uploads///Chart  No

Lennar’s Investments in Unconsolidated Entities

By

Apr. 1 2015, Updated 5:05 p.m. ET

Growing through joint ventures

As mentioned in the previous article, Lennar (LEN) creates JVs (joint ventures) for its land acquisition strategy. These JVs are unconsolidated entities, which means they’re not on the company’s balance sheet.

Article continues below advertisement

The advantages of JVs

If managed well, JVs are very advantageous to a company. Through JVs, Lennar (LEN) reduces the initial capital it would have to invest some other way in order to acquire potential future homesites. JVs also help the company get access to land it can’t purchase otherwise.

Participants in these JVs are land owners and developers, other homebuilders, and financial or strategic partners. This type of strategy can help Lennar take on its competition, including PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL).

What are the risks?

During hostile market conditions such as the recent recession, the JV strategy could boomerang. Asset impairments for various reasons might result in a loss of equity. This may lead to some of the JV partners becoming financially unsound, which might put pressure on Lennar if the JV is unable to fulfill its obligations.

But even though JVs are risky, they’re less risky than financing since losses are limited to the extent of the equity portion of the company. Because of this, Lennar is curtailing its joint venture exposure.

D.R. Horton (DHI) has a very small number of JVs, and all of them are consolidated in the balance sheet.

JVs are declining

As of November 2014, Lennar (LEN) had 35 unconsolidated joint ventures compared to 270 in 2006. Lennar’s (LEN) maximum recourse debt exposure related to these unconsolidated joint ventures in 2014 was $24.5 million, while debt without recourse to Lennar amounted to $713.3 million. The recourse debt allows the lender to acquire debtor’s assets in case of default. The investment in unconsolidated entities amounted to $656.8 million in November 2014, slightly down from $716.9 million a year ago.

Major homebuilding ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones U.S. Home Construction Index Fund (ITB) have invested in Lennar with an exposure of 3.36% and 10.8%, respectively.

Advertisement

More From Market Realist

  • BioNano Genomics Saphyr system
    Company & Industry Overviews
    BioNano Genomics (BNGO) Stock Looks Like a Buy, Solid Opportunity
  • Delta aircraft
    Company & Industry Overviews
    Delta Air Lines Updates Mandatory Vaccine Policy, Explained
  • AMC advertisement in walkway
    Company & Industry Overviews
    Why It's Time for Most Investors to Sell AMC Entertainment Stock
  • 100 Thieves founder Matthew Haag
    Company & Industry Overviews
    Why Growing Esports Company 100 Thieves Isn't Publicly Traded
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.