The First of Many Big Bulk Purchases to Occur
December 6, 2007 by Lucas Lechuga
I realize that I'm late to disclose the following information but I thought I'd write a post about it anyways.
There are many of you out there that read about this major transaction on Monday, as I did, in the Wall Street Journal or the many other online and print publications that were released that day. However, I'm sure there are some of you that are unaware of what transpired Monday morning.
Lennar Corp. (NYSE: LEN), a major Miami-based homebuilder in the United States, revealed Monday morning that they sold a substantial portfolio of properties at a large discount. These properties were previously valued by Lennar at $1.3 billion dollars as of September 30, 2007.
The portfolio, consisting of "about 11,000 homesites in 32 communities nationally, consisting of raw land and both partially and fully developed homesites in California, Colorado, Florid, Illinois, Maryland, Massachusetts, Nevada and New Jersey," was sold to a joint venture which consisted of an 80 percent stake by major Wall Street bank Morgan Stanley for $525 Million, or about 40 cents on the dollar. Lennar Corp. will own the other 20 percent stake and receive fees for managing the properties.
I think we'll see more and more of these bulk deals occur in 2008. A major hedge fund analyst that I spoke with on Monday told me that Lennar has traditionally been the first to acknowledge and act on given circumstances. It'll be interesting to see, in 2008, which other developers make the same acknowledgment. It'll be even more interesting to see which major bank is the first to dispose of properties in a major headline sale.
Very very roughly…so if you assume that there is 4 to 1 leverage in the deal (probably not more these days…) and a target equity IRR of 20%, they are expecting the equity component of the deal to more than quadruple in a 5 year time period. Put another way, they are expecting the deal’s total enterprise value to be worth at least $1.5bn in 5 years time for an 18% IRR (have assumed $10m running costs). i.e. back to and slightly above the Lennar value of $1.3bn It’s quite instructive about how sellers have to price if they must… Read more »
these investors can buy in bulk, but what about the small investor? how can you possibly get in on a couple of properties at a good discount. it would be great but 40 cents on the dollar are for Wall Street only.
Lucas, through your closing data research have you found any recent bulk purchases involving any of the new(er) condo projects in Miami?
Brad – It’s a little too early for Miami. I think we’ll see a few announcements around February. My guess is that Star Lofts on the Bay or Onyx on the Bay will be the first to announce a bulk deal.
However, I agree with Ana that the huge discounts are only for large investment groups. These large funds will buy the properties from banks at a considerable discount and then resell them to end-users at about a 20-30% discount off the original price.
So people planning to sell existing homes in 2008 better hold on until at least 2010??
I bought a pre-constr. in March that I can not sell until I own for a year. I was planning to sell and then find a good deal on something else…but…as I read more and more all over the internet…it seems 2008 will be F LOODED with inventory.
I now have 3 investment properties that I am forced to rent and hold on to….
The $ I made in 2005 is now held up on these properties that won’t see appreciation for at least 2 years….
“These large funds will buy the properties from banks at a considerable discount and then resell them to end-users at about a 20-30% discount off the original price.” If this is the case, then why don’t the developers or builders themselves do the same thing? Why take a 60% hit when they can take a 20-30% hit by selling it straight to individuals, as you say the bulk buyers will. It’s not like Lennar is some small-time company. They’re the biggest builder in the nation. I don’t think these “bulk buyers” are going to get the kind of return they’re… Read more »
It’s probably a conspiracy then!
I hope y0u were kidding when you made that comment. I’m pretty sure that Morgan Stanley has people in place that have credentials far higher than yours to make such decisions. I guarantee that Morgan Stanley is not going to take a loss on this deal. But I’ll tell them that BB says that they made a bad decision. I think it’ll make for a laugh for them in the office.
“I’m pretty sure that Morgan Stanley has people in place that have credentials far higher than yours to make such decisions.” I’m sure the CEOs of all the major lenders on the “Mortage Lender Implode-O-Meter” have better credentials than me also. And the top execs of Countrywide Financial and CitiGroup. As well as most of the other major lenders and homebuilders that are on the verge of bankruptcy. It goes without saying that Carl Icahn, the billionaire financial wizard who offered to buy out WCI at $22/share earlier this year (which WCI rejected as too low an offer) is much… Read more »
“I guarantee that Morgan Stanley is not going to take a loss on this deal”
Lucas, BB makes a lot of sense. It is unfortunate that you attempt to trivialize his response.
Citibank, Bear Stearns etc etc will be taking billions in losses. There are hundreds of “expert” analysts and MBAs in all of these companies, and look what it got them.
In a way it is better for the public and the economy that those funds come in even though bulk purchases prevents small buyer to get in the deal. I saw the Onyx proposal and the way it is marketed …it isnt 60% it is more a 30% with prices that were already hich for s singled out tower. Anyway think about the great depression and the outcome of a negative cycle were no one buys because they wait for a better price ..it aint good for anyone buyer seller ..cause the risk is the job market which is the… Read more »
What makes the Miami market worse is the fact that there are fewer big buisnesses. NYC may be selling smaller condos for double the price of Miami, but they have the jobs to back it up. The old adage, build it and people would come doesn’t hold true if those people can’t get a job here. I think Miami needs to start courting these bigger buisnesses and extend Brickell Avenue to welcome them…All these high rises are great..but where are the JoBs?? The fact that we are a no state income state should be a major factor is getting us… Read more »
BB – I agree with much of your assessment but I don’t think that Lennar’s portfolio that was sold to Morgan Stanley has lost 60% of its value since September of this year. The reason why I said what I said is because you stated “Morgan Stanley probably got this stuff for closer to true market value than they realize”. To me that suggests that you feel that the book value of these properties has lost about 60% since they were purchased by Morgan Stanley for about 40 cents on the dollar. I may be wrong about what you meant… Read more »
I think no one is taking into consideration that many of these funds lost their shirts if you look across the board all MBS and CDO’s are way down, no one really knows what they are worth as intelligent as these analysts at Goldman Sachs, Bear Stearns and Lehman brothers are the fact remains that BB is right no one took into account the fact that wages havent doubled like property values over the past 5 years and the fact that its common sense that its not a good deal to buy if it costs you twice to own what… Read more »
Rosemarie – You’re in the same boat that many other preconstruction buyers are in. It may take even longer than 2010 for you to sell for a profit and recoup your cost of carry. Good luck!
“I don’t think that Lennar’s portfolio that was sold to Morgan Stanley has lost 60% of its value since September of this year.” I don’t either. I really don’t know enough specifics about this deal to judge it with any degree of confidence. But I would be curious to see what Lennar’s stated value was on these properties and compare it to the current market value. There is a townhome development in northern Palm Beach County that Lennar was selling pre-construction in the $500-575k range at the market peak. After the market dried up, they had to slash the prices… Read more »
Whoa! Lucas, what a following you have! It is most definitely impressive the analysis you, BB and others in this Blog are able to pronounce. As a new-comer to Blogs, just starting to form my own, I must tell you, my homework is most definitely bigger than I first thought. You and other Bloggers I’ve come to find and like in our local market have most definitely set a high bar for me. THANK YOU. With regards to these large bundled sales and purchases, I have coincidentaly become a participant with a group puting together bundles of $20M+ (looking to… Read more »
This website offers the discounts to individual buyers
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