Credit Suisse Bumps Lennar On Five Point IPO Valuation

On July 8, Credit Suisse analyst Michael Dahl released a note, "Five Point IPO Creates Path for Higher Value," updating its target price for Lennar Corp. (NYSE: LEN).

Lennar is the second largest homebuilder in the U.S., delivering 21,000 homes in 2014 across 42 metro markets. Notably, at its peak, prior to the Great Recession, Lennar had delivered as many as 50,000 homes in a single year.

Five Point Overview

On July 7, Five Point Holdings Inc., a JV Lennar formed in 2009 to develop large complicated tracts of land in California -- including former El Toro military base, former naval shipyard Hunters Point and Newhall Ranch -- filed a draft IPO registration with the SEC.

Lennar is contributing its 20 percent non-controlling interest in the JV, as well as its 60 percent interest in its manager, Five Point Communities; which Credit Suisse estimates to equate to a total ~30 percent interest in the Five Point IPO entity.

Five Point is cumulatively developing land to accommodate ~50,000 home sites and ~20 million square feet of commercial space.

Tale Of The Tape - Past Year

While noting the unique nature of the Five Point real estate holdings, Dahl felt that land developer Howard Hughes Corp. (NYSE: HHC) would still be the closest comp for the Five Point IPO.

During the past 52-weeks, shares of Lennar have traded in a range of $35.61 - $53.58 per share, with shares closing at $52.77 on July 7, when the JV IPO was announced.

Credit Suisse - Lennar: Reiterate Neutral, Increase PT From $51 To $53

• Noting that Howard Hughes trades at 2.7x TBV (tangible book value), Dahl estimated the value of Five Point to Lennar at $4 to $6 per share.
• Credit Suisse had previously valued the Lennar interests in Five Point to be worth $2 to $3 per share; in a sense confirming that this IPO is a positive move, which should help unlock value for Lennar shareholders.
• Credit Suisse sees the transaction as having little or no effect on Lennar's core homebuilding business, since LEN has already had to compete with other builders to buy developed lots from Five Point.
• Dahl believes that the IPO will make it easier for shareholders to assess the value of the JV's, while noting that there will be a 12 month lock-up for the IPO shares, which would delay monetization of any actual gains.
• The Five Point IPO is expected to occur prior to the end of Lennar's fiscal year.

Credit Suisse - Price Target Risks

Risks to Lennar achieving the $53 PT include:
"1) On the positive side, stronger than expected sales, lower mortgage rates, or greater than expected income from LEN's multi-family and/or distressed asset investments;
2) On the negative side, higher mortgage rates, lower consumer confidence, or tightened mortgage lending standards; and
3) Drawn out resolutions in its distressed investments, leading to lower than expected returns."