Required reading for this blog post is the fully consolidated Lennar analysis on my site. That analysis was performed right before Lennar started selling off bulk assets at a sharp discount, which spawned this follow up analysis.

Insolvency: a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency

I am now delivering on the long ago promise to make public the granular calculations of my opinion on Lennar's (the nation's largest home builder) recent property sales to raise cash. I looked at the date the models was completed by the analysts, and yes, it has been over a month. Well, here it is. It has not been proofread yet, so forgive any typos. To begin with, I alleged Lennar was near insolvent over a month ago. Events since then have simply validated my opinion, and intensified them as well. I believe that Lennar did the right thing by selling the assets. They simply waited too long. I have heard from at least two, unrelated private equity parties who both said, unbeknownst to each other, that they have been trying to buy land from Lennar but Lennar had been unrealistic with their expectations in terms of the valuation of the property. Now they are selling at 50% discounts. This should have been done last year. The cost to their net worth will now be astronomical, and as you can see they have already stepped into the realm of insolvency. I will have the full 60 page analysis ready for dowload in a day or two, free for registered users and super free for those who have used the invite tool in the user menu to invite thier friends to visit the blog.

In the Lennar model, I backed into the valuation write down (impairment) it would take to push Lennar's fully consolidated financial statements (not the stuff they have been reporting, but the real deal with all assets and liabilities taken into consideration) into a debt to capital ratio in excess of 100%, or in other words - insolvency. The magic number is anything above 8%. At 8%, Lennar's assets no longer exceed the value of thier liabilities. This is excluding all non-recourse debt and anything that does not contractually bind the company to explicitly extend capital such as maintenance agreements, performance agreements, etc. This is telling, as you may know, since they recently sold large parcels of land and work in process at a 50% discount to reported book (that is 60% as reported in the press, less rights of first refusal and partial ownership of the new venture). This wasn't their tertiary properties (like this one in Chicago) either. Thus, any write down on much of the existing properties will probably be worse since macro conditions are worsening and a significant amount of the properties left are inferior to what they just sold. We haven't gotten very far into this story and already it doesn't look good.

I've decided to make this update as conservative as possible, so I will apply the greatest possible benefit of doubt towards Lennar's favor. For instance, the largest property sale was reported at a 60% discount. I reduced it to 50%. I will assume that that reduced discount is 100% overshot as compared to the rest of Lennar's current inventory and further reduce it by 50% to apply it as a mark to market at 25%. Now, I will redcue that even further for work in process and finished homes and assume a 15% discount on those properties since they are more liquid than raw land (eventhought the original sale included whole finished communities, work in process and raw land and still came out to a 50% off sale). So let's assume we have a weighted average of about 18% discount to current inventory book values. I feel this is extremely conservative, particularly if you read A note on mortgages, overly optimistic recovery rates and recent events... , where in California a 33% price reduction would not move a finished existing REO. Centex, Beazer, Hovnanian, et. al. are having similar issues despite some discounts considerably over 30%. Alas, let's stick with our 18% mark, and consider it the mark that will be fed into the Lennar model.