Results: Millrose 2q26
Steady as she goes, but no answers to key questions.
Original review: Millrose
Tag for finding my other articles on this stock: MRP
Key takeaways
Strong customer demand but still no answer to fundamental questions around business model and returns. Current discount to book value is 18% which feels about right to me.
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 I worry the business model is flawed.
The first problem is that if homebuilders refuse to exercise options, Millrose’s cash flow stops abruptly. So far every option contract has been honoured, but I worry what happens in a recession.
The second problem is that Millrose cannot retain profits but it does retain losses. Mathematically, I think book value has to fall over time.
The third problem, and the biggest one for now, is that Millrose cannot grow without either lifting the debt ceiling, issuing shares, or coming up with a funky new capital structure. If Millrose can trade above book value it could issue shares and grow, but why would it? The ROE does not justify a p/bv >1x. Commentary this quarter suggests they will lift the debt ceiling, which will drive growth but also increase risk.
Notes
Net income 0.76/share.
AFFO/share $0.77. Run rate AFFO $0.80/share => $1.60 per year.
Dividend up to $0.77 - 100% AFFO payout.
BVPS $35.24, down 2c.
Invested capital now $8.8bn.
Now have 19 counterparties.
32% of invested capital is not with Lennar and new issuances in this bucket yielded 10.6% in the q.
Received $1bn in the q as builders drew down lots, and reinvested $1.1bn, with the balance funded with debt.
No change in underwriting conditions. They mentioned that deposits have come down from 20-25% to 10% but that their credit policy is agnostic between bigger deposits and better terms. Need to understand this trade-off better.
Zero option terminations since inception.
Every counterparty has honoured every option, at a time when several public builders have recorded walkaway charges on abandoned parcels.
But “because it hasn’t happened, doesn’t mean it won’t happen”.
Part of their underwriting is: who else could take this if the counterparty walks?
Emphasis throughout the call on scale, datasets, and disciplined underwriting as competitive advantages.
“Demand for what we do has never been higher….We believe this is more than a cyclical response to today’s market. It reflects a structural evolution in how builders think about capital allocation.”
Commentary suggests they are considering raising the leverage cap based on the strong performance of the operating platform.
“We know that if we pause our purchases, we’ll be able to generate cash rather quickly to pay down debt.”
Believe they are in a good position to be able to argue for investment grade ratings from the agencies.
Industry inventory is normalising which is good news, cyclically.
Thanks for reading - if you enjoyed reading this please like and restack, and do get in touch if you have questions.
Pete
Disclaimer: This post is for informational and educational purposes only. Building Arks is not licensed or regulated to provide any financial advisory service and nothing published by Building Arks should be taken as a recommendation to buy or sell securities, relied upon as financial advice, or treated as individual investment advice designed to meet your personal financial needs. You are advised to discuss your personal investment needs and options with qualified financial advisers. Building Arks uses information sources believed to be reliable, but does not guarantee the accuracy of the information in this post. The opinions expressed in this post are those of the publisher and are subject to change without notice. The publisher may or may not hold positions in the securities discussed in this post and may purchase or sell such positions without notice.
Good summary, Pete! I went away thinking the same: they will raise their debt ceiling