value creation."
Lennar can achieve this in several ways, "including a discounted payoff, where the borrower pays off the loan balance at a discount but above Lennar's purchase price; foreclosure and liquidation, where Lennar takes back the asset and then sells to a third party; or value add, where Lennar develops or leases the asset and sells at a later date."
Last month, Lennar said it swung to a fourth-quarter profit as the builder was helped by a tax benefit.
In late 2007, the firm sold 11,000 properties to a joint venture with a Morgan Stanley affiliate for $525 million, or a 40% discount to book value. See archived story on the land deal.
Last year, Lennar bought a stake in a joint venture called LandSource. The builder had sold most of its investment in LandSource to Calpers in 2007 at the height of the real estate bubble, before LandSource went bankrupt.
Lennar has positioned itself to benefit further from a real estate recovery through a distressed-land transaction with the FDIC to purchase a 40% stake in bank loans with a combined unpaid balance of about $3 billion.
Late Wednesday, the Miami-based company said it closed transactions with the FDIC to buy two portfolios of loans for $243 million.
Lennar subsidiary Rialto Capital Advisors will conduct the daily management and workout of the portfolios, the company said.
Lennar has purchased a 40% interest in the loan portfolios, while the FDIC is keeping the remaining 60% equity interest. The FDIC provided $627 million of financing at no interest for seven years.
With FDIC kicking in about $365 million in equity, Wall Street analysts pegged the portfolios' overall purchase price at $1.22 billion, or 40 cents on the dollar.
The portfolios include about 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.
"Acquiring and working out distressed real estate loans was a large and extremely profitable part of our business during the last major real estate down cycle in the early 1990s," said Lennar Chief Executive Stuart Miller in a prepared statement.
The builder has been preparing to invest in distressed loans for two years, and it takes "great pride in understanding market cycles and identifying the opportune point of entry," Miller said.
"Our strong cash position and proven track record in this area enables us to capitalize on this market cycle and create long-term value for our shareholders," said the CEO, adding the company expects the deal will be accretive to 2010 earnings.
Deutsche Bank analyst Nishu Sood said Lennar is the first builder to do a major distressed land deal in the housing bust.
"Given Lennar's history of timely strategic decision making, we think investors will give management the benefit of the doubt," the analyst wrote in a note Thursday. "This is appropriate, but at the same time we think there are long-term risks given the unusually severe nature of this cycle."
Shares of Lennar, which in recent years has faced investor worries over its exposure to joint ventures, were up about 8% in afternoon trading Thursday.
"Comparisons abound among both investors and builders between the current period of distress and the early 1990s," Sood said. "If the recovery path of the housing market is similar to the mid- to late-1990s current distressed deals like Lennar/FDIC will look brilliant in hindsight."
However, the analyst worried that the comparison may not be so easy.
"The early 1990s downturn was more typical historically speaking (i.e. V-shaped) and led into an unprecedented 14-year mortgage credit driven upturn," Sood wrote. "This housing downturn by contrast has done nothing but bust historical paradigms. We think this elevates the risk of large distressed deals relative to the early 1990s."
Lennar has purchased a stake in acquisition, development and construction loans, about 70% of which are residential, and the remaining commercial. They are mostly concentrated in Georgia, Nevada and Arizona. In late January, Lennar announced plans to enter the Atlanta market.
J.P. Morgan analyst Michael Rehaut said while 90% of the portfolio is nonperforming, "we believe experience of Lennar's Rialto team managing the portfolio, and the extensive due diligence performed, should result in value creation."
Lennar can achieve this in several ways, "including a discounted payoff, where the borrower pays off the loan balance at a discount but above Lennar's purchase price; foreclosure and liquidation, where Lennar takes back the asset and then sells to a third party; or value add, where Lennar develops or leases the asset and sells at a later date."
Last month, Lennar said it swung to a fourth-quarter profit as the builder was helped by a tax benefit.
In late 2007, the firm sold 11,000 properties to a joint venture with a Morgan Stanley affiliate for $525 million, or a 40% discount to book value. See archived story on the land deal.
Last year, Lennar bought a stake in a joint venture called LandSource. The builder had sold most of its investment in LandSource to Calpers in 2007 at the height of the real estate bubble, before LandSource went bankrupt.
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