Lennar Plans $1 Billion of Apartments in Rental Foray
Lennar Corp. (LEN), the largest U.S. homebuilder by market value, said it plans to diversify into apartments with the construction of $1 billion of multifamily properties as rental demand climbs.
The Miami-based company plans to start building 3,000 apartments at a development cost of $560 million this year, Chief Executive Officer Stuart Miller said today on a conference call. The first projects are a $36 million, 316-unit community in Jacksonville, Florida, in partnership with Carlyle Group LP (CG), and a $32 million, 264-unit community northeast of Atlanta.
“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 steadily improving employment,” Miller said on the call.
The plan is the most ambitious foray yet by a U.S. homebuilder into the rental market, said Robert Wetenhall, an analyst with RBC Capital Markets LLC. Apartment demand has surged as millions of people forced out of their houses by foreclosure switched to renting, and stricter mortgage requirements made it harder for potential homebuyers to obtain loans. The U.S. apartment-vacancy rate was 4.5 percent in the fourth quarter, an 11-year low, Reis Inc. reported last week.
Lennar is entering the market as its sales of single-family homes increase and profit margins improve. The company said today that net income for the three months through Nov. 30 rose to $124.3 million, or 56 cents a share, from $30.3 million, or 16 cents, a year earlier. The average estimate of 20 analysts in a Bloomberg survey was for earnings of 45 cents a share.
Revenue rose to $1.35 billion in the fourth quarter from $953 million a year earlier. New orders increased 32 percent to 3,983 homes.
The results included a net tax benefit of $18.6 million. Excluding tax gains, Lennar’s earnings would have been 48 cents a share, Chief Financial Officer Bruce Gross said on the call.
Lennar slipped 0.8 percent to $40.68 at the close in New York. The shares gained 97 percent in 2012, compared with an 84 percent advance for the Standard & Poor’s Supercomposite Homebuilding Index (S15HOME) of 11 companies.
Investors probably expected Lennar to beat estimates by a larger margin, and the announcement about diversifying into apartments may have injected uncertainty into the company’s profile as a homebuilder, according to Wetenhall. The analyst, who rates Lennar outperform, the equivalent of buy, said entering the multifamily segment is “a strong move.”
“Lennar has the management wherewithal to execute this and augment its growth strategy,” Wetenhall said in a telephone interview.
Other builders in the multifamily market include Toll Brothers Inc. (TOL), the largest U.S. luxury-home developer. The company has invested in joint ventures developing apartments, including spending $15.4 million for a 50 percent interest with Brandywine Realty Trust in a 398-unit project in Plymouth Meeting, Pennsylvania.
Lennar has opened multifamily development offices in Atlanta; Chicago; Dallas; Seattle; San Francisco; Orange County and Santa Barbara in California; Charlotte, North Carolina; Miami and Jacksonville, Miller said.
It will take as long as three years for the apartments to contribute to income, Miller said. Lennar may sell the properties and continue as an operator through a fund “where we could accumulate a huge portfolio of income-producing properties that would benefit the company on the long-term basis,” he said.
Lennar’s entry into apartments puts it in competition with real estate investment trusts at a time when construction has increased and rents have begun to level off, said Jeffrey Langbaum, an analyst with Bloomberg Industries.
“Apartments are the one real estate property type where new construction is already approaching historic levels, driving rental growth rates lower for existing landlords,” he said in a e-mail. “Additional new supply would theoretically exacerbate that situation.”
Lennar may be competing with REITs including Post Properties Inc. (PPS), Camden Property Trust (CPT), Mid-America Apartment Communities Inc. (MAA) and Colonial Properties Trust (CLP) in the southeast U.S. and AvalonBay Communities Inc. (AVB), Essex Properties Trust Inc. and BRE Properties Inc. (BRE) on the West Coast, Langbaum said.
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