Using Veritas to Construct the "Per…

29-04-2017 Hits:94605 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:85519 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:85894 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:89996 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:88430 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:88171 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:59307 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:87762 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:87306 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:87653 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:94065 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:91346 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Last week, we ran a what if scenario assuming the greatest possible benefit towards Lennar's favor in regards to their debt to asset situation, and we came up with insolvency. The reason for my doing such was an attempt to lend an inescapable credibility to my findings. As was stated in the earlier opinion, the mark that was given to Lennar's assets was unrealistically conservative, but was done so to prove a point. Well, now I am here to give a realistic mark, and display the scenario accordingly.

As stated in the earlier analysis, Lennar sold off a large block of assets for approximately 60% of what it was reported as on the books. This discount is to be adjusted to 50% due to some retained ownership and rights of first refusal. Since this sale included a heterogenous mix of raw land, construction in progress, and finsihed communities, it would be unrealistic to attribute the large discount solely to that of the more illiquid raw land. In addition, despite discounts of up to 56%, Lennar, Hovnanian, Centex, Pulte, and Countrywide among several other banks hosting a slew of evergrowing REOs cannot effectively move their inventory as builder backlog decreases, bank REO inventory builds, and builder inventory remains close to static.{readmore}



Although Vegas is an extreme example (it is a leading state in foreclosure rates), this graph serves to illustrate how quickly REOs are ramping up for many banks, who are now competing builders and existing home owners for sales, as was foretold in my Bubbles, Banks and Builders series. This snapshot was taken nearly 4 months ago, before things got as bad as they are now.

So, taking the 60% discount Lennar gave Morgan Stanley, the troubles and foibles mentioned above, and the fact that the discount given on the other two sales weren't disclosed (if it was less than that given MS, it would have been in Lennar's best interests to disclose it), a mark of 50% is quite appropriate.

We won't get into Lennar's off balance sheet accounting since it was discussed in depth in my previous opinions, but the full consolidation of all of Lennar's assets and full recourse liabilities leaves them more than 33% underwater. That is, for every $1 of Lennar stock, Lennar owes $1.33 in debt. That is significant negative equity. It is forecast to get much worse this year, increasing to about $1.72 of debt for every $1 of equity, and trend even worse for the following two years - assuming Lennar is still a going concern at that time. Lenders, BEWARE! Those assets are a bit more impaired than you may believe them to be.

As you can see below, the Z score tells a similar tale.


For the Z score, 1.81 is the line of demarcation that denotes a historical 72% chance of a company going bankrupt in 8 quarters. While not perfect, [[Professor Altman's Z score]] analysis has historically proven to be quite accurate and is widely used. If you look at the chart above, there is significant margin for error, for Lennar score is expected to trend down to about 1.25 by year end, and is currently less than 1.5. To be clear, the Z score measures the probability of bankruptcy, not simply insolvency, which has been illustrated in the previous chart.

Now for those who really don't care that Lennar has more debt than assets, or that there is a high probability that Lennar will be headed towards bankruptcy, we still have something to talk about. After marking Lennar's assets to market, we find that their stock price has not adjusted to the new found asset value. As a matter of fact, it is also ignoring the mounds of debt buried in its JVs.

    Price (08/11/07) Shares outstanding BPS      
      2006 2007 2008 2009
Lennar Corporation LEN 18.32 160 35.3 18.9 14.2 10.2
D.R. Horton, Inc DHI 13.86 315 20.6 17.6 17.6 17.2
Pulte Homes PHM 11.52 256 25.8 20.3 20.6 21.7
KB Home KBH 23.70 90 37.9 33.0 30.7  
M.D.C. Holdings, Inc. MDC 38.89 46 47.9 40.9 39.9 43.0
RYL Group RYL 26.68 42 35.5 30.3 30.1 35.6
Source: Bloomberg Concensus Estimates            

Now to be fair to Lennar, if the other builders had their assets marked to market, their book value numbers will fall significantly as well, with Ryland being a main culprit. There stock is currently trading above the inflated value of their assets, imagine if the assets were market to reality (see icon Ryland Group Summary Update (991.5 kB)). 

Company Market Cap
(US$ mn)
Net Debt              (US$ mn) Current EV
(US$ mn)
        2006 2007E 2008E 2009E
Lennar Corporation            2,935            2,984            5,919        0.52        0.97        1.29        1.80
D.R. Horton, Inc            4,365            4,960            9,325        0.67        0.79        0.79        0.81
Pulte Homes            2,949            3,375            6,324        0.45        0.57        0.56        0.53
KB Home            2,123            1,506            3,628        0.62        0.72        0.77  NM 
M.D.C. Holdings, Inc.            1,783               232            2,015        0.81        0.95        0.97        0.90
RYL Group            1,123            1,042            2,165        0.75        0.88        0.89        0.75
Industry Average              0.66        0.78        0.80        0.75

Alas, if we actually run the numbers on Lennar, even excluding the qualitative and fundamental factors of actual insolvency, they are still roughly about 37% overvalued. Bring in reality and the real world, and they have no real equity value per share, for they have not equity.

Relative P/B Valuation
Lennar Corp 2008
Book value per share 14.54
Industry P/B 0.80
Target Stock Price (US$) 11.59

The data in this summary is derived from my 16 page Lennar update, a comprehensive buy side style research opinion which has all assumptions, metrics, and projections and is available for download (after free registration): icon Lennar Fully Consolidated Analysis (462.52 kB). I respectfully request that anyone who downloads the report or is interested in additional analysis please take the time to complete my site survey. It is voluntary and anonymous, and it assists in delivering research without charge.