O que a Berkshire viu na Lennar

Berkshire Hathaway is boosting its exposure to the US residential real estate market at a challenging time for the sector, according to the wire material. In the past six months, CEO Greg Abel has doubled Berkshire's stake in Lennar, one of the largest US residential homebuilders. The company now owns 12% of the company, valued at $2.2 billion at current prices.

Between mid-September and early October, Berkshire purchased about $600 million worth of Lennar shares at prices ranging from $74.80 to $81.96. The stock, currently trading around $78 (below its book value of $90), has fallen 25% year-to-date, one of the steepest declines among major US residential homebuilders. The S&P Homebuilders index has dropped about 10% since the beginning of the year.

In a separate deal, Berkshire completed the acquisition of Taylor Morrison, one of the largest US residential builders, for $8.5 billion, including debt. The Berkshire now controls Clayton Homes, a leader in the prefabricated homes segment, making it the fourth-largest builder in the US. This comes at a time when the US residential market is under pressure due to rising interest rates, higher costs, and falling household purchasing power.

The average rate for 30-year mortgages is 7.4%, while the median price of residential properties has risen to $418,000. This is a far cry from a year ago when mortgage rates ranged from 3% to 4% and the median home price was about $235,000. The American Homebuilders Index, calculated by the National Association of Home Builders, fell to 29 points, the lowest level since June 2012.

Lennar is a reflection of this deterioration. In the third quarter, revenue fell nearly 9% year-over-year to $8 billion, and net income dropped 52% to $284 million. To maintain sales, Lennar has been offering discounts, with the average price of homes sold falling 24% since the peak in 2022, according to consulting firm ResiClub.

This has led to a sharp decline in the construction division's gross margin to 16%, the worst result for a third quarter since 2009. In a recent CNBC interview, Abel stated that Berkshire has a "very long-term" view for the US residential market – and that the American dream will continue to exist. "In five or ten years, these will be very strong assets for Berkshire," he said.

In the case of Lennar, the land-light approach may have caught Berkshire's attention. Last year, the builder spun off Millrose Properties, a company created to concentrate part of its land holdings. Today, Lennar owns only about 2% of the future construction tracts, with the rest dependent on third-party contracts. The goal is to reduce capital tied up in land, improve return on equity, and increase operational flexibility.

However, the market has not bought into Berkshire's vision yet. At the beginning of October, Morgan Stanley initiated coverage of Lennar with an underweight rating and a price target of $65. The bank believes that while the land-light model may improve return on capital, it brings costs that could limit revenue recovery. Analyst Adam Kramer wrote that while the less capital-intensive model may improve returns, growth in the number of homes delivered needs to translate into higher profits and cash generation.

Morgan Stanley also sees risks in Lennar's exposure to first-time homebuyers – a group that typically makes smaller down payments and is therefore more dependent on financing and more sensitive to rising interest rates. Thus, the combination of high interest rates, squeezed household income, and higher costs could keep margins depressed for longer than the market expects. However, analysts are looking at a much shorter time horizon than Berkshire.