Results: Millrose 1q26
No sign of trouble (yet).
Original review: Millrose
Tag for finding my other articles on this stock: MRP
Key takeaways
Strong customer demand but no answer to fundamental questions around business model and returns. To really work this needs to trade above book value but there is no reason for it to do so. Current discount is 23%.
Thesis and valuation update
No change to thesis. The risk is that this works until it doesn’t.
Millrose clearly have strong customer demand but doing deals that are good for customers isn’t the same as doing deals that are good for shareholders.
Housing demand isn’t great, so homebuilders are holding onto land they know they can sell relatively soon, and selling longer-dated land to Millrose with an option to buy it back. They pay Millrose 10.7% when they could finance it on their own balance sheet for 6% - they are either dumb or they think they are shifting significant risk to Millrose.
Millrose pays out all of its option premium profits as dividends, and when it sells land it can only break even or lose money. It cannot retain profits but it does retain losses. Mathematically, I think book value has to fall over time.
This is a problem, because Millrose is near its debt ceiling and can’t grow without either lifting the debt ceiling, issuing shares, or coming up with a funky new capital structure. They have said they will not issue shares below book value, but if book value can only shrink the shares are unlikely to trade at a premium. I would not be surprised to see Millrose lift its debt ceiling. This obviously increases risks.
In fairness, a higher debt ceiling could also mean a higher dividend, a higher stock price, and accretive share issuance. That’s the bull case. But the fact is that Millrose’s flywheel only really works if the stock trades above 1x book. And if it does, Millrose will attract competition: their competitive advantages are replicable by any number of asset managers with access to capital.
Finally: it would reduce risk if the housing market accelerates from here, because homebuilders will be more likely to exercise their options. But if it decelerates… ouch. And one day, it will decelerate.
Notes
Net income of $122.9 million, or $0.74 per share.
AFFO $126m, up 2.5% q/q adjusting for slightly fewer days.
100% AFFO payout.
BVPS $35.26, down 2c.
Now 143k homesites across 904 communities in 30 states with 17 counterparties, up 2 q/q.
Assets now 69/31 Lennar/other. Non-Lennar deals average 10.7% vs an average cost of debt of roughly 6%. These options are typically floating subject to a fixed rate floor, currently around 10%. Millrose mainly fund these deals with floating debt.
Amended credit facility to unsecured and added $500m of capacity.
Debt/cap 29% vs 33% limit.
Industry conditions:
Housing “demand is choppy, but not collapsing”.
Homebuilders are pulling back on starts; maintaining sales through incentives and inventory management; protecting balance sheets amid meaningful margin compression; preserving/growing land pipeline and community count; and restricting direct land ownership. The last two are mutually exclusive without a partner like Millrose.
“When builders are earning less on every home, the last thing they want is more capital tied up in land that won’t produce a closing for years, but they can’t afford to lose those future communities either.”
Competitive advantages
“As a publicly traded company [with] a fully unsecured investment-grade…capital structure, Millrose offers counterparties a degree of capital certainty and transparency that private land banking alternatives are structurally unable to replicate.”
Scale = sophisticated underwriting, diversification of risks, and certainty of execution.
“The software and workflow complexity of managing nearly 144,000 homesites across 904 communities in real time is a barrier that cannot be replicated quickly or cheaply.”
Proprietary lot pricing dataset across 30 states “has become a genuine competitive advantage”.
Once they have a relationship with a homebuilder it tends to grow as they become operationally integrated with the land finance team and gain trust with the C-suite.
Confusing commentary on growth
They have significant demand but they are close to debt ceiling and don’t have a plan to fund it.
They “haven’t yet turned our attention to alternative financing…structures” but they “spend a lot of time thinking…about what could next steps be”. Whatever that means.
Hope to trade at levels where they can “unlock the equity markets as a financing vehicle”.
“We’re not going to walk away from business, and we’re certainly not going to walk away from our existing clients”. They need capital.
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Pete
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The problem with land banking is you are essentially selling a call option for ~10% but if home prices fall, the lots will fall by essentially 3x whatever home prices fall by. This is a function of how lots are priced as a % of a home’s ultimate sales price.
Homebuilders know this, which is why they still choose to use land banks even though they could get cheaper financing using their own balance sheet. I’ve worked on several land banking transactions before, and I could never get comfortable with how lopsided the bet is.