7. Lennar Corporation (NYSE:LEN)
Number of Hedge Fund Investors In Q1 2024: 75
Lennar Corporation (NYSE:LEN) is a major American home builder with a presence all over the country. Being a home builder means that the firm relies on low interest rates to fund its growth. This is true for the demand side and the supply side of Lennar Corporation (NYSE:LEN)’s business. The demand side relies on low rates to take out affordable mortgages, while the supply side relies on low rates to finance large building projects. Given that the market adjusted its rate cut expectations in April, it’s unsurprising that Lennar Corporation (NYSE:LEN)’s shares are down by 6.7% since then. However, the settlement of a historic home brokerage commission lawsuit earlier this year could see commissions drop and inject more demand into Lennar Corporation (NYSE:LEN)’s market. Additionally, in today’s high rate environment, the firm has proven to be quite agile. It is transitioning to an ‘asset light’ model through which it expects to reduce land holdings and reduce exposure to land speculation and high carrying costs.
Baron Funds was gushing about Lennar Corporation (NYSE:LEN)’s asset light model in its Q1 2024 investor letter. Here is what the firm said:
We are bullish on the long-term prospects for Lennar. We believe the company is exceptionally well run, favorably positioned to generate compelling long-term growth, and committed to unlocking shareholder value through several strategic initiatives.
Given its massive size (the company delivered 80,000 homes across its national footprint in 2023), Lennar benefits from important scale advantages that enable the company to attract labor, procure materials, and acquire land more easily and at more favorable pricing than its smaller competitors. Lennar is using these advantages to transition its business model into a “capital-light manufacturing operating model” whereby new homes are “manufactured” at a consistent pace throughout the year while employing a “land-light” strategy to reduce capital requirements. This transition is enabling Lennar to more easily meet its growth objectives (grow new home deliveries by approximately 10% per year) while improving operating and capital efficiency and reducing business risk. The transition has also led to improved cash-flow generation, which the company has been deploying for debt repayment, dividends and share purchases. The company is now sitting on approximately $5 billion of cash, which equates to approximately 11% of Lennar’s market capitalization. We anticipate that a large portion of this cash will be returned to shareholders via share repurchases. We are excited about this business transition and think it may lead to a higher valuation multiple over time.
We are also encouraged that management is exploring taking additional steps to create shareholder value by reducing capital intensity and simplifying the company. For example, last month management discussed the prospect of spinning off as much as $4 billion of land assets into a separate entity. Management may also monetize its partial interest in a large multi-family portfolio via the sale of the portfolio.
Although we are pleased with the strong recent share price performance of Lennar, we still underwrite compelling annual returns over the next few years, as we expect Lennar to compound book value per share at a mid-teens rate and see potential for the valuation multiple to expand further.
