Millrose Properties, Inc. Class A

gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the Millrose Properties first quarter 2025 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. We kindly ask that you please limit your questions to one and one follow-up. If you have additional questions, please return to the queue. I will now turn the call over to Jesse Ross, Milrose Head of Financial Planning and Analysis. Jesse, you may begin the conference.

Good morning, everyone, and thank you for joining us for Milrose Properties' first earnings call as a publicly traded company, following our spinoff from Lenard Corporation on February 7th. With us today to discuss our first quarter 2025 results are Darren Richmond, our Chief Executive Officer and President, Robert Nitkin, our Chief Operating Officer, and Garrett Rosenblum, our Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the first quarter 2025 financial and operational results announced as well as the first quarter investor presentation we released and posted on our website under the investor relations heading for a discussion of forward-looking statements and reconciliations of non-GAAP financial measures. With that, I'll turn the call over to Darren.

Thank you, Jesse, and good morning, everyone. It is my pleasure to welcome you to our first earnings call as a standalone company. This is an exciting milestone for us, and we're eager to share the progress we've made in our first quarter as a public company. Millroads is the first publicly traded land banking REIT that provides home builders with a reliable, efficient source of capital for land acquisition and development. Our innovative home option purchase platform allows us to deliver home sites to builders on a just-in-time basis, while generating recurring predictable cash flows for our shareholders. We maintain a close, mutually beneficial relationship with Lennar Corporation, one of the nation's leading home builders. Lennar serves as our anchor tenant with a portfolio of approximately 6.6 billion in assets under purchase option agreements with a weighted average yield of 8.5% as of March 31st, 2025. This relationship provides Milrose with a stable foundation as we grow and diversify our platform to serve other home builders. The value we bring to the market is clear. Home builders today face increasing challenges in managing their balance sheets while maintaining the flexibility to respond to market opportunities. Milrose is uniquely positioned to be their trusted partner, offering perpetual capital solution that alleviates balance sheet demands and unlocked enterprise value. For investors, Millrose represents a stable, tax-efficient, income-generating investment vehicle. Our business model is simple yet powerful. We generate consistent income from monthly option fee payments on capital deployed. Importantly, our revenue model is not tied to land value speculation or the execution of land development. which helps us to deliver highly predictable revenues, earnings, and dividends. Our strategy is built with a long-term success. While broader demand for homes has remained strong, the housing market continues to face pressures of high interest rates and other market uncertainties. Despite this economic backdrop, home builders are continuing to invest in land and land development. Looking at the longer term, strong structural tailwinds persist. We believe that there continues to be a significant shortfall in housing supply, and while estimates vary the actual deficit, most estimates peg the gap in the range of 3 to 5 million units. Additionally, many of our builder clients are operating with historically high margins and strong balance sheets, highlighted by low leverage levels, positioning them and the industry for resilience and future growth. We believe Millrose is well positioned to capitalize on these trends. Our unique operating model allows us to scale efficiently while maintaining a conservative risk profile. We're excited about the opportunities ahead and we're committed to delivering value for our shareholders, home builder partners, and the communities we serve. We are already proving out our investment thesis. Our first quarter of operations was highlighted by robust demand for our capital demonstrating the power of the Millrose platform. Looking first at our Lennar portfolio, we are seeing our capital recycling model at work with receipts of $645 million in cash proceeds from home site sales to Lennar and $635 million redeployed into land acquisition and development funding in the quarter. We have also made progress in growing our partnerships with other home builders. While we don't disclose the names of our specific customers to protect the confidentiality of those counterparties, we can say that the engagement across the industry has been overwhelmingly positive. We have executed five separate programmatic partnership commitments with homebuilder counterparties, which provide the builder with defined capital availability from Millrose under pre-negotiated terms. We believe this approach gives our counterparties important visibility in their land planning. During the quarter, we announced 351 million of transactions outside the Lennar relationship, with average yields of 11.7%. We're pleased to report that this progress has continued after the quarter end, with approximately 130 million of additional non-Lennar transactions between the March 31st quarter end and today, resulting in approximately 480 million of total cumulative transactions funding since the spinoff. We are also excited to announce a significant new transaction. Millrose has entered into a commitment to fund approximately $700 million in a traditional land banking transaction structure in partnership with the New Home Company to support their acquisition of land C homes. This transaction, like our previously announced Roush-Cullman transaction, exemplifies Millrose's differentiated ability to facilitate large-scale capital efficient M&A in the homebuilding sector. Given this exciting increase in demand, we are increasing our full year 2025 guidance in transaction funding outside of the Lennar Master Plan agreement to $1.5 billion from the previously announced $1 billion. I will share, however, that I've set for our team an internal stretch target of $2 billion, which I do believe is achievable given the market reception we've observed thus far. Accordingly, we are also increasing our year-end quarterly earnings per share run rate guidance to a range of 69 to 71 cents per share. To support this investment pace, we are also pleased to announce a new signed $1 billion delayed draw term loan commitment from Goldman Sachs and JPMorgan. This new capital commitment, in addition to our $1.3 billion revolving credit facility, provides us with ample capital capacity to execute on our growing opportunity set. Our performance demonstrates the power of our business model, and we are excited about the future prospects as we continue to leverage the Lennar agreement while also diversifying our business and capitalizing on growing demand across the industry. Overall, we see a number of very durable sector tailwinds that should continue to advantage Melrose. They are, one, the as mentioned structural shortage of housing, mainly the result of challenges to get land permitted and entitled. Two, the new home market continues to pick up market share from the existing home market given the structural move in interest rates. Three, the big builders continue to get bigger owing to their scale advantages. And four, more builders are shifting to just-in-time delivery of land and are embracing land-light strategies. With that, I will now turn the call over to Rob for an operational update.

Thank you, Darren. Good morning, everyone. I'm pleased to join you on our first earnings call and to provide an update on our operational progress for the quarter. As you can probably infer from Darren's comments, our team has been highly active since the spinoff. We currently operate with 33 dedicated homebuilder finance professionals across multiple offices whose focus and execution across origination, diligence, asset management, and servicing functions have been instrumental in establishing the foundation of Melrose. As Darren noted, in the quarter, we redeployed over $600 million in Lennar home site sales proceeds into newly underwritten Lennar transactions and development funding. This is in addition to the previously disclosed $859 million Rausch-Coleman transaction that closed shortly after the spinoff, in which we acquired approximately 24,000 homesites and simultaneously executed option agreements with Lennar. I'd like to recognize the entire Lennar team in their work to ensure a seamless transition and stewardship of these mission-critical homesite assets and a highly successful post-spin operating relationship. Beyond our Lennar relationship, we have executed on strong demand from third-party homebuilders, enabling us to deploy capital as attractive, risk-adjusted returns. During the quarter, we underwrote, diligent, and closed $351 million in third-party transactions, and this momentum has continued post-quarter end, as Darren noted. As of today, we have closed or are committed to close transactions with seven counterparties apart from Lennar, the majority of whom are publicly traded homebuilders. I'm also pleased to elaborate on Darren's mention of our exciting transaction with the New Home Group. Melrose has entered into a $700 million land banking funding commitment in support of the Landsee Homes acquisition recently announced by New Home Company, a leading home builder owned by funds affiliated with Apollo Global Management. While New Home will acquire Landsee's operating business, Melrose will acquire a significant portion of its home site assets and enter into corresponding option agreements with New Home. The $700 million commitment includes up to a $600 million commitment for land acquisition, which is expected to fund in the third quarter of 2025, and an additional up to $100 million in subsequent land development funding. The transaction represents an attractive home site portfolio, but also the creation of a stronger builder counterparty, including a $650 million additional equity contribution by Apollo. We have great respect for the management of Matt Zates and the entire New Home team, with whom we've enjoyed a mutually beneficial relationship historically. As our pipeline continues to grow, we are investing heavily in the expansion of our underwriting, diligence, asset management, and servicing teams, as well as our technology platform to support scalable growth and transaction capacity. With that, I'll turn the call over to Garrett for a financial update.

Thank you, Rob, and good morning, everyone. I'm pleased to walk you through Milrow's properties financial performance for the first quarter of 2025. This quarter marks an important milestone as we establish ourselves as a standalone REIT with a strong platform, significant liquidity, and a disciplined capital allocation strategy. For the quarter, we reported net income attributable to Milrow's common shareholders of $64.8 million after an adjustment for expenses from the pre-spin period, or $0.39 per share, driven by $82.7 million in option fees. Our book value per share at the end of the quarter stood at $35.40. Our management fee expense was $12.1 million, which is calculated transparently at 1.25% of gross tangible assets. Interest expense was $2.5 million and income tax expense was $4.4 million. We plan to distribute 100% of our earnings back to shareholders. In the quarter, we paid an inaugural dividend of $63.1 million, or $0.38 per share. The $0.38 dividend per share is the prorated portion for the stub period, which would equate to $0.65 per share on a normalized quarterly basis. Turning briefly to our balance sheet, Melrose is currently capitalized with $7.2 billion of total assets with a debt to capitalization ratio of approximately 5%. We ended the quarter with $350 million in total debt and ample liquidity of approximately $1.1 billion, which includes availability under our revolving credit facility and cash. Going forward, we expect to maintain a conservative maximum leverage target of 33% net debt to capitalization. Finally, turning to guidance, we are increasing our guidance for full year 2025 transaction funding outside of the Lennar Master Program Agreement to $1.5 billion, and increasing our year-end quarterly earnings per share run rate guidance to a range of 69 cents to 71 cents per share. Once again, Melrose plans to distribute 100% of earnings back to shareholders in the form of cash dividends. We remain focused on delivering value to our shareholders through consistent earnings, prudent capital allocation, and a conservative balance sheet. With that, I'll turn the call back to Darren.

Thank you, Garrett. To close, I want to reiterate how excited we are about the opportunities ahead for Melrose. Our innovative approach to land banking is transforming the way home builders access capital while providing stable, predictable returns for our investors. We're confident in our strategy, and we're committed to delivering value for all our stakeholders. Thank you for your support, and we look forward to sharing our progress in the quarters ahead. Operator, that concludes our prepared remarks. We are now ready to take questions.

We will now begin the question and answer session. At this time, if you'd like to ask a question, simply press star 1 on your telephone keypad. We kindly ask that you please limit your questions to one and one follow-up. Our first question comes from the line of Julian Bluen with Goldman Sachs. Please go ahead.

Thank you for taking my question and congratulations on the quarter team. Can you help us think about the kinds of yields you look for on some of these larger deals like the Lansi new home deal? Just trying to understand if it's more roughly consistent with the non-Lenar deals or sort of the Lenar preferential rate.

Yeah, no, Julian, thanks for joining us. It is definitely the non-Lennar. And again, we've talked about this in the past, just given the demand for this capital versus the supply, we, you know, are getting consistent rates with what we've reported. Now, they might be a little bit lower than the 11.7 because in some of these, in many of these, we actually are getting cross-collateralization. And so there is a give up on rate for more credit enhancement, which many of the builders are moving towards.

Okay, great. Thank you. And maybe bigger picture, can you help us understand how crucial Milrose's participation was to unlocking this transaction for Apollo and New Home? And how should we think about the opportunities out there to support other transactions within home building and maybe also beyond?

Yeah, I think Ralph Coleman really set the standard for using Millrose as a tool to effectuate M&A. And there's a lot of buzz right now from the more the mid-sized builders as they're trying to outrun their lack of scale. And so there's a lot of activity more in the mid-market part of the home builder sector. And to get right to the heart of your question, Millrose is very front and center as a tool now in the toolbox to effectuate M&A. We are very excited about that. And in part, that's part of the reason why our stretch goal is more towards $2 billion than $1.5 billion, because we do think, given the activity in the sector right now, we are going to be a participant in more and more conversations and ultimately in more M&A. And M&A, look, we all know it's hard to achieve given cultural and valuation issues, but we are now a tool in the toolbox for M&A.

Okay, great. I'll get back in the queue.

Once again, for any questions, press star one. Our next question comes from the line of Eric Wolf with Citi. Please go ahead.

Hey, thanks. For your guidance of 69 to 71 cents of EPS run rate at year end, can you just talk about what's embedded in that in terms of total transaction funding, the weighted average yield on that funding, the mix between $1 master program versus non-master program, and just anything else that you think is important to get to that sort of 70 cents of run rate by year end?

Yeah, sure. Thanks for the question, Eric. Happy to. So that would be consistent with a $1.5 billion non-Lenar target. So think of that as the existing balance of Lenar deals and that $1.5 billion of non-Lenar. It assumes a yield on the non-Lenar that's about 50 basis points more conservative than the 11.7 that we realized in the first quarter. And cost of debt, that's about 50 basis points more conservative, wider than our cost of debt today. So hopefully that helps.

Yeah, that's helpful. And then you just gave the rates, I guess, about 11.2% on the $1.5 billion. But maybe just talk about sort of average duration on that, option deposit, termination fees, cross-collateralization, anything you just think is important from a risk mitigation point of view. And then to the extent that your underwriting perhaps has changed over the last couple of months, given a little bit more of a in certain environment, can you just talk about sort of how you've adjusted your underwriting based on the current environment?

Yeah, sure. So in general, that pipeline, it varies in terms of deposit and cross-collateralization pooling. I think, you know, you're going to see a mix of some pooling, some others, you know, based on what Darren alluded to with builders seeing the cross-termination pooling and higher deposits as a tool to bring down their yield. And, you know, we're happy with that dynamic approach. Generally speaking, the overall deposit on this category of deals is higher than in the Lennar category. And generally speaking, we are very focused on risk mitigation, particularly given what you mentioned in the market. We're seeing plenty of demand, but it hasn't changed our underwriting process, which continues to be as rigorous as it ever was. you know, not only the real estate diligence, but the vetting of gross margin and ASP assumptions that we believe to be consistent with the correct market. So, you know, we continue to be rigorous in our underwriting. Thank you.

Our next question is a follow-up from the line of Julian Bluin with Goldman Sachs. Please go ahead.

Thank you. And maybe following up on that, we noticed that the weighted average duration for the new third-party deployments was quite a bit longer than the deployments for Lenar. Can you sort of help us understand what's driving that difference? And then how do you get comfortable around that longer duration, given maybe the lack of cross-collateralization on some of those third-party deals? Does the higher yield help make up for that?

Yeah, I would say I actually wouldn't characterize, you know, that duration on third-party deals as longer duration. You know, remember, that's the final home site takedown. So the weighted average life of the deal is much less than that, maybe around half of that. So, you know, in the 50-ish months sort of total last takedown, we're very comfortable with that duration. And what you're keying in on is that you're right, the duration, again, for final takedown of the new Lennar deals we've done is shorter, which is – consistent with, you know, what Lenar has said, which is this is a tool for work-in-progress, shorter-term home site, you know, inventory. Got it. Thank you.

Our next question is a follow-up from the line of Eric Wolf with Citi. Please go ahead.

Thanks. It looks like you're assuming around an average takedown per site of called around 100,000. Could you just talk about how that relates to sort of the total estimated sort of home prices that you're assuming, the margins that you're assuming the homebuilders get? I'm just trying to understand sort of what that represents relative to sort of total home sale and the profit that you're expecting the homebuilder to take down from that.

Yeah, sure. So if you think about, call it $450,000 home sale, that would mean a total lot price of $100,000. And so the balance of that would be the vertical build cost and the gross margin assumptions, where we're generally underwriting, as we've talked about, to a gross margin consistent with the builder's targets that they reported.

Okay. Because as far as the new delayed draw term loan, I think you said something about it was 50 basis points wide of your line of credit. I don't know if I heard that right, but maybe just, you know, walk us through the LPV on that loan, trying to understand something like the asset base that it's secured by, as well as the rate and anything else that you think is sort of important for us to understand about that loan.

Yeah, this is Darren. the rate is actually consistent with the revolver and has many of the same terms and conditions as in the revolver.

Yeah, so said differently, my sort of more conservative assumptions in that full-year target, that was, you know, that assumption was not, that was more conservative than, you know, the rate on that delay zero, turn one.

Got it. And is that secured by Lenar, I guess, Lenar home sites and just anything in terms of the LPV on that? So if it's, you know, called billion dollars, like what's the sort of leverage profile?

Yeah, the spin out was of Lenar's assets, which are themselves unlevered. So this would be a corporate loan against all of our assets, inclusive of Lennar's and other third parties now. So hopefully that answers your question.

Yes, it does. Sorry. I thought when you said it was secured, I thought it was secured by like a certain percentage of assets, but I got it. It's by everything. At the corporate level. Right. Makes sense. Okay. And then, you know, in terms of your decision, I guess, to distribute a hundred percent of earnings back to shareholders, could you just sort of talk us through sort of, um, you know, that decision, I guess, to the extent that there's any sort of timing mismatches in the future related to, you know, take down proceeds versus deploying capital, you know, would you slightly lower the dividend or would you just fund the access through the line of credit? Like how did you come up with the decision to fund exactly a hundred percent, uh, of your earnings distributed back to shareholders?

Yeah, this is meant to be a cash yielding instrument. This capital, the reason why REIT was chosen is really to repatriate as much capital annually as we produce. And so that the decision is really consistent with that. The extra between 90% and 100% would be taxable anyway. So we don't really get any capital advantages inside of the REIT to recycle and reuse those proceeds. If you think about the dividend, then 10% at 100% and then 90% of that, it's really a small amount of capital $8 billion or so balance sheet. And so it doesn't really do much from a capital deployment perspective, but it does a lot to move the needle from an effective yield. And that's what we're really trying to do is drive our accretive growth, drive that yield as high as we can, and repatriate as much capital to shareholders as we produce.

I understand. That's helpful. And the last question, thanks for letting me ask all these. I think... You know, as part of your initial agreement with NARA, you were receiving option fee payments or you are receiving option fee payments on around $580 million of funding that was funded with their deposits. Are you assuming that some of that comes off to get to that, call it $0.70 year-end run rate? And what's a good assumption for how that should come off over time?

Yeah, it has a small impact that, you know, won't be meaningful. I think you'll see all the reconciliations on the materials in both the 10-Q and the presentation. But, you know, I don't think it's particularly meaningful.

Got it. All right. Thank you.

Thank you.

And once again, for any questions or follow-ups, simply press star 1 on your telephone keypad. That will conclude our question and answer session. I'll hand the call back to management for any closing comments.

Yeah, we'd like to thank everybody for joining us today. We're very excited about our progress that we've made thus far and the momentum that we have as a business, as an organization, and really our role in the sector. Thank you, and we look forward to doing these again in the future. Take care.

This will conclude today's call. Thank you all for joining. You may now disconnect.