Signs of distress or efficient capital allocation?
---- Recent media reports ----
The Real Deal: "Another major signal of the lackluster multifamily market: One of the biggest homebuilders in the U.S. is selling thousands of luxury apartments in a move that will likely generate billions of dollars."
CoStar: "Lennar’s multifamily segment posted a loss in the fourth quarter and the unit is projected to weaken further at a time when a media report says the national homebuilder has hired JLL to sell a portfolio of 11,000 luxury apartments in its Quarterra arm for an estimated price of $4.5 billion."
---- Background ----
Lennar first mentioned its multifamily development platform back in 2012:
"As demand for new sale housing continues to increase from historically low levels, rental demand has continued to grow, fueled by expanding household formations, credit and down-payment challenged homebuyers, and a steadily improving employment picture. As a result, we believe that our core homebuilding business and our new rental segment are very complementary and that both should flourish in this recovering market."
When it launched a multifamily development platform, Lennar outlined its box as follows...
-- Up to 70% LTC financing
-- Lennar to invest up to 25% of required equity
-- Remaining equity to come from institutional LPs (Pru, Carlyle, etc.)
-- Non-recourse bank construction financing
-- Targeting 125-150 bps over current cap rates w/no trending
-- Targeting 25%+ IRRs and 2x+ multiples
The ultimate goal was always to build and spin a big portfolio...
"While we anticipate merchant building and selling some of these apartment developments once they are stabilized, our long-term goal is to build a portfolio of high-quality Class A income-producing properties across the country."
---- "Quarterra Multifamily" ----
Ten years later, in July 2022, Lennar rebranded its multifamily operations as Quarterra in anticipation of spinning off the company by year-end. But Lennar closed out 2022 by saying, “the current market conditions are simply not favorable to our commercial asset manager spin on the year-end timeline,” and refused to update its timeline.
---- Takeaways ----
Many media reports suggest that Lennar is motivated to sell its Quarterra assets due to recent operating losses. ...almost implying that this is a distressed sale.
We think there's a more likely explanation for Lennar's decision...
-- Lennar's stock increased 65% in 2023.
-- Demand remains strong for Lennar's core product.
-- Lennar continues to generate 25% ish margins building that product.
-- Quarterra accounted for <1% of Lennar's profit over the last 5+ years.
Why deal with the headache when you don't see a return to 25%+ IRRs, 2x multiples, and/or a more favorable IPO/takeout for the platform?
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