Andrew Bary

A real estate investment trust with a 9% yield and a distinctive business model looks poised to deliver nice returns for investors after a successful spinoff from Lennar earlier this year.

Millrose Properties, whose shares trade around $31, gets paid by Lennar and other homebuilders to warehouse and improve land until it is ready for use as sites to build houses. That fills a need for the companies, which have sought to hold fewer assets in recent year to boost returns and lower risk in constructing homes.

The company effectively acts as a land bank for homebuilders.

Lennar, one of the two largest U.S. homebuilders along with D.R. Horton, spun off an 80% stake in Millrose in February to its shareholders. The stock has since rallied from around $21.

Barron's wrote about Millrose at the time of the spinoff.

Now, Lennar plans to distribute the remaining 20% to its holders in an exchange offer, known as a split-off, in which Lennar's Class A shareholders can swap their shares for Millrose stock. Lennar plans to distribute some 33 million Millrose shares in the transaction, which will close in early November.

The bull case on Millrose is that earnings and the dividend will go higher as the company puts more land on its balance sheet at increasingly attractive yields. That could help lift the stock, which may now be being held back as arbitrageurs buy Lennar and sell short Millrose to capture a favorable spread of about 6% on the deal.

If the favorable outlook pans out, some investors expect that the stock can trade at book value or higher over the coming year.

Book value stood at about $35.29 a share on Sept. 30, according to preliminary third-quarter results released on Oct. 9. The company will make a full report on the quarter on Oct. 23. If the stock trades up to book value, where it traded in August, investors could earn a total return of about 20% over the next year, based on the gain in the share price plus Millrose's hefty dividend.

While the Millrose dividend yield is now 9.4%, based on an annualized payout of $2.92 a share, Citi analyst Eric Wolfe wrote recently that the dividend could rise to about $3.06 annually in 2026 as earnings increase. That would result in a yield of close to 10%.

Citizens analyst Aaron Hecht began coverage of Millrose last week with a Market Outperform rating and $40 price target. He wrote that he expects the company to "generate outsize returns as homebuilders have limited institutional quality capital partners to fund the industry-wide transition to become land light."

Sentiment on the stock should improve as "investors become increasingly educated on the story," Hecht said.

He sees the company generating $3.02 a share in adjusted funds from operations in 2026, up from $2.51 in 2025. The company pays out virtually all of that in dividends.

Millrose's main customer is Lennar, but it has taken on business from other homebuilders since the spinoff. It earns roughly 8.5% annually on land that it holds for Lennar and closer to 11% for the land banked for other homebuilders, resulting in a blended rate of 9.1% on Sept. 30. Part of the case for the stock is that new landholdings for non-Lennar customers carry better returns.

It has a strong balance sheet with assets of more than $8 billion and debt as of June 30 of just $1 billion. Lennar accounts for about $6 billion of the assets. It aims to get leverage up to about a third of total capital, which could mean around $3 billion of total debt and $9 billion of assets.

The company is managed by an outside company, Kennedy Lewis, which specializes in homesite development. Kennedy Lewis is paid 1.25% annually on the company's asset base..

Millrose controlled around 130,000 lots on June 30. California, Texas and Florida are the states where it has the largest landholdings.

Millrose holds undeveloped land, such as farms, that has been approved for development, making it ready for homesites. Homebuilders reimburse it for its expenses.

Millrose sees a big opportunity because the homebuilding industry needs about $150 billion of homesites every year and there is little competition besides Forestar Group, a spinoff from D.R. Horton.

A key risk is that homebuilders walk away from their Millrose contracts, which could lead to losses in a weakening housing market. Millrose seeks to mitigate that risk by mixing different landholdings together in a single asset pool -- so-called cross collateralization -- that makes its less palatable for homebuilders to walk away from a land package . It also carefully selects the sites it is willing to finance and hold to ensure it could sell them if necessary.

There is concern about increased pressure on Millrose from its homebuilding partners because tougher conditions in the homebuilding industry have led builders to offer more concessions to buyers in recent quarters.

On the second-quarter earnings call, the company emphasized its selectivity. While it identified certain Florida markets--Fort Myers, Naples, and Daytona Beach -- as soft, it said it had minimal exposure to them.

Millrose appears to be doing a good job of mitigating risk while diversifying its business away from Lennar. The company generates reasonably high returns, and an ample dividend, while possessing a nice growth outlook as the leading supplier of land to the homebuilding industry.

Write to Andrew Bary at andrew.bary@barrons.com

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October 14, 2025 16:50 ET (20:50 GMT)

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