LENNAR CORP LEN.B
April 28, 2017 - 11:43am EST by
Arturo
2017 2018
Price: 42.11 EPS 4.28 4.67
Shares Out. (in M): 235 P/E 10 9
Market Cap (in $M): 11,700 P/FCF 0 0
Net Debt (in $M): 4,728 EBIT 0 0
TEV ($): 16,428 TEV/EBIT 0 0

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  • Homebuilder
  • Dual class

Description

Lennar Class B shares provide an opportunity for a) investors who want to participate in the homebuilding sector at a discount, or b) those who want to speculate that an activist will be able to close the discount in the next 12 -18 months.

Lennar is one the nation’s largest homebuilders, with sales of $11 billion in fiscal 2016. The company operates in four major segments: Homebuilding is 89% of revenue and Financial Services (6% of sales) which primarily originates and resells mortgage related to Lennar built homes derives most of its sales from Lennar’s new home customers.  Lennar’s other two segments are Rialto an investment manager specializing in foreclosed homes, distressed debt and mortgages, and a multifamily construction operation, which primarily operates through joint ventures.

Lennar Corp. has two classes of stock – the Class A shares  (LEN) are actively traded and the Class B Shares (LEN-B) which have identical economic rights, but have 10 votes per share.  Due to the low trading volumes of the Class B shares (approximately 25,000 shares per day) the Class A shares trade at a significant premium to the B shares – currently around 20%.  For investors who are willing to sacrifice liquidity, LEN-B offers an opportunity either as a straight long position or hedged with the Class A shares.

Prior to the great financial crisis, Lennar’s Class B shares sold at a single digit discount to the Class A shares.  The discount widened dramatically in October of 2008 and remained in the mid 20 percent range until recently, when Mario Gabelli’s GAMCO indicated that it had acquired a significant position in the B shares and intends to discuss making the B shares freely convertible into A Shares.

 

                        Lennar Class A Premium

                                Over Class B

     
 

2004

7.1%

 

2005

7.9%

 

2006

7.9%

 

2007

6.7%

 

2008

18.6%

 

2009

30.3%

 

2010

23.8%

 

2011

26.9%

 

2012

26.1%

 

2013

24.9%

 

2014

21.0%

 

2015

22.4%

 

2016

24.6%

 

2017 YTD

23.6%

     
 

CURRENT

20.4%

Lennar’s homebuilding segment operates in 17 states and represents 89% of revenues and roughly 80% of operating profits before corporate G&A. The product mix is primarily focused on entry-level buyers and move-up buyers. Prices range from the $300,000s to the $500,000s.  The average price of a Lennar home delivered in 2016 was $362,000 up from $345,000 in 2015.

New home sales in the United States have been in a slow recovery mode since the 2008-2009 financial crisis, but are currently well blow the levels seen in the 1970s, ‘80, or ‘90s, let alone the early 2000s.  Lennar, with its strong presence in Florida was particularly hard hit, but has managed to grow revenues and profits as the economy has recovered.  Low interest rates have helped as well.

   

AVERAGE SINGLE FAMILY

 
   

HOUSING UNITS COMPLETED

 
   

(000s)

 
       
 

1970s

 

1,095

 

1980s

 

978

 

1990s

 

1,071

 

2000-2006

 

1,433

 

2007

 

1,218

 

2008

 

819

 

2009

 

520

 

2010

 

496

 

2011

 

447

 

2012

 

483

 

2013

 

569

 

2014

 

620

 

2015

 

648

 

2016

 

738

       

 

Risks 

Lennar faces two obvious macro risks.  Homebuilding has always been a cyclical industry.  A decline in the economy and lower employment hurts demand for housing more than most other sectors.  Housing is also particularly sensitive to interest rates as many first time buyers compare the cost of renting versus ownership. 

Another macro factor that has emerged since the GFC is the reduced level of home ownership in general.  Homeownership peaked at 69.2% of households in 2004 and is currently under 64%.  This is close to the levels seen in the early 1960s, just before the Baby Boomers came into the housing market.  Millenials seem less interested in owning homes than previous generations.  Whether this trend will continue or is just a reaction to the excesses of the previous housing bubble, high levels of student loans and a weak job market is hard to say.  On the positive side, new home purchases have been steadily increasing since the 2011 trough and remain 25 to 30% below the 1 million plus average seen in the 1970 to 2000 period.

Since the Miller family controls 40% of the votes, it is unlikely that the Class B shares will become convertible into Class A shares without their support.  The only real benefit I can see for maintaining the discount is the reduction in future gift/estate taxes it provides for the family.  This may not be an issue if Trump’s proposed tax plan goes through, but I have no basis to handicap the likelihood of tax law changes.  If Gabelli’s proposal fails, I think it is likely that the premium would go back to the mid 20s, an increase of about 5 percentage points.

 

Capital Structure

Lennar has 203 million Class A shares outstanding and 31 million Class B shares.  The Miller family holds 21 million of the Class B shares, giving them roughly 40% of the votes.  Stuart Miller, age 59 is the chairman and CEO. 

The Class B shares have been in existence since the company went public in 1971. Initially the Class B shares received 90% of any dividends paid to the Class A shares and could only be transferred within the Miller family.  These rights were modified when the company listed on the NYSE in 2003 and class B shares now receive the same dividends as the Class A shares and are freely tradable. The Class B shares are not convertible into Class A shares except that if the Class B shares become less than 10% of total shares outstanding, they will automatically convert to Class A sha  

Summary 

Lennar is a reasonably priced homebuilder selling at approximately 12 times earnings.  Because of the liquidity discount, the Class B shares effectively sell for less than 10 times earnings.  If there is no change in the conversion rights of the B shares, they should provide a reasonable return.  A successful campaign by Gabelli would provide a nice 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

There is a shareholder proposal in the current proxy statement to eliminate the preferential voting enjoyed by the Class B shares.  While this proposal will clearly not succeed, it has elicited a filing by Mario Gabelli’s GAMCO which owns 3.5 million Class B shares (11%) indicating the Gabelli intends to discuss making the Class B shares convertible into Class A shares and that Gabelli may put this proposal in the 2018 proxy.  This would allow the Millers to retain control, but would close the gap between the Class A and Class B share prices.

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    Description

    Lennar Class B shares provide an opportunity for a) investors who want to participate in the homebuilding sector at a discount, or b) those who want to speculate that an activist will be able to close the discount in the next 12 -18 months.

    Lennar is one the nation’s largest homebuilders, with sales of $11 billion in fiscal 2016. The company operates in four major segments: Homebuilding is 89% of revenue and Financial Services (6% of sales) which primarily originates and resells mortgage related to Lennar built homes derives most of its sales from Lennar’s new home customers.  Lennar’s other two segments are Rialto an investment manager specializing in foreclosed homes, distressed debt and mortgages, and a multifamily construction operation, which primarily operates through joint ventures.

    Lennar Corp. has two classes of stock – the Class A shares  (LEN) are actively traded and the Class B Shares (LEN-B) which have identical economic rights, but have 10 votes per share.  Due to the low trading volumes of the Class B shares (approximately 25,000 shares per day) the Class A shares trade at a significant premium to the B shares – currently around 20%.  For investors who are willing to sacrifice liquidity, LEN-B offers an opportunity either as a straight long position or hedged with the Class A shares.

    Prior to the great financial crisis, Lennar’s Class B shares sold at a single digit discount to the Class A shares.  The discount widened dramatically in October of 2008 and remained in the mid 20 percent range until recently, when Mario Gabelli’s GAMCO indicated that it had acquired a significant position in the B shares and intends to discuss making the B shares freely convertible into A Shares.

     

                            Lennar Class A Premium

                                    Over Class B

         
     

    2004

    7.1%

     

    2005

    7.9%

     

    2006

    7.9%

     

    2007

    6.7%

     

    2008

    18.6%

     

    2009

    30.3%

     

    2010

    23.8%

     

    2011

    26.9%

     

    2012

    26.1%

     

    2013

    24.9%

     

    2014

    21.0%

     

    2015

    22.4%

     

    2016

    24.6%

     

    2017 YTD

    23.6%

         
     

    CURRENT

    20.4%

    Lennar’s homebuilding segment operates in 17 states and represents 89% of revenues and roughly 80% of operating profits before corporate G&A. The product mix is primarily focused on entry-level buyers and move-up buyers. Prices range from the $300,000s to the $500,000s.  The average price of a Lennar home delivered in 2016 was $362,000 up from $345,000 in 2015.

    New home sales in the United States have been in a slow recovery mode since the 2008-2009 financial crisis, but are currently well blow the levels seen in the 1970s, ‘80, or ‘90s, let alone the early 2000s.  Lennar, with its strong presence in Florida was particularly hard hit, but has managed to grow revenues and profits as the economy has recovered.  Low interest rates have helped as well.

       

    AVERAGE SINGLE FAMILY

     
       

    HOUSING UNITS COMPLETED

     
       

    (000s)

     
           
     

    1970s

     

    1,095

     

    1980s

     

    978

     

    1990s

     

    1,071

     

    2000-2006

     

    1,433

     

    2007

     

    1,218

     

    2008

     

    819

     

    2009

     

    520

     

    2010

     

    496

     

    2011

     

    447

     

    2012

     

    483

     

    2013

     

    569

     

    2014

     

    620

     

    2015

     

    648

     

    2016

     

    738

           

     

    Risks 

    Lennar faces two obvious macro risks.  Homebuilding has always been a cyclical industry.  A decline in the economy and lower employment hurts demand for housing more than most other sectors.  Housing is also particularly sensitive to interest rates as many first time buyers compare the cost of renting versus ownership. 

    Another macro factor that has emerged since the GFC is the reduced level of home ownership in general.  Homeownership peaked at 69.2% of households in 2004 and is currently under 64%.  This is close to the levels seen in the early 1960s, just before the Baby Boomers came into the housing market.  Millenials seem less interested in owning homes than previous generations.  Whether this trend will continue or is just a reaction to the excesses of the previous housing bubble, high levels of student loans and a weak job market is hard to say.  On the positive side, new home purchases have been steadily increasing since the 2011 trough and remain 25 to 30% below the 1 million plus average seen in the 1970 to 2000 period.

    Since the Miller family controls 40% of the votes, it is unlikely that the Class B shares will become convertible into Class A shares without their support.  The only real benefit I can see for maintaining the discount is the reduction in future gift/estate taxes it provides for the family.  This may not be an issue if Trump’s proposed tax plan goes through, but I have no basis to handicap the likelihood of tax law changes.  If Gabelli’s proposal fails, I think it is likely that the premium would go back to the mid 20s, an increase of about 5 percentage points.

     

    Capital Structure

    Lennar has 203 million Class A shares outstanding and 31 million Class B shares.  The Miller family holds 21 million of the Class B shares, giving them roughly 40% of the votes.  Stuart Miller, age 59 is the chairman and CEO. 

    The Class B shares have been in existence since the company went public in 1971. Initially the Class B shares received 90% of any dividends paid to the Class A shares and could only be transferred within the Miller family.  These rights were modified when the company listed on the NYSE in 2003 and class B shares now receive the same dividends as the Class A shares and are freely tradable. The Class B shares are not convertible into Class A shares except that if the Class B shares become less than 10% of total shares outstanding, they will automatically convert to Class A sha  

    Summary 

    Lennar is a reasonably priced homebuilder selling at approximately 12 times earnings.  Because of the liquidity discount, the Class B shares effectively sell for less than 10 times earnings.  If there is no change in the conversion rights of the B shares, they should provide a reasonable return.  A successful campaign by Gabelli would provide a nice 

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    There is a shareholder proposal in the current proxy statement to eliminate the preferential voting enjoyed by the Class B shares.  While this proposal will clearly not succeed, it has elicited a filing by Mario Gabelli’s GAMCO which owns 3.5 million Class B shares (11%) indicating the Gabelli intends to discuss making the Class B shares convertible into Class A shares and that Gabelli may put this proposal in the 2018 proxy.  This would allow the Millers to retain control, but would close the gap between the Class A and Class B share prices.

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