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.
“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 down into the low-300k range.
Now, someone who bought at the lower price may think “wow-what a deal I got!”. However, the reality is that they actually paid the true market value. They didn’t get a townhome for 40% off, they got it for full price, in my opinion. The earlier buyers just paid 75% too much.
In order to make a hedge-fund type profit (big double digit annual returns), you really would have to buy property for 50% off the CURRENT value–not 2005’s price. Even though you got a big discount, you’ve got holding costs and a bad real estate market with prices going down daily to contend with.
If Morgan Stanley really did buy stuff at 60% off the actual late-2007 market value, they’ll probably do fine. But if Lennar was valuing their stuff at the wishful 2005 prices, then I say Morgan Stanley is going to lose money. A big component of this deal seems to be raw land and vacant homesites. You can’t rent out vacant land to cover holding costs. And there isn’t much of a resale market for it and probably won’t be for a long time.
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.
“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 hoping for. I seriously doubt that Lennar really sold their stuff for 60% off the real market value. That’s probably just what they want these investors to think. The stuff they sold was probably over-valued to begin with. Morgan Stanley probably got this stuff for closer to true market value than they realize.
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….
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 sell, because given the cost of capital and risk involved, if I need to make 18% a year over 5 years on this deal, I have to buy at a 50% discount. So developers, two choices – act like investment banks and ride it out for 5+ years – because the required return is now high double digits not 10% (Citi just paid 11% to ADIA for it’s preferred capital – so ANY deal they do for the bank has to have a return higher than this) or sell for 50% off the End 2006/beginning 2007 “market price”
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.
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 smarter than me. However, WCI stock is now trading at $4/share. His intelligence and experience didn’t stop him from attempting to make a bad investment.
My point? Smart, well-credentialed people do not always make the right decisions. MANY, MANY people have been accurately predicting the real estate market’s downfall over the last several years. Many of these people (including myself) used nothing more than a common sense interpretation of what was happening in the market to come to these correct conclusions. You don’t need a PHD in economics to understand that home prices can not double over a period of a few years without people’s salaries doing the same thing. And that prices are not sustainable over the long term without sound underlying financial fundamentals (it shouldn’t cost TWICE to own a condo vs. renting one, for instance).
It’s amazing that all these brilliant people didn’t see this mess coming. But fact is, they didn’t. And now many of them and their companies are in severe financial trouble because of it.
You strike me as a very intelligent person, Lucas, and I think you have one of the best real estate blogs on the web. I was initially drawn to it because of your “just the facts” approach and comprehensive research. I don’t doubt that you are genuinely more optimistic about the Miami real estate market than I am. I do agree with you that there will be many deals to be had in the coming years. If I was in the market for a condo in Miami, I would certainly want you representing me. I think you’ll do quite well in the coming years.
But you must admit that in light of all the recent developments, with some of the leading companies in the real estate and financial industries taking HUGE, multi-billion dollar losses on their recent investments, that saying something like “I guarantee that Morgan Stanley is not going to take a loss on this deal” is rather imprudent at this time.
“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 last front to a worldwide economic crisis (remember the whole world works together) ..that s what we call systemic risk..
Those funds are the guardians of that risk
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 some more buisness to open up shop here…If you have jobs, people WILL come…and condos will have NO problem selling.
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 it costs you to rent. We can go on discussing what these properties are worth, but they are only worth what someone is willing to pay you. SO if no one is buying they are only worth the highest offer that you get in essence. Too many realtors only use the comparable sales aproach to valuation, but the fact is that there are hardly any comparables over the past 6 months in Miami. Many CEO’s including the CEO at Bear have gotten fired for not predicting the losses from Subprime that all the major firms are getting. And the fact is that most of these condos and houses in Miami were financed and the bank is servicing the loan and sold it to Wall Street. Now that all these Mortgage backed Securities went under, all these loans need to be sold and it they are all down so in the next 2 months expect the amount of Bank Owned REO’s to significantly increase in the market, The Bank is not in the Business of holding real estate so they need to liquidate this soon becuase they dont rent them and it is costing them property taxes and maintenance every month. The developers cant cut their prices 50% and have everyone that bought at full price 2 years ago and closed hate them, plus if they sell at that heavy discount they will lose money, so eventually they are going to have to give back to the lenders the product that was used as collateral for the loan so Vulture Funds will come in and buy all these properties at a discount in bulk and people are jsut going to strt walking away from their deposits not to mention many flippers were holding for a properties for a year loosing money but when they sold the property for more it was worth more than they lost so all these speculators made profits. When they see that they are going to have to hold the properties and loose money for the next 4+ years they will realize that they could never afford them in the first place. There is too much inventory coming to the market to fast all at the same time, there are 20,000 condos coming to the market in the next year, its simple supply and demand
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 but that is what I took from it. Prices have definitely come down since September but I think it is closer to 10% than 60%.
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!
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 sell no less than $100M) to investor grups looking for REO opportunities throughout the United States.
There is a potential buyer we are now entertaining, who is looking for several of these ranging in value between $20M and $500M in different parts of the country. These bundles may include all types of real estate, including residential, commercial, land, etc.
What this tells me is simple. Just like banks have bundled and sold in the secondary market those mortgages we pay, they’ve finally come to realize that they best sell these portfolios as well and are very aggressively doing so.
Watching this unfold, it comes to reason for me that major builders, who most probrably also have some of those high worth (even if their salaries don’t reflect it) MBAs, etc, would be looking at opportunities to get points with the bosses and sell portfolios of planned development properties still in the raw land stage, as well as existing finished products that won’t move.
Now they’re playing the same game banks do. It is not the bank’s business to hold property, just as it is also not the developer’s business to do so. At some point, they’re better off out of there, and move on in order to salvage some of their name, let others (the present and new owners), deal with the problem, and find new opportunities.
These are DOERS who take charge and control of their situations. Otherwise, they’d also be at the mercy of “The Market”, and we all know how ugly that can get. Actually, they know and this is why they divest themselves of problems, create opportunities for others, and re-capitalize and recover some of their investments, cut their losses short and move on to the next thing (specially for Lennar which just had their fiscal year end November 30th – what a better time for showing off money in your books than that?).
This scenareo however, creates a new micro problem for these communities, where associations are strapped, people are fed up, services promised may no longer be in their budget to provide and some of those earlier property values may not (never?) recover to those original “exhuberant” levels.
This does not even consider the projects which have become text-book cases for fraud officials at the FBI and other industry experts.
From these experiences, buyers will infer how to deal with new developments in the future and how or when to buy next time a market like the one we recently had comes back. Memories are short, and many will do it again, but the long term effects are still to be known.
The land tracks sold, though not an asset since it doesn’t earn income at this stage, may be purchased by another visionary (just like Lennar once saw a vision for that track, yet the market has thrown them the ultimate curve ball and forced them into a strike zone), smaller investor groups would resell these tracks, some of which may be developed in some way, others will be resold to other bargain hunters and would be homesite owners, etc.
In the end, all this does is trickle down money that ends up in the hands of doers, not monkeys repeating what others are doing. Now, we may see investors (and speculators as I typically see land-owners as since they typically buy and hold land until it becomes valuable to someone) come out again at some level, once they realize that opportunities may be available again.
Some will buy cheap enough to actually be able to rent a unit and at least break even and not have to worry about this alligator eating them up every month. A generally better investment approach in my view for true investors.
The money is freed up for Lennar and others to finally, move on, learn, adjust and create new opportunities. Perhaps they themselves will turn around and purchase some of the many REO opportunities out there and create new wealth from those new opportunities.
Someone else’s loss always becomes someone’s gain. This is how the stock (and really, all), markets live and breathe. Somebody is buying what others are selling.
Between now and 2010-2012, which is when I think the more than 60,000 units of new construction being build or in planning stages will be out, plus the excess inventory of today will start finally balancing out, there will be a fairly flat market filled however, with opportunities for those who have the guts to invest (not speculate), and lament by those who got their butts caught by the elevator doors, so to speak, while trying to exit.
This market, the opportunistic market we are now begining to see, will help many create new wealth. These people probably have staying power and are able to involve themlselves for the long haul.
Though most are still waiting to see if the jury is out on wheather we have hit bottom. I feel perhaps we have…IF investors come back out and start snatching opportunities.
As to the small timer, just contact banks and stay on top of HUD and other agencies selling repossessed homes. Get together with other money people, pool funds, create a venture and beging making offers to purchase REOs, preforeclosures, etc.
Visit builders, join investor clubs like DREIA, do your due diligence and enter into deals with them to take some of their existing inventory at deeply discounted prices. Most builders will deal with you and even sell you their fully, professionally furnished model homes at a discount. It’s there for the asking.
Opportunities always abound…for the DOERS so get in gear and jump into action. Your time has come.
Thank you, Lucas, for the opportunity to learn from you and your followers and to participate.
This website offers the discounts to individual buyers
Hi! I was surfing and found your blog post… nice! I love your blog. 🙂 Cheers! Sandra. R.