Lennar Venture Banking on Increasing Property Values in Newhall Land Deal

By DANNY KING
Staff Reporter

With its planned purchase of Newhall Land and Farming Co., Florida homebuilder Lennar Corp. is making a big bet on continued demand for housing on the outskirts of L.A., and constraints on supplies to fill that demand.

The $990 million acquisition of 36,000 acres in the Santa Clarita Valley, including entitlements for 26,000 home sites and 5,000 apartments, gives Lennar a guaranteed supply of buildable land stretching out at least two decades.

That supply could come in handy if L.A.'s growth continues at its current pace, and if other large planned developments in the region, such as the 3,050-home Ahmanson Ranch on the L.A./Ventura county line, remain tied up in litigation.

While L.A. County housing permits have averaged 17,000 units over the past four years, population increases fuel demand for nearly three times that figure, said David Team, a vice president of Lennar's former commercial development arm and partner in the venture, LNR Property Corp., in a conference call last week.

Meanwhile, housing demand in the Santa Clarita Valley has pushed up median housing prices in Lennar's Stevenson Ranch and in Valencia 47 percent and 33 percent, respectively, within the past two years, according to DataQuick Information Systems.

Purchasing Newhall Land and Farming also allows Lennar to bypass the risky and time-consuming process of gaining approvals for much of the acquired property. The L.A. County Board of Supervisors approved the 21,000 home sites entitled for Newhall Ranch in May.

"They're getting a good parcel of land in a land-constrained area," said Joseph Sroka, a research analyst at Merrill Lynch.

The purchase, coming just as Lennar's nearby Stevenson Ranch development begins its fifth and final phase, will likely leapfrog Lennar to the top of the county's most active home builders.

Lennar subsidiary Greystone Homes sold 392 homes in Los Angeles County last year, second to Los Angeles-based rival KB Home, which sold 522.

Beginning in late 2004 or early 2005, the joint venture between Lennar and LNR will begin selling off Newhall parcels to affiliated and non-affiliated homebuilders.

Lennar expects to buy enough of the partnership's land to build 1,000 homes annually, starting in 2005, said Stuart Miller, chief executive of Lennar and chairman LNR Property, in another conference call last week.

"We are expecting to do no vertical construction in our joint venture," Miller said. "We would expect that the property, as it reaches maturity, would be sold either to venture participants or third parties."

How much land is sold to other developers has yet to be determined. However, the partnership will need to sell off a significant chunk to erase the $400 million in debt it will incur to complete the Newhall Land acquisition.

"We have a long history of finding value with large land positions and immediately paring down and limiting risk," Miller said. "That is very much the plan for Newhall Land and Farming."

Sharing the wealth

Because of Lennar's track record, as well as the sheer numbers of developable lots, few builders are likely to get shut out of the county's fastest growing area, according to Steven Seemann, vice president of Walnut-based Shea Homes, a subsidiary of developer J.F. Shea Co.

"Both (Newhall Land and Lennar) are good prudent business groups they're going to produce lots at a rate the market will absorb," said Seemann, whose company developed Cypress Point at Westridge in Valencia.

About half of the $1 billion in property sold over the past five years by Lennar Land Partners another 50/50 land-owning partnership between Lennar and LNR went directly to Lennar, according to LNR's 10K filing with the Securities and Exchange Commission in February.

At Stevenson Ranch, however, Lennar has sold off a higher proportion of the land to other developers, who have built most of the homes there to date.

Lennar's involvement with Stevenson Ranch, as well as its commitment to retain many Newhall Land officials, may ease one of the most pressing issues that will come up once the deal closes.

Newhall Land is in the midst of obtaining entitlements on 450 acres at its River Park project near Newhall Ranch and Bouquet Canyon roads a development that could include 1,100 units of single- and multi-family units.

"I'm not sure it's going to change a whole lot," said Jeff Lambert, director of planning and building services in Santa Clarita. "Lennar doesn't have the kind of history Newhall does, but we've worked with them in following their (Stevenson Ranch) development across the freeway. They're not a foreign entity."

Commercial plans

Included in the proposed purchase is 1,200 acres earmarked for between 12 million and 15 million square feet of commercial development, and about 1.5 million square feet of existing commercial space in Santa Clarita. (Newhall Land also owns 30,000 acres of farmland in Ventura County and the Central Valley.)

Once the deal is completed, existing commercial space, including the 736,000-square-foot Valencia Town Center, will be sold to LNR for between $200 million and $250 million, said Shelly Rubin, LNR's chief financial officer, in last week's conference call.

LNR, which was spun off from Lennar in 1997, may add some buildings at Valencia Town Center. While most of the existing space there has been leased out, "there's some land for one or two additional anchors," Team said.

In addition to the 79 percent-leased Valencia Town Center, Newhall Land's commercial holdings include retail centers Valencia Entertainment Center, NorthPark Village Square and River Oaks Shopping Center as well as the 244-room Hyatt Valencia Hotel and 152-room Hilton Garden Inn.

LNR's recent track record in Los Angeles includes development of the first two phases of LNR Warner Center in Woodland Hills. It sold the 450,000 square foot project in March for $111 million.

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