The management fee structure alone would give me pause — 1.5% on gross tangible capital, not net, creates exactly the wrong incentives at exactly the wrong time. What this analysis surfaces that most Millrose coverage glosses over is the asymmetry of the homebuilder option: they get the upside of land appreciation, they can walk when projects go sideways, and Millrose is still on the hook for horizontal infrastructure costs regardless. That's not a land bank, that's a publicly traded entity absorbing the capital-heavy tail risk so Lennar can look capital-light on their balance sheet. The cashflow timing mismatch in a downcycle scenario is the piece that deserves more attention than it gets — the income stops before the obligations do, and that gap can move fast. For anyone drawn to the 10% yield, the honest question is whether you're being compensated for that specific risk or just for the illiquidity and complexity of understanding it. What's the actual bear case threshold where the dividend math breaks down — has anyone modeled a 20-30% option non-exercise rate?
The asymmetry is even worse than that - Millrose isn't only on the hook for horizontal infra, it's on the hook for environmental remediation and homeowner lawsuits if the homebuilder doesn't exercise.
As for modelling non-exercise rates, there are two issues. First, Millrose can't make profits on the sale of good land, so *any* losses on bad land will erode bvps (and eventually dps). Second, while I haven't explicitly modelled non-exercise rates, there isn't a lot of cash on hand so any slowdown in option exercising that isn't matched by a slowdown in horizontal infrastructure development has the potential to cause issues. A key underlying question is: will homebuilders want Millrose to keep funding horizontal infra through a downturn so they have homesites ready for the upturn? It is hard to imagine why the answer would be no.
Also on the cash flow timing point: in the next housing downturn the stock market will worry about this whether it happens or not. I could easily imagine this trading at 50% of book even if the cash keeps flowing. Indeed, that might be the time to buy.
That remediation and litigation exposure is the part that really doesn't get priced in — environmental reclamation costs on a stalled project aren't just a line item, they're open-ended and timeline-unpredictable in a way that makes the deposit/termination fee protection look thin. Your point about homebuilders wanting horizontal infrastructure to keep moving through a downturn is the most interesting tension in this whole structure — it's probably true, which means Millrose's cash keeps flowing out even when the housing market is signaling stop. That's not a bug the pooling provisions were designed to fix. If the "time to buy" moment is 50% of book during a downcycle panic, the harder question is whether the per-share book value itself holds — or whether by that point the erosion you're describing has already quietly happened. Has anyone in the REIT analyst community actually stress-tested the bvps trajectory under a multi-year non-exercise scenario, or is everyone just anchoring to the spin-out marks?
I really enjoyed reading this. I have a small position in Millrose and some of the points you raised have given me some pause (I am not the retired person looking for yield but rather mid 40s looking at something that may have a long runway). I was able to get comfortable around some of the points presented, but this seems like a good forum for discussion (legitimately looking for good discourse).
Kennedy Lewis on both management fee and conflict of interest in terms of best deals going to their other books of business. One of the items I paid attention to was Darren Richman's (co-founder of Kennedy Lewis and CEO of Millrose) putting nearly $6m into MRP shortly after it went public and not selling share (i realize it's been a short time). This seemed to me the kind investment that would align management and Millrose's interest but I'll be honest, if $6m is a de minimis amount of Darren's wealth, etc., this wouldn't be the first time I'm reading the wrong signs from insiders (hence, small position). The other piece of this is Brave Warrior Advisors investments that had a significant, long-term investment in Lennar, took the spin-out shares but then also has been continuing to increase its position in MRP. Having such a significant investor in both MRP and LEN seemed to me to be an indication of LEN and MRP management being aligned with investor interests but again, it wouldn't be the first time I looked at a large fund for to develop/support a thesis and been wrong.
I think you homed in on the key to this analysis which is the banking relationship. If a bank makes a bunch of bad loans, it will go out of business. If MRP pools the worst land of builders, it won't make it. My assumption here is around safeguards built into the pooling (MRP has a sense of the portfolio of land of developers, it has the HOPP'R system/database where it can pool things so that risk is legitimately spread across assets that developers would be reluctant to part with, and if builders are acting in good faith and MRP is then there is a very high percentage of these that will go to completion) and LEN genuinely wanting this to be a sustainable way to offload some of its balance sheet and generate higher returns on equity (as well as other builders). There was a podcast towards the end of last year (i think) with Darren Richman where that really does seem to be what MRP is trying to do (but again, wouldn't be the first time I listen to a CEO and what they say and what they do are different things), but it looked as though they are looking to develop long-term relationships with builders. Also, management has stated they won't issue shares below book value so if that were to happen then that would be a huge red flag. I guess we'll see if that happens in the next 6-12months.
For the reasons you present very clearly in that chart, the MRP proposition advantages the builders - but I my thinking on this is that this could be the trade-off in attempting to pursue high-quality, long-term customers and more importantly, the high quality land/development pools developers would be reluctant to give up? If I recall, I think NVR, as a builder, made good use of options contracts, etc. to keep land off balance sheet and has done very well for the past 25 years in capital efficiency. If MRP is just trying to create the vehicle to be the other side of that model and identify economies of scale in running it, then this could create good economics for both MRP and developers over the long term.
I think it is a very strong point about an overall market downturn and I completely agree with all of the downsides this post pointed out.
Thanks for the kind words and well constructed comment!
I agree the insider buying is a positive sign - but it was at $22, we don't know how much of the CEO's net worth it is, he has an offsetting incentive as an equity owner of KL, and we don't know how much power he actually has.
One thing you said I disagree with is that there are economies of scale. There are, but they sit with the manager. Millrose's costs are linearly linked to its size. As it grows it pays a higher fee. That benefits the manager, which will have fairly fixed costs, not Millrose.
For me, the biggest issue is that I don't see how BVPS (and therefore eventually DPS) goes anywhere but down. They have to pay out their profits, and so they can't build up equity to offset the inevitable occasional failed deal - and that's in the good times, let alone the bad.
Ultimately the question is: why is this a good business? Why will they consistently be a better buyer of land than developers or other land banks? I don't think there is a good answer to that. This is a commoditised business and we should expect it to earn commoditised returns.
I'd love to be wrong here - I don't short, so I have no dog in this fight - but there are enough red flags to keep me away.
Great response and through this discussion, I have some questions that I need to research and attempt to answer. I wouldn't say I have a dog in this fight either. I was contemplating if this was a position that was worth increasing, but until I can comfortably answer some questions, I'm on pause. I'll revert back to this discussion if I find anything worth adding.
You are exactly right about the economics that sit with the manager and that is a red flag. In terms of scaling, what I was referring to the fact that if they have a unique data set by which to rapidly evaluate pools of properties, etc. I'm not convinced of this point but I've seen it before where you have a unique sliver of information and that begets the collection of more of that same information (or allows better decision making on your part about whether to accept or not accept deals...largely this boils down to underwriting discipline). Management speaks to this on conf calls in the following way: "The technology and processes underpinning our platform allow us to underwrite based on real-time market data, effectuate lot selection and deed transfers required for homesite takedowns, and monitor project-level performance in real time to manage risk proactively as market conditions evolve. This operational discipline, combined with our experienced team, is critical to maintaining predictability and protecting downside while continuing to grow." Which obviously are just nice-sounding words to string together, so it means very little unless I can resolve if there is some uniqueness to their ability to do that. But alas, these are tertiary points to the big one you point out - commoditized business with commoditized returns with a big downward risk with no ability to cushion that over time. Because in this you are locked in with LEN at 8.5% and looks like other builders between 10-11%, so you'd have to grow volume (and I think this is your point...the only way to do that is going to be a hit to BVPS which ultimately will impact DPS).
Agreed. I’m skeptical they have a tech/info advantage - would make a very interesting call with IR to understand why others can’t do what they do, and whether that advantage is available to KL’s other funds. But I’m open to evidence if you find it!
Great analysis, really enjoyed it. My view: the risks outweigh the returns.
I’m with you, and thanks, but in fairness to the bulls, we won’t really know until it’s been through a downturn.
True, we just have to wait, the market is cyclical, eventually the environment will turn negative
The management fee structure alone would give me pause — 1.5% on gross tangible capital, not net, creates exactly the wrong incentives at exactly the wrong time. What this analysis surfaces that most Millrose coverage glosses over is the asymmetry of the homebuilder option: they get the upside of land appreciation, they can walk when projects go sideways, and Millrose is still on the hook for horizontal infrastructure costs regardless. That's not a land bank, that's a publicly traded entity absorbing the capital-heavy tail risk so Lennar can look capital-light on their balance sheet. The cashflow timing mismatch in a downcycle scenario is the piece that deserves more attention than it gets — the income stops before the obligations do, and that gap can move fast. For anyone drawn to the 10% yield, the honest question is whether you're being compensated for that specific risk or just for the illiquidity and complexity of understanding it. What's the actual bear case threshold where the dividend math breaks down — has anyone modeled a 20-30% option non-exercise rate?
Also, if you’re into emerging markets real estate, I’d love your thoughts on my IRSA review.
The asymmetry is even worse than that - Millrose isn't only on the hook for horizontal infra, it's on the hook for environmental remediation and homeowner lawsuits if the homebuilder doesn't exercise.
As for modelling non-exercise rates, there are two issues. First, Millrose can't make profits on the sale of good land, so *any* losses on bad land will erode bvps (and eventually dps). Second, while I haven't explicitly modelled non-exercise rates, there isn't a lot of cash on hand so any slowdown in option exercising that isn't matched by a slowdown in horizontal infrastructure development has the potential to cause issues. A key underlying question is: will homebuilders want Millrose to keep funding horizontal infra through a downturn so they have homesites ready for the upturn? It is hard to imagine why the answer would be no.
Also on the cash flow timing point: in the next housing downturn the stock market will worry about this whether it happens or not. I could easily imagine this trading at 50% of book even if the cash keeps flowing. Indeed, that might be the time to buy.
That remediation and litigation exposure is the part that really doesn't get priced in — environmental reclamation costs on a stalled project aren't just a line item, they're open-ended and timeline-unpredictable in a way that makes the deposit/termination fee protection look thin. Your point about homebuilders wanting horizontal infrastructure to keep moving through a downturn is the most interesting tension in this whole structure — it's probably true, which means Millrose's cash keeps flowing out even when the housing market is signaling stop. That's not a bug the pooling provisions were designed to fix. If the "time to buy" moment is 50% of book during a downcycle panic, the harder question is whether the per-share book value itself holds — or whether by that point the erosion you're describing has already quietly happened. Has anyone in the REIT analyst community actually stress-tested the bvps trajectory under a multi-year non-exercise scenario, or is everyone just anchoring to the spin-out marks?
Agreed.
Only thing I would add is: some things you don’t need to model. That kind of cash outflow risks being terminal.
I really enjoyed reading this. I have a small position in Millrose and some of the points you raised have given me some pause (I am not the retired person looking for yield but rather mid 40s looking at something that may have a long runway). I was able to get comfortable around some of the points presented, but this seems like a good forum for discussion (legitimately looking for good discourse).
Kennedy Lewis on both management fee and conflict of interest in terms of best deals going to their other books of business. One of the items I paid attention to was Darren Richman's (co-founder of Kennedy Lewis and CEO of Millrose) putting nearly $6m into MRP shortly after it went public and not selling share (i realize it's been a short time). This seemed to me the kind investment that would align management and Millrose's interest but I'll be honest, if $6m is a de minimis amount of Darren's wealth, etc., this wouldn't be the first time I'm reading the wrong signs from insiders (hence, small position). The other piece of this is Brave Warrior Advisors investments that had a significant, long-term investment in Lennar, took the spin-out shares but then also has been continuing to increase its position in MRP. Having such a significant investor in both MRP and LEN seemed to me to be an indication of LEN and MRP management being aligned with investor interests but again, it wouldn't be the first time I looked at a large fund for to develop/support a thesis and been wrong.
I think you homed in on the key to this analysis which is the banking relationship. If a bank makes a bunch of bad loans, it will go out of business. If MRP pools the worst land of builders, it won't make it. My assumption here is around safeguards built into the pooling (MRP has a sense of the portfolio of land of developers, it has the HOPP'R system/database where it can pool things so that risk is legitimately spread across assets that developers would be reluctant to part with, and if builders are acting in good faith and MRP is then there is a very high percentage of these that will go to completion) and LEN genuinely wanting this to be a sustainable way to offload some of its balance sheet and generate higher returns on equity (as well as other builders). There was a podcast towards the end of last year (i think) with Darren Richman where that really does seem to be what MRP is trying to do (but again, wouldn't be the first time I listen to a CEO and what they say and what they do are different things), but it looked as though they are looking to develop long-term relationships with builders. Also, management has stated they won't issue shares below book value so if that were to happen then that would be a huge red flag. I guess we'll see if that happens in the next 6-12months.
For the reasons you present very clearly in that chart, the MRP proposition advantages the builders - but I my thinking on this is that this could be the trade-off in attempting to pursue high-quality, long-term customers and more importantly, the high quality land/development pools developers would be reluctant to give up? If I recall, I think NVR, as a builder, made good use of options contracts, etc. to keep land off balance sheet and has done very well for the past 25 years in capital efficiency. If MRP is just trying to create the vehicle to be the other side of that model and identify economies of scale in running it, then this could create good economics for both MRP and developers over the long term.
I think it is a very strong point about an overall market downturn and I completely agree with all of the downsides this post pointed out.
Thanks for the kind words and well constructed comment!
I agree the insider buying is a positive sign - but it was at $22, we don't know how much of the CEO's net worth it is, he has an offsetting incentive as an equity owner of KL, and we don't know how much power he actually has.
One thing you said I disagree with is that there are economies of scale. There are, but they sit with the manager. Millrose's costs are linearly linked to its size. As it grows it pays a higher fee. That benefits the manager, which will have fairly fixed costs, not Millrose.
For me, the biggest issue is that I don't see how BVPS (and therefore eventually DPS) goes anywhere but down. They have to pay out their profits, and so they can't build up equity to offset the inevitable occasional failed deal - and that's in the good times, let alone the bad.
Ultimately the question is: why is this a good business? Why will they consistently be a better buyer of land than developers or other land banks? I don't think there is a good answer to that. This is a commoditised business and we should expect it to earn commoditised returns.
I'd love to be wrong here - I don't short, so I have no dog in this fight - but there are enough red flags to keep me away.
Great response and through this discussion, I have some questions that I need to research and attempt to answer. I wouldn't say I have a dog in this fight either. I was contemplating if this was a position that was worth increasing, but until I can comfortably answer some questions, I'm on pause. I'll revert back to this discussion if I find anything worth adding.
You are exactly right about the economics that sit with the manager and that is a red flag. In terms of scaling, what I was referring to the fact that if they have a unique data set by which to rapidly evaluate pools of properties, etc. I'm not convinced of this point but I've seen it before where you have a unique sliver of information and that begets the collection of more of that same information (or allows better decision making on your part about whether to accept or not accept deals...largely this boils down to underwriting discipline). Management speaks to this on conf calls in the following way: "The technology and processes underpinning our platform allow us to underwrite based on real-time market data, effectuate lot selection and deed transfers required for homesite takedowns, and monitor project-level performance in real time to manage risk proactively as market conditions evolve. This operational discipline, combined with our experienced team, is critical to maintaining predictability and protecting downside while continuing to grow." Which obviously are just nice-sounding words to string together, so it means very little unless I can resolve if there is some uniqueness to their ability to do that. But alas, these are tertiary points to the big one you point out - commoditized business with commoditized returns with a big downward risk with no ability to cushion that over time. Because in this you are locked in with LEN at 8.5% and looks like other builders between 10-11%, so you'd have to grow volume (and I think this is your point...the only way to do that is going to be a hit to BVPS which ultimately will impact DPS).
Agreed. I’m skeptical they have a tech/info advantage - would make a very interesting call with IR to understand why others can’t do what they do, and whether that advantage is available to KL’s other funds. But I’m open to evidence if you find it!