Real Estate

Builder dumps homes in Morgan Stanley deal

Lennar sells portfolio previously valued at $1.3 billion for $525 million to joint venture owned 80% by Morgan Stanley.

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By Chris Isidore, senior writer

Morgan Stanley has swept up 11,000 properties from homebuilder Lennar Corp. for $525 million.

NEW YORK( -- In another sign of the collapse of the market for new homes, builder Lennar Corp. has dumped a portfolio of 11,000 properties for 40 percent of their previously-stated book value.

Lennar (Charts, Fortune 500), the nation's largest builder in terms of revenue, is selling the properties to a joint venture it has established with the real estate arm of Wall Street bank Morgan Stanley (Charts, Fortune 500). Morgan Stanley will own 80 percent of the joint venture, while Lennar will own 20 percent.

Lennar announced the deal late Friday as its fiscal fourth quarter came to a close. It is selling the properties for $525 million, even though it said their book value as of Sept. 30 stood at $1.3 billion. Lennar also will receive fees for continuing to manage the properties, which include mix of raw land as well as partially and fully developed homesites.

The shares of most major home builders were up in early afternoon trading Monday, with Lennar gaining nearly 4 percent, while Morgan Stanley shares were off 1 percent.

The nation's home builders, including Lennar, have been hammered by the problems in the mortgage securities market and the downturn in housing. Last week, the government's report on new home sales reported a record glut of completed new homes for sale, and the biggest year-over-year drop in the median price of a new home in 37 years. Most builders have had to take large charges against their earnings as they revalued their holdings and walked away from options to buy additional land.

But the deal also suggests that bargain hunters on Wall Street might be willing to step in and try to grab some prime properties at a fraction of their previous value.

"I think this is really starting to show some of the desperation," said Hugh Moore, a principal at Guerite Advisors, a research and financial advisory firm. "The problem is that these national builders came in and overpaid at the top of the market. It was a land rush mentality. And Lennar had the reputation for being one of the more careful buyers."

Mike Larson, a real estate analyst with Weiss Research, said there are a number of so-called vulture investors out there looking to make big purchases in distressed real estate, and that a deal of this size could help spur more of these types of purchases.

"You've got a benchmark to use now," Larson said. The 60 percent discount paid by Morgan Stanley doesn't mean that homeowners looking to sell their own homes are facing that kind of discount, he said. "For sellers holding out for unrealistic prices, it should be a wake up call."

The biggest discount in prices might be in undeveloped land and in condos in vacation and retirement markets such as Florida where overbuilding was rampant, according to Moore.

"It's important to remember that all real estate is local," he said. "I don't think you're going to find en masse suburban single family homes selling for 50 cents on the dollar. But I wouldn't be surprised if you can find some for 75 cents on the dollar."

For Morgan Stanley, which manages $88.3 billion in real estate assets on behalf of its clients, the Lennar deal represents a relatively small bet. It also has not been as badly hit by the subprime problems as some of its rival firms, such as Merrill Lynch (Charts, Fortune 500) and Citigroup (Charts, Fortune 500), which took much bigger than expected subprime charges that resulted in the departures of their chief executives.

"This transaction provides us with increased liquidity and flexibility at an opportune time," said a statement from Stuart Miller, Lennar's president and CEO.

As a part of the transaction, Lennar has options and rights of first offer, giving it the chance to purchase certain finished homesites at current market values. It also could receive extra revenue if the joint venture exceeds financial targets on the sale of the properties.

The sale raised the possibility that Lennar's results in the just closed quarter could again be hit by a large charge for the reduced value of its holdings. Lennar took a $847.5 million third-quarter hit for valuation adjustments and writeoffs of options, a move that plunged the company into a loss more than six times what had been forecast by analysts.

Analysts had been forecasting that its fourth quarter loss would be only a $1.00 a share in the just completed period, which would be an improvement from the $1.24 a share it lost a year earlier an the $3.25 a share it lost in the third quarter. But as glut of new homes on the market continues to push prices significantly lower,

Charges due to reduced land and home valuations have caused most builders to report larger than expected losses in recent quarters. In October, credit rating agency Moody's downgraded the debt of Lennar, No. 2 builder Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status.

Last month Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 7 builder by revenue, reported that the sales pace during October "significantly deteriorated" in most of its markets, and its preliminary results also showed a sharp rise in cancellations. D.R. Horton (Charts, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss last week, but that followed a quarter with a much larger-than-forecasted loss.

Toll Brothers (Charts, Fortune 500) is due to report results Thursday, and the luxury home builder is forecast to report a 46 cent a share loss, its first loss of the current housing slump. To top of page

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