Millrose Properties, Inc. (MRP): A Bond Trading Well Below Par
I believe this recent Lennar spin-off is still deeply discounted
Below is my original writeup, written around the spin-off date of 2/7/25. It is then followed by a couple updates since the spin date. While the price has risen a bit since spin, this one is still fairly discounted in my opinion.
Lennar has now spun off its subsidiary, Millrose Properties. They are doing this to continue their stated plan of becoming an asset-light home builder. Millrose will be one of the first (if not the first) publicly traded land banking companies, focusing on providing prominent home builders the ability to stay asset-light while the land is horizontally developed. I’ll discuss the difference between traditional land banking companies and Millrose’s model below.
There are some structural forces at play that I believe make this an attractive opportunity. Chief among them is how the market will likely view Lennar as the "GoodCo" and Millrose as the "BadCo." Lennar will shed about $6-7 billion of land from their balance sheet, with the goal of achieving higher returns on invested capital, which this move should accomplish. I have followed this from a distance for many months, and even I initially perceived it as a GoodCo spinning off an asset-heavy BadCo.
The BadCo will also be a REIT, which typically attracts a much different investor profile than a company like Lennar, so I don’t believe there will be much crossover between the shareholders of these companies. That said, I believe there will be a significant amount of indiscriminate selling, which seems to be happening already.
Lennar is about 80% institutionally owned, and based on the pro forma ownership of Millrose post spin-off, the top 10 institutions will own about 34% of the company. This includes BlackRock, State Street, and Vanguard, who will likely be major sellers. Given the current unfavorable perception of real estate and the likely forced selling, I believe this presents a very attractive investment opportunity, as Millrose will have a solid business model that provides predictable and steady income. My view is that this is a mispriced bond that will slowly go to par as the market better understands it.
Background
According to the S-11 (a registration form for real estate companies, similar to the S-1), Lennar will distribute 80% of Millrose’s shares to Lennar’s common shareholders. The remaining 20% will be temporarily retained by Lennar and eventually disposed of through a “spin-off, split-off, or another transaction.”
Shareholders will receive 1 Millrose share for every 2 Lennar shares they own. It is estimated that there will be 167,646,137 total shares outstanding, with about 135,000,000 (~80%) being distributed to shareholders, and the balance retained by Lennar.
What is Millrose getting?
Millrose will receive:
$5-6 billion in developable homesites (lots),
Up to $1 billion in cash, of which ~$900 million is to be used to acquire developable homesites from Rausch (a builder that Lennar acquired recently),
Intellectual property.
Essentially, they are receiving ~$5.9-6.9 billion in land, factoring in the Rausch land purchase, ~$100 million in cash, and will have no debt, although they are negotiating a $1 billion line of credit.
How the industry operates
The land development timeline can be broken down into 3 main stages; approval/soft development, horizontal development, and vertical development.
The approval process is when plans are created, and various governing bodies must sign off on these prior to breaking ground. I would opine that the most uncertainty lies in this stage as you are at the mercy of various 3rd parties and governmental bodies. A couple years ago I was working with a partner to develop a small flex industrial property and something that was very simple ended up dragging on forever during this stage. My firsthand experience from this stage made me realize that development was not for me and involved too much uncertainty.
Horizontal development is the stage after all approvals/permits have been obtained and ground can be broken. This stage involves putting in all the infrastructure (roads, lights, sewers, electrical, etc) prior to the homes being constructed.
Vertical development is the actual home construction and is the final piece of the puzzle prior to the home being sold to a retail buyer. For builders that wish to remain asset-light and focus on their core competency, this is where they’d like to focus most of their resources. In essence, builders want to have their cake and eat it too in the sense that they’d like to control all aspects of development but have it off their balance sheet for most of this time. You might ask how it is possible to do this, and the answer is through option agreements.
From research I did on another idea (Comstock), my understanding is that NVR and Dwight Schar pioneered the option strategy. NVR filed for chapter 11 protection in the early ‘90’s due to over-extending themselves and post-bankruptcy they transformed into an asset-light company using option contracts to control land, as opposed to owning it. This allows them to shift the risk of a market downturn onto someone else’s balance sheet for fees embedded into the agreement that compensate the land bank for assuming market risk. There is also typically a takedown schedule outlining when the builder is to purchase the lots in a staggered manner.
This concept has grown in popularity with homebuilders as it increases their returns on equity and also allows them to shift market risk onto someone else. Large builders will generally have relationships with multiple land banking partners and these guys provide an invaluable service to builders. They are part real estate partner (offering a service that banks won’t), part lender (extending credit in the form of owning the land and financing the horizontal improvements), and part insurance company (taking on the market risk that the builder doesn’t want) to these builders they work with.
Some example land banking names are Forestar Group (majority-owned by DR Horton), and Domain Real Estate Partners.
What makes Millrose different
Most land banking companies, except for Forestar Group (majority-owned by DR Horton), are private. These private firms have finite investment horizons, requiring them to return funds to investors after a certain period.
Millrose, being a publicly traded company, will act as an evergreen capital provider, allowing them to recycle capital instead of raising new funds repeatedly. This reliability is a significant advantage for their builder partners.
An example would be Farmer Bob owning the land during the land approval stage, the land bank (Millrose) owns it during the horizontal stage, and the home builder (Lennar) owns it during the vertical stage.
Millrose and Lennar’s arrangement
Once Millrose buys the land from Farmer Bob they will reimburse Lennar for site development costs in planned draws in accordance with the master agreement in place between Millrose and Lennar. For instance, if Lennar spends $25mm to complete a phase of development, Millrose will reimburse them this amount.
When the horizontal development is complete and homes are ready to be built, Lennar will buy the homesites from Millrose at predetermined prices according to the takedown schedule. Millrose is now made whole and can rinse and repeat.
By providing this to Lennar, Millrose will receive:
1. A non-refundable option deposit. 5% of the total project land acquisition and budgeted horizontal development costs (which is also the takedown price).
2. Monthly option payments. Based on invested capital × applicable rate / 360 days, with a floor of 7% and a ceiling of 10% (tied to a corporate bond index). For the spin-off assets, the applicable rate is set at 8.5%.
3. Other expenses. As laid out in the agreement, such as insurance.
There are some other interesting elements to Millrose and Lennar’s arrangement. All of this is in the S-11 but I’ll highlight the ones that stuck out to me:
Pooling
Properties (developments) will be pooled together and Lennar will hold the option over the entire pool of properties. The pooling will prevent Lennar from cherry-picking the best land deals and walking away from the bad ones. For example, if Lennar has 40 developments in a pool, they have to either take down all of them or walk away from all of them, there is no in between. This shows the commitment Lennar has to Millrose and how they want this to be a successful arrangement for both sides.
With the assets being transferred to Millrose in the spin-off, they will own 862 properties with a total of 105,440 homesites and a total takedown price of $10.474 billion. These properties are divided into 21 unique pools that Lennar holds options on, and the pools have properties evenly distributed based on location, stage of development, etc.
This is a huge insurance policy for Millrose and drastically reduces their chances of being stuck with undesired land. This is an element that I believe is being overlooked by many people I’ve heard talking about Millrose being ugly. Pooling the properties prevents cherry-picking where the builder takes down the most desirable ones and leaves the land bank holding the rest.
Guaranteeing site improvement costs
As mentioned above, Lennar will guarantee the site improvement cost budget, capping Millrose’s total capital outlay and making it very predictable as far as when and how much capital will be needed on specific projects they get involved in.
Millrose overall strategy
Millrose’s overall focus will be on:
1. Shorter duration deals (less than 5 years) with entitlements already in place.
2. Homebuilder guarantees site improvement costs.
3. Pooling of communities to spread risk.
4. Diversification across many markets.
5. Due diligence done by Lennar, that Millrose reviews.
6. Monthly option payments from high quality builders.
Millrose REIT election and management
Millrose Properties, Inc. (Millrose) will be the REIT and Millrose Properties Holdings, LLC (Millrose Holdings) will be the taxable subsidiary where substantially all business is done. Millrose will initially hold a $4.7 billion note from Millrose Holdings at a rate of 7.5%, and this will be qualifying REIT income.
Millrose’s 2 sources of income will be 1) interest income on the promissory note and 2) dividends from Millrose Holdings. They are acutely aware of maintaining their REIT status and go over the 95/75% income rule in detail. I see no issue with this.
Millrose will be externally-managed by Kennedy Lewis Land and Residential Advisors, LLC. This is a subsidiary of a NY-based asset management group that Lennar states they have had a relationship with for a while now. While I typically don’t like externally-managed REITs, I can find nothing negative about KL and their management fee (1.25% of tangible assets) seems reasonable as Millrose will have no day-to-day expenses beyond this fee. They also have a good bit of experience in land banking and could be able to unlock some non-Lennar builder relationships for Millrose.
Millrose’s valuation
Millrose incorporates elements of a real estate company, a bank, and an insurance company, making valuation challenging due to a lack of direct comparables.
To estimate valuation, I’m valuing it 3 different ways: cap rate, price/FFO multiple (common for REITs), and average lot takedown prices that builders such as Lennar pay.
The assumption I’ve made based on my own real estate knowledge and speaking with others who are in this specific space is that Millrose will hold their properties for an average of 3 years (some will be less, some more, but 3 should be a safe average). I’m also assuming they will only have $6 billion in funds deployed initially, which is the low end of their range ($5.9-6.9 billion of land given).
Based on this, their per share pre-tax yield should be $2.62. and After-tax should be $2.41/share. The after tax figure is a good proxy for FFO since typical REITs do not pay taxes at the corporate level.
Cap rate – On a cap rate valuation basis, applying the following cap rates to Millrose’s after tax yield gets us the following per share valuations:
Low valuation (10% cap rate): $24.10
Mid valuation (8.5% cap rate): $28.35
High valuation (7% cap rate): $34.43
Price/FFO – On a price/FFO basis, using the following multiples (the mid is slightly lower than the average during mid-way 2023 when REITs were very cheap) we arrive at these valuations:
Low (9x multiple): $21.69
Mid (12x multiple): $28.92
High (15x multiple): $36.15
Average lot takedown price for similar builders – Using a range of what builders such as Lennar are paying for finished lots (this was derived from looking at other builders’ filings and determining an estimated average using relevant inputs – happy to send my findings if needed) I created a range with my mid-price at the very low end of the spectrum for most builders.
Low ($65,000/lot): $40.88
Mid ($78,544/lot): $49.40
High ($90,000/lot): $56.60
Value signals and thoughts
The first signal to me is that the Miller family, who founded Lennar, will be electing to receive all their shares as class B. Any Lennar shareholder can elect to receive class B shares, which get 10 proxy votes per share versus 1 proxy vote for the class A shares. The catch is that class B shares won’t be traded and thus should be very illiquid. My guess and Lennar’s guess that they state in the S-11 is that almost everyone will elect to receive class A shares.
Based on pro forma ownership, the Miller family will own 12.8% of the outstanding Millrose shares and assuming they are the only ones receiving class B shares, they will have a voting interest in Millrose around 44%. This will pretty much give them control.
Based on what I’ve gathered and from simply looking at historical charts, Lennar got hit pretty hard in the housing crisis and learned many lessons from that. I’ve listened to Stuart speak on this and it reminds me of NVR and how they emerged post-bankruptcy in the 1990’s with lessons learned and went on to create tons of value for shareholders with a fortress balance sheet.
The Miller family electing to receive illiquid shares in Millrose with a near majority voting interest likely means that they are committed to this being a prosperous venture over the long term. It is also in Lennar’s best interest for this to work as this is a reliable and cheap way to finance their land acquisitions and remain asset-light. And if you look at Lennar there is nothing I can find that shows them acting in ways that are not shareholder-oriented in nature.
Another thought is how they will be a REIT and must distribute 90% of earnings. Most real estate-related REITs (excluding mortgage REITs) have large depreciation costs that allow them to show very little profit, if not a loss. Since Millrose won’t own any depreciable assets (land isn’t depreciable) they will be forced to maintain a dividend that keeps them in line with the 90% rule. This should create an artificial “floor” to their stock price assuming that their earnings remain steady.
And the best of both worlds would be them not declaring a dividend initially, which it doesn’t look like they are doing. This will hopefully allow the price to drop as forced selling occurs and if/when the dividend is announced it could cause it to re-rate fairly fast.
Summary
Home builders need reliable, predictable capital partners that are well-capitalized and Millrose appears to be just that. While Lennar will be their only customer initially, it is possible they will form relationships with other builders as is their stated goal, allowing them to grow. They are negotiating a $1 billion line of credit which would give them dry powder to expand.
Aside from this, they will likely operate with little leverage to be able to withstand market downturns, and their business model allows them to do so by recycling capital. As lots are taken down by Lennar, they will then be able to buy more property and keep the flywheel going. There is a big shortage of housing in the U.S. and my view is that Millrose is a picks/shovels business that should have more stability and predictability than the actual builders.
I view this as a bond trading below par that will eventually end up closer to par once the market understands this better and the indiscriminate selling is finished. And with REITs being heavily influenced by interest rates, any drop in rates would almost certainly be positive for Millrose.
That was my original writeup right around the spin date of 2/7/25. I was extremely conservative and took the low end of Millrose’s ranges given for various things and it is turning out that the ranges that Millrose gave were extremely conservative. For instance, my per-share after-tax yield I was using was $2.41 and turns out it is closer to $2.70 and Millrose’s announced dividend is $2.60 thus far.
This all played into things being more attractive, but a couple things I completely overlooked were Millrose’s ability to use leverage and their ability to generate builder relationships outside of Lennar. Read below to see these updates play out as they occurred in the last few months.
Update 3/25/25
It has been almost 2 months post-spin and Millrose recently announced their inaugural dividend, which is $.38 from 2/7/25 through 3/31/25, or $.65 on a normalized basis per quarter. Which will yield well over 10% based on our cost basis and right around 10% based on current price.
They have also announced that they have a good amount of demand from 3rd party (non-Lennar) builders that are paying over 11% on funds deployed (Lennar is initially paying 8.5%). With our cost basis being about 66% of book value, this ends up being a return of about 16.5% to us. And if leverage is used, this should increase even further.
There have also been several insiders buying, including the CEO who recently bought ~$6 million of shares on the open market. This is a strong signal that there are likely positive things in the future based on what insiders are seeing.
Update 5/14/25
This update is based on the release of their earnings and 10-Q. For Q1 ending 3/31/25 they deployed $351 million with third party customers at a weighted average yield of 11.7%, well above the Lennar weighted average yield of 8.5%. They revised their $1 billion in 3rd party funds deployed they guided for in 2025 up to $1.5 billion. They also increased quarterly run rate guidance to $.69 to $.71/share and intend to pay out 100% of earnings, meaning the dividend will likely increase over time as more funds are deployed to 3rd party builders at higher yields than what Lennar pays.
As of 3/31/25 the total debt was $350 million, with a debt-to-capitalization ratio of 5%. They can go up to 33% without needing approval, meaning they can borrow a lot more if they desire. They’ve now secured a $1 billion delayed draw term loan and already had a $1.3 billion credit facility. This has been necessitated from the large amount of demand from homebuilders.
This is from their recent 10-Q and shows the invested capital for Lennar vs. all others. As the highlighted column fills up over time as 3rd party builders work with Millrose, earnings should continue growing. It seems like demand is very strong based on what Millrose is saying. Both their guidance and subsequent events show this:
If Millrose receives the 11.7% return on capital they’ve been getting on average from outside builders, and pays around 6.4% for the debt, which is around the current rate for their existing debt of SOFR + 2%, the spread is 5.3%. After the management fee of 1.25% the spread is 4.05%. That is super healthy and should be very accretive if they can maintain that over time. This single transaction would add about $.17 annually in pre-tax earnings, with no capital of their own tied up as they would likely borrow the full amount.
If more and more builders recognize this as an avenue to make acquisitions, this will likely increase demand for Millrose’s balance sheet over time.
Update 7/31/25
Millrose released earnings and commentary today and the results were strong. It seems like there is a lot of demand for this product amongst homebuilders and Millrose is filling a gap being a permanent capital solution when compared to private land banks that don’t always have permanent capital at the scale Millrose has.
They raised their end of year quarterly run rate guidance from $.70/share to $.73/share as well and intend to pay out 100% of earnings to shareholders.
Millrose is also unlocking value for builders from land banking services associated with larger M&A transactions. The recent acquisition of Landsea had Millrose contribute about $500 billion to purchase lots the target owned and option them back to the acquiring builder, which is less capital they need to come up with. I would imagine other builders are taking note of this and it could lead to more M&A in this space moving forward.
Their agreements outside of Lennar’s continue to be strong as well with a weighted average yield of 11.4%. With borrowing costs in the 5-6% range and a 1.25% management fee, they have a spread of 400-500 basis points between what they are lending funds out for and their cost of capital. It doesn’t take a rocket scientist to figure out that this kind of net return on assets is highly accretive. A bank would drool over a return on assets that was a fraction of this.
Thesis is on track and my belief is that over time the market will recognize this is a very steady income payer and there should be multiple expansion (or cap rate compression if looking at it through a real estate lens) over time.
It is hard to project figures here with little data that seems to be changing rapidly for the better. But if we use their year-end quarterly run rate earnings guidance at $.73/share, this is $2.92/share in earnings (after tax) and they intend to pay out 100% of earnings. As I write this on 7/25 the price is $30.54, which implies a 9.56% dividend yield that is likely to incrementally rise over time.
My belief is that this should not trade this cheaply, based on the fundamentals. Lots of builders are adopting the “asset-light” model, and there is a shortage of housing in the U.S. I believe these characteristics make Millrose a valuable asset to the homebuilding industry and I expect them to do well over time.
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.
Great write up. Could you share your land sales pricing model with me?