Lennar Corporation (NYSE: LEN, $105.18; Market Capitalization: $27.6 billion) took a significant step in its long-term strategic transformation by completing the spin-off of Millrose Properties (NYSE: MRP, $28.03; Market Capitalization: $4.7 billion) on February 7, 2025. This move marked the culmination of a multiyear shift toward an asset-light, land-light operating model for the company. By transferring its land banking assets into Millrose, a publicly traded Real Estate Investment Trust (REIT), Lennar has effectively decoupled land ownership from its core homebuilding operations. Millrose will now be responsible for acquiring, developing, and delivering finished lots to Lennar on a just-in-time basis, allowing Lennar to focus on its core competency i.e. home construction, while significantly reducing capital intensity and balance sheet risk.
This transformation is rooted in Lennar’s evolving land strategy, which has increasingly relied on land option contracts rather than outright ownership. As of March 2025, approximately 98.0% of Lennar’s lot position was controlled through land option contracts reflecting a dramatic shift that can enhance capital efficiency and supports stronger cash flow generation. The spin-off of Millrose Properties further institutionalizes this approach, enabling Lennar to maintain a flexible and scalable land pipeline without the burden of land carrying costs.
With this asset-light model firmly in place, Lennar is now doubling down on a volume first strategy. Lennar’s 1Q25 results highlighted the balancing act between sustaining sales momentum and managing profitability in a challenging housing environment. Consumer hesitancy, driven by high mortgage rates and insufficient down payment savings, required the company to provide increased incentives to drive demand, which put pressure on margins (~388 basis point YoY contraction in EBIT margin to 9.4%). We believe, US housing will continue to be plagued by historically low affordability with little relief in sight, as a modest pullback in rates will get offset by higher home prices in the near-term.
The company is now targeting 8.0–10.0% YoY annual growth in home deliveries, with projections of up to 87,000 closings in FY25, including contribution (~4,000 units) from its partnership with Rausch Coleman. To achieve this, Lennar intends to leverage pricing strategies via elevated buyer incentives, which may further compress gross margins. However, we expect margins to act as a shock absorber, which are likely to support consistent volume growth and cash generation.
For 2Q25, Lennar Corporation expects new home orders in the range of 22,500-23,500 and home deliveries in the range of 19,500-20,500. The company expects its average sales price to decline to $390,000-400,000 (1Q25: $408,000), reflecting continued affordability-driven pricing adjustments. The gross margin on home sales is expected to fall to 18.0% from 18.7% in 1Q25.
The establishment of Millrose Properties and the continued execution of Lennar’s asset light strategy reinforce the company’s long-term positioning for resilience and profitability. By delegating land acquisition and development to a specialized REIT, Lennar can concentrate on its core strength i.e. efficient homebuilding while mitigating capital risk and enhancing operational flexibility. That said, the broader US housing market remains under pressure from persistent affordability challenges, elevated mortgage rates, and softening consumer sentiment. These headwinds, as acknowledged by management in the recent quarterly results, are likely to impact near-term order volumes and compress margins. In this environment, Lennar must continue to carefully manage inventory levels and adopt dynamic pricing strategies to protect profitability and sustain market share. We maintain our target price of $121.00 per share on Lennar. Given a reasonable upside of 15.0% from the last closing price, we revise our rating to a BUY on Lennar. While FY25 may be a transitional year with some earnings softness, the outlook for FY26 and beyond is improving, making Lennar a stock to watch in the homebuilding sector.
Key highlights of the conference call (1Q25)
• Revenue growth of 4.4% YoY was driven by consistent volume growth and a balanced sales pace. The homebuilding segment delivered 17,834 homes, up 6.2% YoY. However, gross margins declined to 18.7%, largely attributed to increased sales incentives (+13% YoY), primarily used to offset affordability constraints faced by buyers. While incentives are currently above normal levels, Lennar expects them to stabilize around 5-6% in the long term, which would support a gross margin recovery to the mid-20% range.
• Selling, General & Administrative (SG&A) expenses amounted to 8.5% of revenue, which were slightly elevated due to ongoing restructuring and operational adjustments following the Millrose spin-off.
• Millrose Spin-Off: Lennar completed the spin-off of Millrose, distributing 80% of Millrose’s shares to Lennar shareholders. This move was a part of the Lennar’s intended transition to an asset-light, land-light model, which reduced the company’s exposure to land ownership and development risks.
• Rausch Coleman Acquisition: The acquisition of Rausch Coleman Homes was a strategic move to expand Lennar’s market presence and operational efficiency. This acquisition aligned with Lennar’s asset-light model, enabling the company to enter new markets with reduced capital intensity.
• Lennar improved its inventory turnover to 1.7x, up from 1.5x in the previous year. The company ended the quarter with approximately 38,300 homes in inventory, including 3,100 complete but unsold homes, which equates to about two unsold homes per community. This is within the company’s target range and reflects disciplined inventory management.
• Lennar continues to focus on reducing construction costs and improving operational efficiency. In 1Q25, direct construction costs decreased 2.5% YoY, marking the lowest cost levels since 3Q21. This decline was achieved through strategic partnerships with trade suppliers and ongoing improvements in supply chain management.
• Macro Environment: The broader housing market continues to face headwinds, with mortgage rates remaining high and consumer confidence wavering. While underlying demand for homes remains strong, affordability challenges and tight lending conditions have limited actionable demand. This environment has led to increased use of incentives across the industry to support sales. At the same time, Lennar highlighted ongoing supply constraints due to years of underproduction, restrictive zoning policies, and higher land development costs. These constraints have kept the overall housing supply tight.
• Pricing: To maintain steady sales despite affordability challenges, Lennar relied on pricing adjustments, mortgage rate buydowns, and closing cost assistance. These strategies were particularly necessary in high volume markets such as Florida and Texas, where affordability constraints were more pronounced. While these measures have pressured margins in the short term, they have been instrumental in maintaining the sales pace and preventing unsold inventory accumulation.
1Q25 results
Total revenue grew by 4.4% YoY to $7.6 billion (+1.9% vs. consensus), driven by a 5.1% YoY growth in the Homebuilding segment to $7.3 billion. Financial Services segment revenue grew 11.0% YoY to $277.1 million, and Others by 191.2% YoY to $7.4 million. Multifamily segment revenue declined 51.3% YoY to $63.2 million. EBIT declined 26.0% YoY to $720.7 million (+1.8% vs. consensus), and the corresponding margin contracted ~388 bps to 9.4%, impacted by a decline in the operating earnings of the Homebuilding segment due to a decline in the average sale prices. Net earnings declined by 27.8% YoY to $519.5 million (+11.7% vs. consensus), and the corresponding margin contracted ~303 bps to 6.8%. Earnings per share stood at $1.96 (1Q24: $2.97), beating the consensus by 13.1%.
The Homebuilding segment revenue growth was driven by a 6.2% YoY growth in home deliveries, offset by a 1.2% decline in the average sales price to $408,000. Segment’s gross margin contracted by ~310bps YoY to 18.7% (1Q25: 21.8%) due to rising land costs and a drop in revenue per square foot on account of increased sales incentives of 13.0% YoY, which were used to offset affordability constraints faced by buyers. The decline in gross margin was partially offset by lower material costs due to reduced construction expenses. Operating earnings declined by 21.3% to $809.3 million. The Financial Services’ segment operating earnings grew 9.3% YoY to $143.5 million, primarily due to higher volume from increased deliveries.
Investment Thesis
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 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.
Valuation and recommendation
Lennar Corporation (Stub Entity)
We value Lennar using the relative valuation methodology 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. 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.
A challenging market due to weak affordability as highlighted by the management in recent results and softening consumer confidence weigh on Lennar’s near-term orders and profitability. We continue to ascribe a P/E multiple (x) of 10.5x and adjust our earnings outlook to reflect impact of lower new orders and gross margins. We arrive at an implied equity value of $30.3 billion. We consider the revised diluted shares outstanding of ~263 million for per share fair value computation. Our fair value for Lennar (Stub Entity) stands at $115.3 per share. We add the Millrose’s 20.0% per share fair value to arrive at a stub target price per share of $121.0. We revise our rating to a BUY from HOLD on Lennar.
Company Description
Lennar Corporation (Stub Entity)
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. The Financial Services segment provides mortgage financing, title insurance, and closing services primarily for buyers of Lennar’s homes through the LMF Commercial subsidiary. The Multifamily segment develops high-quality multifamily rental properties, and the Lennar Other segment comprises investments in technology initiatives directly or indirectly related to improving its business.
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