Leadership

Lennar's Wholesale Push Reflects First-Mover Play For Volume, Share

Lennar's bid to sell off portfolios of homes and communities in bulk fits a pure-play vertical construction strategy, both in the near term and long term ... on a path to domination.

Leadership

Lennar's Wholesale Push Reflects First-Mover Play For Volume, Share

Lennar's bid to sell off portfolios of homes and communities in bulk fits a pure-play vertical construction strategy, both in the near term and long term ... on a path to domination.

December 12th, 2022
Lennar's Wholesale Push Reflects First-Mover Play For Volume, Share
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Left to right: Stuart Miller, Executive Chairman, Rick Beckwitt, Co-CEO, Co-President, Jonathan Jaffe, Co-CEO, Co-President, Lennar Corporation

Bloomberg staffer Patrick Clark broke a big news story about Lennar last week, reporting that the nation's No. 2-ranked homebuilding firm is pushing a larger quotient of its single-family home production into a widening wholesale channel as the prospects for retail sales to owner-occupiers deteriorate.

Clark writes:

Lennar is circulating lists of properties to potential acquirers, according to people familiar with the matter, who asked not to be named because the process is private. Many of the properties are located in the Southwest and Southeast, the people said, with the builder giving landlords the chance to acquire entire subdivisions in some cases.
A representative for Lennar said the company offers single-family landlords the chance to buy unsold completed homes, as well as homes that are nearing completion, as part of its normal marketing efforts. The most recent inventory list had about 5,000 homes, the representative said, though the number changes monthly."

A news report with a $2.5 billion revenue implication for a Fortune 100 publicly traded enterprise is noteworthy in its own right.

However, it's actually three meaningful stories in one, with implications of at least $18 billion in the immediate term of the next six to 24 months, and probably five to 10 times that in a time-frame of three to five years.

To appreciate the up- and downstream ramifications takes context, an understanding of how this insight's coming to light impacts both competitors and business partners, and what it signals both near-term and long-term.

Here's what builders need to know

First, let's peek at the Lennar strategy. Is Lennar's push now to offload single-family homes to investor/developers as BTR stock a strategic shift? The question is valid. Why? Well, the mere fact that a journalist gets wind of a corporate initiative doesn't mean it's news, it only means that the journalist has just learned of it.

This is important to understand. Lennar Homes' strategy – especially as the corporation moves toward a well-telegraphed asset-light, pure-play vertical which focuses on core value generation around construction as a platform separate from its SpinCo Quarterra Group single-family build-for-rent, apartments and other real estate services – is not lurching in a new direction with its push to sell as many homes wholesale as it can.

Rather, Lennar strategists are exercising tactical options they put in place well before the market showed signs of trouble.

Profitable residential vertical construction is the endgame – whether the customer is a retail owner-occupier or a wholesale investor-developer. Whether it's a single home or a portfolio of homes, pulling as much volume through its national, regional, divisional, and local overhead structure as possible at an acceptable gross margin runs at the root of the strategy. What's changed for Lennar is what's changed for every homebuilder, no matter what the construction and assembly model might be.

That is the question of what consumer households can and will do during 2023 when it comes to the will and the wherewithal to buy, to buy new, to rent, or to sell. Forecasts for new home sales next year are all over the map – ranging from lows of 500,000 or so, estimated by Redfin analysts, to a relatively rosy 663,000, per National Association of Home Builders economics research folks.

If the swing is as bad as some economists project, actual new home sales could crash from 771,000 in 2021 (actual), to 640,000 in 2022 (estimated), to 500,000 in 2023 (projected). In new home sales revenue dollars, that two-year swing would suck $80.4 billion out of the market vs. 2021 revenues next year.

Here's what it means

This suggests that at least scores, if not thousands of smaller homebuilders, are looking down the barrel of a make-or-break year in 2023, depending on the severity and duration of any downturn of any seriousness.

Fact is, none of us knows. Many of us believe what we most want to believe and look at historical precedents and current data as evidence our belief is correct.

Tactically, a few things are going on with the Lennar push to lighten its inventory of homes under construction and permitted to start that reflect telltales of optionality rather than urgency. We'll start with the obvious – clearing its own overhang of inventory and blocking out rivals' in their efforts to do so – and then add a few, possibly more nuanced insights.

  • With the main focus on securing and closing backlogged homes as planned, clearing its own slack of excess unsold homes with first-mover alacrity is a classic "musical chairs" play that trades on a strategic conviction that giving up a chunk of gains is far better than paying the price – a potentially existential one – of carrying inventory in an "air-pocket" market where very little trades at all.
  • With Lennar's portfolio management play to push inventory more assertively into a wholesale channel, it not only clears its own decks for the chance of a fresh new level-set on pricing, product, and pro- formas in the Spring, but it also takes that channel option away from other homebuilders by beating them to it, amassing a better scaled share of the BTR channel, leaving others the leftovers.
  • As an alternative to "walking away" from land deals, doing build-for-rent ventures with JV partners spares Lennar costs and possible impairments to land, and can serve as bargaining leverage with those investors and land sellers.
  • Further – and very importantly now as commodities, labor, lots and other input cost resources are feeling the first sense of slackness in demand themselves – Lennar is a master in ratcheting down what it will contract to pay more assertively than many other builders. By wresting production visibility through deals with BTR channel investors and developers, Lennar can leverage its push for more favorable pricing with greater local scale and clout as a bargaining tool with vendors and partners.

These are a few of the tactical motivations for Lennar's aggressive push at year-end to get overhangs in inventory slotted into the rental asset class channel while still pulling all of that construction through its system.

Not mentioned in the Bloomberg analysis is an important note, which is that in leaking Lennar's BTR push to the media, would-be home and community portfolio partner prospects – the large financial and strategic players set up for built-for-rent development – are using the media to get better leverage with Lennar on unit pricing by trying to widen the field of homebuilder providers.

Those players in the free-money days paid almost as if there were no limits for the production capacity, but now, to hit reasonable pro formas in an environment of weakening new rent trends, they're having to work to drive down their costs to make their models pencil.

Here's why it matters

There are two kinds of homebuilding operator in the 5,000 or so set that contribute to 20 or more homes a year, and in aggregate, produce nine out of 10 new homes in the U.S.

One kind is in a battle to come out of a downturn that began just before mid-year of this year, and will end who knows when. Survival.

The other kind is in a battle – no less fierce and competitive – to dominate new residential construction, not just this year and next, but for the next decade, and the decade after that.

Lennar's strategy – and its practices as an operator – amount to domination, with relationships, resources, and results in a sustainably regenerative virtuous cycle of profitability and value.

A downturn – even a harder one than many homebuilders and their partners may currently be prepared for – fits squarely into that plan for domination, as others' weaknesses become Lennar's strengths. Five different housing cycles serve as proof.

Potential investor and developer buyers of Lennar portfolios of homes and subdivisions are – by going out to the public media – driving for better pricing for themselves because they need it, and they feel that by opening up the field of play they'll gain bargaining strength.

Execs at Lennar get it. They've seen it before. The smart money says Lennar's bargaining power may be sufficient to accomplish its late-2022 and 2023 performance plan just as it's mapped out. The strategy's center will hold.

ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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