Stuart Miller’s Lennar has $7.33 billion tied up in land it does not own

Lennar had $7.33 billion of deposits and pre-acquisition costs on land at Aug. 31, up from $6.38 billion at Nov. 30, even though it owns fewer than 2.5% of the roughly 488,000 homesites it controls ^[1][2]. Executive Chairman and CEO Stuart Miller said the market had “deteriorated since our last earnings call” ^[1].

Net earnings for the quarter fell to $284 million from $591 million, and Miller said Lennar was carrying about 12.0% in incentives along with base price adjustments ^[1].

Lennar’s land model puts its money into deposits and write-offs

Lennar holds almost all of its homesites through options ^[1]. One of its biggest land partners is Millrose Properties, the land bank Lennar spun off, which had about $5.9 billion invested in Lennar deals at Sept. 30 and put $546 million more into Lennar land in its third quarter ^[1][4].

Those options cost money when Lennar lets them go. Its write-offs of option deposits and related costs reached $224 million in the first nine months of the fiscal year, up from $147 million ^[2].

Lennar earned less on each home and cut its delivery target

Gross margin on home sales came in at 15.8%, down from 17.5% a year earlier ^[1]. New orders dropped 9% to 20,879 homes, and the average delivered price fell 3% to $372,000 ^[1].

Miller’s team trimmed the full-year delivery target to 80,000 to 81,000 homes from 82,000 to 83,000 and guided fourth-quarter gross margin to 15.5% to 16.0% ^[1].

The West earned the thinnest margin among Lennar’s regions

Lennar’s quarterly report lists home sales and the cost of those homes for each region ^[2]. By our math the West earned about 12.1% on homes sold, against about 20.9% in the East, and the West also brought in the most revenue at $2.59 billion ^[2].

How to use this

For land and lot sellers

1. Plan for an option contract with a deposit instead of a cash purchase, since Lennar owns fewer than 2.5% of its homesites ^[1]. Ask for the deposit to become non-refundable when due diligence ends and for lot purchases on a fixed schedule.
2. Size the deposit with Lennar’s write-offs in mind. We calculate that its $224 million of nine-month write-offs on option deposits and related costs ran 52% above the prior year ^[2], and a larger non-refundable deposit raises what it costs the builder to drop your lots.

For buyers of new homes

1. Ask the sales office how much of its incentive money can go toward a rate buydown, and get that amount in dollars. On a $372,000 home with 10% down, we calculate principal and interest at about $2,282 a month at Freddie Mac’s 7.24% average ^[3] and about $2,059 at 6.24%, a saving of $223 a month.
2. Request the list of finished homes that have not sold. Lennar had 1.8 completed unsold homes per community across 1,713 communities at the end of August ^[1], and its fiscal year closes on Nov. 30 ^[2].
3. Write every incentive into the purchase contract and confirm whether it requires Lennar’s own lender. Lennar expects its financial services arm to earn $90 million to $95 million in the fourth quarter ^[1].

For investors and lenders

1. Compare the fourth-quarter margin with the 15.5% to 16.0% guidance ^[1]. A result below 15.5% could point to incentives rising again during the fall.
2. Track the balance sheet next to the buybacks. Homebuilding cash fell to $1.15 billion from $3.44 billion at Nov. 30, debt to total capital rose to 16.6%, and Lennar spent $256 million on 3 million shares in the quarter ^[1].