On February 07, 2024, Millrose Properties (NYSE: MRP; $26.74; Market Capitalization: $3.5 billion), and Lennar Corporation (NYSE: LEN, $121.94; Market Capitalization: $32.2 billion) started regular-way trading. MRP opened at $23.49, made an intraday high of $27.07, and a low of $22.26 before closing at $26.74. LEN opened at $126.52, made an intraday high of $126.70, and a low of $121.40 before closing at $121.94. Post separation, Millrose converted into an independent, publicly traded company which will engage in land purchases, horizontal development and homesite option purchase arrangements for Lennar and potentially other homebuilders and developers. Meanwhile, Lennar (RemainCo) will focus on being a pure-play homebuilder specializing in the construction and sale of homes, primarily focusing on entry-level and first-time buyers, supported with an asset-light, land-light strategy.
On September 20, 2024, Lennar Corporation, one of the largest homebuilders in the US, announced its intention to spin off some of its land banking assets. Accordingly, on December 18, 2024, Millrose filed Form-S11 with the SEC in relation to the planned spin-off. On January 10, 2025, Lennar Corporation announced the distribution record date and timelines for a taxable spin-off of approximately 80% of the Millrose Properties (Millrose) stock. As per the arrangement, Lennar Corp. shareholders were to receive one share of Millrose for every two shares held in Lennar Corp, resulting in a spin-off ratio of 1:2. The transaction was intended to be taxable for US federal income tax purposes, and no action was required from stockholders. The record date for the spin-off was January 21, 2025, and Millrose common stock commenced regular way trading on the NYSE on February 07, 2025, following the completion of the distribution under the symbol ‘MRP’, while Lennar Corporation (Parent) continues to trade on the NYSE under the ‘LEN’ ticker.
We maintain our HOLD rating on the Lennar (Stub Entity) with a target price of $130.0 per share. Lennar, a leading US homebuilder, is well-positioned to benefit from industry growth trends like the need for affordable housing and rising urbanization. The company’s shift to an asset-light, land-light model enhances its focus on homebuilding and financial services. However, the US housing market faces challenges like rising mortgage rates and potential oversupply, which could slow sales, especially in less affordable markets. Homebuilders like Lennar must strategically manage inventory and pricing to maintain profitability and market share. In case of Millrose, given that the stock has run up significantly post start of RW trading, we revise our rating to HOLD (previously BUY) while maintaining our target price of $29.0 per share. The company is uniquely positioned to capitalize on the growing demand for residential development while mitigating the risks associated with traditional land banking. We believe, the HOPP’R portal will further enable it to leverage Lennar’s expertise in real estate financing, ensuring efficiency and reduced long-term land holding risks.
Deal Overview
On September 20, 2024, Lennar Corporation, one of the largest homebuilders in the US, announced its intention to spin off some of its land banking assets. The spin-off, named Millrose Properties Inc. (Millrose; SpinCo), will qualify as a Real Estate Investment Trust (REIT), which will acquire and develop land for Lennar and other home builders, providing fully developed homesites through land option contracts.
Accordingly, on December 18, 2024, Millrose filed Form-S11 with the SEC in relation to the planned spin-off. Lennar initially plans to distribute approximately 80.0% of the outstanding shares of Millrose’s common stock to its existing stockholders in a partial, taxable spin-off. Lennar will issue to each of its stockholders one share of Millrose’s common stock for every two shares of Lennar common stock held at the close of business on the record date, resulting in a spin-off ratio of 1:2. It plans to subsequently dispose of the remaining approximately 20% in a spin-off, a split-off or another separate transaction. The planned spin-off is subject to final approval from the Lennar Board of Directors and other certain other customary conditions. Millrose’s Class A Common Stock (but not Millrose’s Class B Common Stock) will be listed for trading on the NYSE under the ticker symbol “MRP” and trading may begin as soon as the distribution is completed.
On January 10, 2025, LEN disclosed the timeline for Millrose Separation. The record date for the spin-off was January 21, 2025, whereas the distribution will take place prior to the opening of trading on February 7, 2025. Millrose common stock commenced when-issued trading on February 5, 2025, which will continue up to the distribution date. Post separation, Millrose common stock commenced regular way trading on the first trading day following the completion of the distribution. Post separation, Millrose Properties (NewCo) listed on NYSE under the symbol ‘MRP’, while Lennar Corporation (Parent) will continue to be listed on NYSE.
Lennar will contribute (i) the use of Homesite Option Purchase Platform (“HOPP’R”) trademark rights, (ii) land assets including approximately $5.0- 6.0 billion of developable Homesites and prospective Homesites (iii) the services of personnel relating to the identification, evaluation and acquisition of future land inventory and land development and (iv) up to approximately $1.0 billion in cash. Millrose intends to use approximately $900 million of the cash contribution to acquire the land assets of Rausch Coleman Companies, LLC, (Rausch) a privately-held US homebuilder whose business, personnel and other assets will be separately acquired by Lennar.
Prior to the spin-off transaction, Lennar first purchased all of the home building operations and related personnel, outstanding contracts and liabilities of Rausch. Millrose then acquired the stock of Rausch that holds land assets (except for any Homesites with homes under active construction). The acquired land assets were then made subject to the Lennar Agreements, and Lennar paid Millrose an additional approximately $100 million in Option Deposits. This transaction referred to as the “Supplemental Transferred Assets Transaction” and this current and future Homesite inventory that will be acquired by Millrose will be termed as the “Supplemental Transferred Assets.” As of September 30, 2024, the Transferred Assets and Supplemental Transferred Assets consisted of an estimated 105,440 Homesites in 26 states.
The spin-off underscores Lennar’s shift toward an asset-light, land-light business model, a direction the home builder has been moving since 2020. Previously, on March 17, 2021, Lennar had announced its plans to consider spinning off some of its ancillary business divisions to become a focused, pure-play homebuilding and allied financial services company. Later, on July 29, 2022, the spin-off was named Quarterra Multifamily (QMF), which focused on developing, owning, and managing the multifamily, single-family rental, and land development strategies on behalf of institutional partners. However, due to unfavorable market conditions, the spin-off was postponed.
Millrose intends to elect and qualify to be treated as a REIT for federal income tax purposes beginning with its first taxable year ending December 31, 2025. The distribution of Millrose common stock is expected to be taxable to Lennar stockholders as dividend income. Additional details about timeline for the spin-off completion, are unavailable.
Deal Rationale
Lennar Corporation is among the leading builders of quality homes for all generations. Its operating segments include Homebuilding operations, Financial Services, Multifamily, and Lennar Other. The company’s management intends to transform it into a pure-play, asset-light homebuilder. This vision includes the development of a “just-in-time” homesite delivery program, where land is held and developed by third party entities until Lennar is ready to build. This approach reflects a culmination of nearly a decade-long strategic pivot towards a more streamlined, homebuilder-centric model. It aims to enhance cash flow, reduce capital expenditure, and improve returns on invested equity. For the last several years, the company has been reducing its reliance on land it owns and increasing its access to land through options and joint ventures. As of September 30, 2024, 81.0% of its total homesites were controlled through options with land banks, land sellers and joint ventures, compared to 73.0% as of September 30, 2023. Management believes that operating as a pure-play homebuilder and financial services company could simplify its structure and enhance value for its shareholders.
The company is currently looking at approximately a $5.0 billion to $6.0 billion of land that it expects to spin-off into a new public company with no associated debt. The spin off highlights Lennar’s transition to a business model with reduced exposure to the high carrying costs related to land assets. This protects the company from potential market downturns that could devalue these holdings.
As per management, the spin-off would be a way to have a consistent source of funding as the company moves to a “land light” construction model. It is also expected to help Lennar shift from relying on private equity to fund lot production. This move underscores a broader trend towards the ”asset-light” business model, which is now widely being adopted by major homebuilding enterprises, public and private.
The proposed spin-off could also drive a re-rating for Lennar (RemainCo) over time, as the market assesses the company’s new profile when the spin is completed. By reducing the opacity associated with land speculation and focusing on core homebuilding operations, Lennar aims to create a more transparent and predictable business model. This transparency is expected to unlock new shareholder value as investors gain clearer insights into the company’s operational efficiency and financial health.
In the rapidly evolving, volatile, and unpredictable US residential construction and real estate development market, Lennar’s announcement to spin off a substantial portion of its land holdings marks a significant strategic shift. These steps are expected to streamline Lennar’s operations, improve cash flow, and reduce financial risk, positioning the company for sustained growth.
On the other hand, the transaction should enable Millrose to raise third-party capital to support its ongoing land development operations. The company will generate returns primarily through option fees rather than relying on land appreciation, adding stability to its income streams and plans to reinvest proceeds from land transactions into new land and development projects, maintaining a continuous investment cycle without the need to return capital to investors.
Investment Thesis
Core Lennar (Stub Entity)
Well Positioned to Capitalize on Growth Trends
The US residential construction market, valued at around $590 billion in 2024, is projected to grow at a CAGR of over 3% from 2024 to 2029. This growth is driven by the increasing need for affordable housing, demographic trends such as millennials entering the housing market, and ongoing urbanization. Lennar, as one of the largest homebuilders in the US, is well-positioned to capitalize on these industry growth trends. As of 3Q24, Lennar holds a market share of approximately 22.8% within the US Construction Services Industry. The company offers a diverse range of home types, from entry-level to luxury homes, catering to various customer segments, which helps it attract a broad customer base and adapt to changing market conditions.
Strategic Spin-Off to Enhance Focus and Efficiency
Following the spin-off of Millrose Properties, Lennar is poised to strengthen its position as one of the leading homebuilders in the US. The spin-off aligns with Lennar’s strategic shift towards an asset-light, land-light business model, allowing the company to focus more on its core competencies of homebuilding and financial services. By divesting its land development operations to Millrose, Lennar can reduce its capital intensity and improve its return on equity, making it a more attractive investment for shareholders.
Healthy Order Backlog and Partnerships to Support Growth in a Constrained Housing Market
As of FY24-end, the company has an order backlog of 11,633 homes with a dollar value of $5.4 billion. The US housing market continues to face a supply-demand imbalance, with a chronic shortage of homes driving demand for new construction. Lennar is well positioned to capitalize on this trend, leveraging its extensive land inventory and efficient construction processes. Additionally, purchase of Rausch Coleman Homes, an affordability-priced growth driver is expected to add approximately 5,000 homes, with an average sales price of $230,000 to Lennar’s portfolio. As per media articles, the acquisition alone is projected to account for half of Lennar’s stated 10% growth target for FY25.
Strong Financial Health and Capital Allocation
Post spin-off, Lennar’s financial health remains robust, with significant cash reserves and low debt levels. As of FY24, the company reported $4.7 billion in cash and cash equivalents and a homebuilding debt-to-total capital ratio of 7.5%. The spin-off will further strengthen Lennar’s balance sheet by reducing land-related liabilities and freeing up capital for growth initiatives. Lennar’s disciplined capital allocation strategy, including share repurchases (13.6 million shares repurchased for $2.1 billion in FY24) and strategic acquisitions like Rausch Coleman Homes, underscores its commitment to enhancing shareholder value.
Interest Rate Challenges May Continue to Drive Lower New Orders
During 4Q24, new orders decreased by 3.0% YoY to 16,895 homes, resulting in a dollar value decrease of 1.0% YoY to $7.2 billion. Deliveries too saw a decline of 7.0% YoY to 22,206 homes. The decline can be attributed to several factors, including higher mortgage rates, economic uncertainty, and potential supply chain disruptions. The housing market that appeared to be improving as the Fed cut short-term interest rates, proved to be far more challenging as mortgage rates rose almost 100 basis points through the quarter. As per management, even while demand remained strong, and the chronic supply shortage continued to drive the market, Lennar’s results were driven by affordability limitations from higher interest rates. Accordingly, the sales pace lagged expectations as interest rates climbed and the new orders fell short of expectations vs the guidance of 19,000 homes. Against this backdrop, the company guides to remain focused on volume-based strategy of driving sales and cash flow while using margin as a shock absorber.
Millrose (Spin-Off)
Different From a Traditional Land Bank Model
Millrose Properties will specialize in financing land development activities, including infrastructure installation and the horizontal development of land for homebuilders. This unique positioning allows Millrose to capitalize on the growing demand for residential development while mitigating the risks associated with traditional land banking. Unlike traditional land banks that hold undeveloped land for extended periods, Millrose would focus on shorter-duration land transactions, typically five years or less. This means that the company would acquire, develop, and sell land more quickly, reducing the time capital is tied up in any single project. This approach would allow for a more efficient capital recycling and reduced the risks associated with long term land holding, offering a more dynamic and potentially lucrative investment model.
Capital Recycling to Reduce External Financial Dependence
Millrose’s business model emphasizes the recycling of capital from land sales to fund future acquisitions and developments. This continuous reinvestment strategy would ensure that Millrose will be able to maintain liquidity and consistently finance new projects without the need for external fundraising, thus reducing significant upfront capital requirement and any potential liquidity constraints. This feature would allow Millrose to continue financing new transactions with customers both in times of strong market conditions and in times of market downturns, reflecting the reliable and consistent nature of the structure.
Innovative HOPP’R Portal to Streamline Homesite Delivery
The Millrose HOPP’R portal is strategically designed as an innovation to the current land banking model in the market. The HOPP’R will provide Millrose with consistent capital to purchase shorter duration land, to develop that land, and deliver “just in time” finished homesites to Lennar and potentially other homebuilders. This system leverages Lennar’s extensive experience, innovation, and technology in real estate financing and land development, ensuring operational efficiency and reduced risks associated with long-term land holding. The HOPP’R Portal’s adaptability allows Millrose to attract a broad range of homebuilders and swiftly respond to changing market conditions, positioning it as a compelling option for investors and homebuilders alike. This innovative approach also ensures a steady stream of capital and timely delivery of homesites, significantly benefiting the company.
Heavy Reliance on Single Customer
Initially, Lennar will be Millrose’s only customer, which could limit revenue diversification and pose a significant risk. If Lennar’s demand fluctuates or if the relationship deteriorates, Millrose’s profitability could be severely impacted. While Millrose is in discussions with other builders, securing additional customers in the short term may be a little challenging. Millrose’s ability to expand its customer base and diversify its revenue streams to ensure long-term stability and growth remains a key monitorable. Additionally, Millrose expects that the land assets that it may receive in connection with such other customers will also be current and future Homesite inventory like the Transferred Assets and the Supplemental Transferred Assets of Lennar. However, the land assets may not have similar characteristics in terms of their shorter conversion duration, diversification of geographic markets and development ready status.
Valuation
Millrose Properties (Spin-Off Entity)
Millrose Properties will specialize in financing land development activities, including infrastructure installation and the horizontal development of land for homebuilders. This unique positioning allows Millrose to capitalize on the growing demand for residential development while mitigating the risks associated with traditional land banking. The HOPP’R portal further enables the company to leverage Lennar’s extensive experience, innovation, and technology in real estate financing, ensuring operational efficiency and reduced risks associated with long-term land holding. Millrose’s ability to expand its customer base and diversify its revenue streams to ensure long-term stability and growth remains a key monitorable.
We conducted a Two-stage Dividend Discount Model of Millrose while forecasting continued fee generation from the purchase option agreements with homebuilders and a continued practice of dividend payout ratio of ~90%. Considering a calculated cost of equity of 11.5%, and a stage two dividend growth rate of ~2.0%, we arrive at a fair value of $29.0 per share for Millrose. Given a limited upside of 8.6% post a significant run up in RW trading, we revise our rating to a HOLD (previously BUY) on the stock.
Lennar Corporation (Stub Entity)
We arrive at the Stub value through deducting Millrose’s 80.0% fair value from Lennar (Consolidated). We value the latter using the relative valuation methodology mainly on 2025E P/E. We compare Lennar with listed companies engaged in the residential construction space such as PulteGroup, Inc., Toll Brothers, Inc., D.R. Horton, Inc., NVR, Inc., Taylor Morrison Home Corporation and Meritage Homes Corporation. Lennar, as one of the largest homebuilders in the US, is well-positioned to capitalize on industry growth trends such as the increasing need for affordable housing, millennials entering the housing market, and rising urbanization. Following the spin-off, the company is further poised to strengthen its position with a strategic shift towards an asset-light, land-light business model, allowing it to focus on its core competencies of homebuilding and financial services.
Recent economic data has alleviated fears of a resurgence in inflation. This is anticipated to stimulate broader economic growth, increase demand for both residential & commercial properties, and lead to increased investment and higher property values. However, the US housing market is currently navigating challenges like rising mortgage rates and a potential oversupply of new properties. Rising rates could slow sales momentum, especially in markets where affordability is already strained. This can pose to be a headwind for homebuilders like Lennar, requiring strategic inventory and pricing management to maintain profitability and market share.
We continue to ascribe a P/E (x) of 10.5x (peer median: 8.7x) to arrive at an implied equity value of $41.6 billion. We consider the diluted shares outstanding of ~272 million for per share fair value computation. Our fair value for Lennar (Parent) stands at $153.0 per share. We deduct the Millrose’s 80.0% fair value from Lennar (Parent) per share value to arrive at a stub target price per share of $130.0. We continue to maintain a HOLD rating on the Lennar (Stub Entity).
Company Description
Lennar Corporation (Parent)
Lennar Corporation (LEN), founded in 1954, is a leading homebuilder headquartered in Miami, Florida. Lennar’s operating segments comprise Homebuilding operations, Financial Services, Multifamily and Lennar Other. The Homebuilding segment primarily includes the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land. The Financial Services segment provides mortgage financing, title insurance and closing services primarily for buyers of Lennar’s homes and, through LMF Commercial subsidiary. The Multifamily segment develops high-quality multifamily rental properties and the Lennar Other segment comprises of investment in technology initiatives directly or indirectly related to improving its business. As of November 30, 2023, Lennar employs approximately 12,284 people.
Millrose Properties Inc. (Spin-Off)
Millrose Properties will focus on acquiring, developing, and managing land for residential and commercial purposes. It will also provide Lennar and other homebuilders with land options through land option contracts. It is anticipated to qualify as a Real Estate Investment Trust (REIT). The size of the unit is expected to be $6-8 billion by asset base, with no debt.
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