Millrose Properties, Inc. Class A

Hello everyone. Thank you for joining us and welcome to the Milrose Properties second quarter earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Jesse Ross, Milrose's Head of Financial Planning and Analysis. Jesse, please go ahead.

Good morning, and thank you for joining us to discuss Milrose Properties' third quarter 2026 results. Joining me on the call today are Darren Richman, our Chief Executive Officer and President, Robert Nitkin, our Chief Operating Officer, and Garett Rosenblum, our Chief Financial Officer. Before we begin, I'd like to remind everyone that today's discussion may include forward-looking statements and references to non-GAAP financial measures. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For a more complete discussion of these factors, as well as reconciliations of non-GAAP measures, please refer to our earnings release and investor presentation, both of which are available on our investor relations website. Given recent events, our prepared remarks today are more detailed than usual. With that, I'll turn the call over to Darren.

Thank you, Jesse, and good morning, everyone. I'll begin with our core business and our financial performance and then spend some time addressing the recent attention surrounding Melrose and the steps we are taking to further enhance shareholder values. Let me start with the most important point. Our business continues to perform remarkably well in the face of a challenging housing market Thank you for joining us. On October 20th, DreamFinders completed its acquisition of Beezer Homes, and in connection therewith, Milrose funded DreamFinders with approximately $1.1 billion of acquisition financing, a land-making investment in roughly 7,000 home sites, more than half of them finished, and a 12% preferred investment in DreamFinders. Pro forma for that transaction, approximately 42% of our asset base is now invested outside the Lennar Master Program Agreement. We underwrote, documented, and closed DreamFinders transaction in a compressed timeframe alongside a public company merger. Rob will walk you through the details shortly. For the fourth quarter, we expect AFFO of approximately 82 to 84 cents per share and year-end AFFO annual run rate above the 330 per share guidance provided on our year-end 2025 earnings call. This represents another increase in our recurring earnings power, marks the sixth consecutive quarterly AFFO increase, and underscores the durability of the Milrose business model, even as the broader housing market continues to face significant affordability pressures. During the third quarter, we funded approximately $1.3 billion in new investments and development funding. received approximately $800 million in net home site takedown proceeds and increased invested capital outside the Lennar Master Program Agreement by over $500 million to $3.4 billion. We added three new counterparties in the quarter and now serve 22 distinct clients. We also continue to expand the reach of our platform across our growing base of home builder and developer counterparties. Garett will walk you through the financial and operating details shortly. But before turning to those results, I want to address the recent attention surrounding our business, provide context for the initiatives we have been developing, and discuss how we're going to think about capital allocation and shareholder returns going forward. Now, let me turn to something many of you have been reading about. For a while, we've been working on an affordability initiative, and I want to begin by emphasizing that neither our concerns about housing affordability nor efforts to develop new products should come as a surprise. We have been discussing the affordability challenges facing the homebuilder industry for some time. On our last earnings call, we specifically addressed the difficulties facing first-time homebuyers and the various tools builders have been using to address those challenges, including mortgage rate buy-downs, incentives, and changes in product design. We have also consistently discussed our intention to expand the applications of our capital platform. In July 2025, we announced a $3 billion financing arrangement with Taylor Morrison to support its Yardley Build to Rent platform. At the time, I specifically described that transaction as an example of using our capital to help home builders address affordability challenges. Taylor Morrison also expressed its hope that Yardley renters would eventually become Taylor Morrison homeowners. We have since expanded our platform into multifamily housing and vertical construction, and used our capital to facilitate industry consolidation. And on our last earnings call, we explicitly told investors that we were expanding our product suite and we're already in the lab developing new products that would complement our existing business and deepen our relationships with Holden Builders. So the idea that we were working on affordability, exploring the intersection of rental housing and homeownership and developing additional applications for our capital is hardly new. We have been discussing these opportunities publicly for well over a year. The opportunity we've been working on to address is real. Everyday prospective home buyers visit new home sales centers with the intention of purchasing a home only to discover that they cannot qualify for a mortgage. We estimate that more than 30% of prospective customers are being denied at the mortgage qualification stage after conversations with our home builder counterparties. Importantly, credit quality has not deteriorated in a manner that would explain the magnitude of the problem. FICA scores have remained remarkably consistent. What has changed dramatically is the cost of financing a home. These are people who want to own a home. They are trying to achieve the American dream of home ownership, but the combination of home prices and mortgage rates has put the dream beyond their immediate reach. We thought that was a problem worth trying to solve in a manner accretive to Milrose's shareholders while reinforcing our core business model. Milrose has pioneered land banking as an institutional product. We have applied our platform to large-scale M&A, vertical construction, built-to-rent, and multi-family housing. Given that experience, we believe we are well positioned to develop an additional affordability solution. Specifically, we're working on a product designed to sit between the for-sale and for-rent markets, a bridge to homeownership. The concept was to allow prospective homebuyers who could not qualify for mortgage today to occupy a home as a renter with a potential pathway to homeownership when the circumstance is allowed. But before we could responsibly introduce such a product, we needed to establish that the underlying operating and financing infrastructure would work. There is another important consideration in understanding why we pursued this initiative. We believe built-to-rent is becoming an increasingly important component of homebuilder finance. It provides another channel of demand for our homebuilder customer, diversifies their source of offtake, and creates additional flexibility in addressing the affordability challenges facing the housing industry. The FHA's recent decision to extend multifamily mortgage insurance eligibility to qualified built-to-rent communities is significant. By expanding access to government-insured construction and permanent financing, the FHA is recognizing the growing role of built-to-rent in expanding housing supply and addressing affordability. Importantly, it also creates another potential source of institutional capital to support this market. Build to Rent does not represent a problem with homebuilder finance. It represents innovation in homebuilder finance. And if you don't recognize Build to Rent as a crucial and growing component of the industry, then I believe you are materially underestimating the opportunity and value of the Milrose platform. For Milrose, every additional channel through which a homebuilder can sell a completed home expands the opportunity to finance its production, accelerate capital recycling, and increase the value of our platform. But there has been a disconnect between the growing importance of bill to rent and the availability of capital to support it. Higher interest rates have sidelined significant amounts of institutional capital. The publicly traded single-family rental companies have been managing their own capital constraints and priorities, limiting their ability to expand. An uncertainty surrounding bipartisan housing legislation created an additional regulatory overhang until the legislative process was completed. Importantly, this retreat in capital has not necessarily reflected deterioration in the underlying assets. Both major publicly traded single-family rental companies continue to report positive blended rent growth, strong occupancy, and healthy renewal performance. Independent industry research has also pointed to improving rent growth as supply pressures moderate. So we have a market where the underlying assets continue to perform, but the capital available to support them has become constrained. And the consequences extend well beyond the rental housing market. When institutional capital retreats from build-to-rent, homebuilders lose an important channel of offtake. That can translate into slower absorptions, higher inventories, and reduced construction activity. In other words, a disruption in the availability of capital for build-to-rent ultimately becomes a disruption in homebuilder finance. We believed it was important to understand that disconnect firsthand. Rather than simply wait for institutional capital to return, we wanted to see how the product performed ourselves. We wanted to understand leasing dynamics, resident retention, operating costs, asset management requirements, and financing alternatives. And we wanted to determine whether the economics could support a scalable institutional capital market solution. That required us to own homes, albeit on a limited basis. and we believe Millrose is particularly well positioned to pursue this opportunity. We already have deep relationships with home builders, visibility into their land pipelines and production needs, an established financing infrastructure and a balance sheet capable of supporting innovative capital solutions. Our platform operates at the intersection of housing production and institutional capital, giving us a perspective that neither traditional rental housing operators nor standalone capital providers necessarily possess. Importantly, this initiative maps directly to our existing operating footprint. We are not entering unfamiliar markets to establish an entirely new business. We are evaluating another application of our capital within the same home building ecosystem we already serve. Adil Pasha, Darren Richman, Garett Rosenblum, Robert Nitkin, Our intention was never to replace the institutional capital providers that have historically supported this market. Quite the opposite. We wanted to understand what was preventing capital from participating and whether we could develop a structure that would facilitate its return. Against that backdrop, beginning on August 28, we purchased 1,233 completed single-family homes across 18 states for an aggregate cost basis of approximately $333 million. This is inclusive of capital expenditures and transaction costs, representing a net investment of approximately $120 million after financing proceeds. We also entered into additional community build-to-run contracts, with expected net investment of approximately $50 million based on $100 million of expected asset level limited recourse financing and $150 million of gross purchase. Leasing and property management are being handled by Evergreen Residential, a nationally scaled institutional rental housing platform managing more than 30,000 homes across 28 states. I want to emphasize that we deliberately structured this pilot around two distinct but complementary components. The scattered site portfolio allowed us to evaluate the economics of owning and operating completed homes. We can observe leasing velocity, rental rates, occupancy, resident retention, maintenance costs, and the performance of third-party servicing. We can also evaluate the cash flow characteristics of the portfolio and its suitability for institutional financing, including securitization. The purpose-built rental communities provide a different perspective. They allow us to evaluate the economics of delivering homes directly into the rental market, including construction costs, development timelines, community level absorption, lease up performance, and the financing structures necessary to support that activity. Just as importantly, they allow us to better understand how Build to Rent can function as a reliable channel of offtake for our home builder customers. Taken together, these two approaches give us visibility into both the operating economics of rental housing and the capital required to finance its production. We believe that understanding both sides of that equation is essential to developing a scalable institutional capital solution. I want to be clear about something. Our first transaction in this area was with Lennar, but this was never intended to be a Lennar solution. It was designed as an industry solution for the homebuilders we serve. Milros now has 22 counterparties. Since our inception, we have been a holistic capital solution for the home building industry, and that is still true today. The same is true for how we think about build to rent and bridge to home ownership. The goal is a model that can work across the industry, not just for any single builder. Now let me put the size of this investment into perspective. Milros has approximately 10.6 billion of assets. Our initial net equity investment of approximately $120 million represents just over 1% of our asset base, with an additional approximately $50 million of anticipated future investment under our Community Build to Rent commitments. The investment was deliberately measured relative to our balance sheet, but the portfolio needed to be sufficiently large to test the operating and financial architecture, including potential to access the securitization market. And there is another important distinction. These are durable, income-producing assets. We're not simply spending capital to conduct an experiment. We're investing in homes that generate rental income and retain underlying real estate value, while providing the operating experience and information necessary to evaluate a potentially much larger opportunity. That is an important feature of how we design the pilot. We can learn from actual operating performance while maintaining an investment in tangible assets with continuing economic utility regardless of whether we ultimately decide to pursue the broader initiative. In other words, the success of the investment does not depend on the success of the new use case. This was always intended to be a crawl, walk, run strategy. First, assemble a portfolio of sufficient scale. Second, observe how the homes perform and evaluate the operating, servicing, and financing infrastructure, and only then determine whether we have the foundation for a broader institutional financing solution. We have not made that determination. Our objective is not to become a large-scale owner and operator of rental homes. It is to understand whether we can use our existing platform, capital markets expertise, and relationships with homebuilders to expand the source of capital available to the industry. That is consistent with what Milros has done since inception. Identify inefficiencies in homebuilder finance and develop institutional capital solutions to address them. If we can help establish a more reliable and scalable source of capital for builder rent, we can create another channel of demand for our home builder customers, diversify their sources of offtake, and strengthen the resilience of our platform through the housing cycle. This is not a departure from our core business. It is a natural extension of it. Going forward, we continue to believe strongly in the opportunities across built rent, single family rental, and particularly rent to own. At the same time, we are seeing unprecedented public sector support at the federal and state levels for programs that align national housing goals with private sector returns. I mentioned earlier the recent expansion of FHA financing for qualifying builder rent communities. I want to emphasize again that we were never trying to recast Milrose's business model. We view this as a corporate opportunity that was relevant to and adjacent to our core business, and we still do. are remain enthusiastic about the rent to own product we were incubating. We have spent considerable time studying past rent to own models and have designed this program specifically to address their shortcomings. We start with a customer who has already decided to buy a home, but encounters challenges with mortgage qualification. Our product would offer a pathway to occupy a home as a renter. with the opportunity to transition into ownership when they become mortgage eligible without the traditional lease of J curve for the capital vehicle. When you combine customer acquisition model with the ability to purchase homes at a discount and finance them with efficient asset-level debt, we believe the resulting economics can generate highly attractive risk-adjusted returns. Importantly, those returns are not dependent solely on home price appreciation. They are supported by the underlying rental economics, the acquisition discount, and the financing structure with the potential to transition to homeownership creating an additional source of value. We continue to believe this is an attractive investment opportunity and we remain committed to careful evaluation of any future investment in the context of our current cost and availability of capital. There are also important facts regarding how this initiative was approved and how we approach the economics. We filed an ADK on September 1st describing the relevant investment architecture and amendments to our various agreements were signed on August 27th. The initiative was reviewed and approved by our independent board following a robust discussion. The single-family rental homes we purchased will not be included in the calculation of management fee payable to Kennedy Lewis. When our board met to approve the fourth quarter management fee amount, Kennedy Lewis unilaterally proposed to exclude these assets from the management fee calculation. Kennedy Lewis believed it was an appropriate decision while Milrose is evaluating a new product that had not been yet proven. Now let me pivot to capital allocation and shareholder returns. The events of the past several weeks have also prompted us to take a fresh look at our business, our capital allocation priorities, and how we deliver value to shareholders. Given the discount at which our shares trade relative to book value, the market seems to be suggesting an earnings or dividend cut. We believe that it's fundamentally flawed assessment of our business. Our cash flows remain highly visible Our underlying business continues to perform remarkably well and no customer has terminated an option agreement or threatened to do so. But rather than simply disagree with the market's assessment, we have taken the opportunity to reconsider how we return capital to shareholders. And we have reached a straightforward conclusion. When our shares trade at a meaningful discount to book value, repurchasing those shares can represent a more attractive use of a portion of our earnings than distributing every dollar as a dividend. Accordingly, going forward, while our shares trade below book value, we intend to distribute 90% of our earnings consistent with maintaining a REIT status and directing the remaining 10% towards share repurchases. In that regard, our board has authorized a $250 million share repurchase program. Now, I want to be very clear about how we intend to fund this program and, equally important, what we will not do. We will not borrow money to repurchase our shares. We will not compromise our liquidity, increase leverage to fund buybacks, or divert capital needed to support our core business. Our repurchases will be funded from earnings that otherwise would have been distributed to shareholders, as well as any lost priority capital that becomes available from Lenar's capital priority right to the extent it is unused. The earnings allocated to repurchases would have been paid out in any event. We are simply choosing to return a portion of those earnings through a different mechanism when we believe doing so creates greater long-term value for shareholders. And when our shares trade below book value, repurchasing them has an added benefit of increasing book value per share for our continuing shareholders. We have worked hard to establish a strong balance sheet, substantial liquidity, and a durable credit profile. We intend to protect all three. Our $250 million authorization provides us with flexibility to act opportunistically. It is not an obligation to deploy that capital, nor does it represent a change in our financial risk appetite. We are not going to sacrifice the credit quality of the enterprise to pursue a higher share price. There is also an important distinction that I want shareholders to appreciate. A dividend reduction driven by deteriorating business performance is fundamentally different from a deliberate decision to allocate a portion of our earnings towards repurchasing shares that we believe are undervalued. Our decision is the latter. We are not changing the economics of our business. We are changing how we return a portion of those economics to shareholders. For too long, the market has evaluated Milrose principally through the lens of its dividend yield. We believe that overlooks the quality and visibility of our earnings, the strength of our balance sheet, and the value of the underlying assets. We want shareholders to evaluate Milrose based on the total economic return we generate, not simply the dividend yield displayed on a screen. Ultimately, our responsibility is to maximize long-term value per share while preserving the financial strength and flexibility that underpin our business. We believe this capital allocation framework accomplishes both. For those who continue to question where our loyalties lie, consider the economics of our decision. Repurchasing shares reduces our asset base and consequently the management fees payable to Kennedy Lewis. Yet that is precisely what we are doing. We are making a deliberate decision to prioritize shareholder value over management fee income. Our actions should speak louder than any assurances we could offer. Staying with the topic of capital, on our last earnings call we acknowledged that we will continue to evaluate our debt to capital target. While we have made no formal decision to change that target, we remain comfortable temporarily exceeding the 33% level we established at the time of our spend, particularly in connection with the M&A transaction, such as DreamFinders acquisition of Beezer. We have discussed our thinking on this before, but I believe it bears repeating. When Milros was spun out, the average duration of our portfolio was approximately three years. We were also managing a newly independent business without an established operating history of our own. Accordingly, we deliberately established a conservative leverage target to ensure that we had sufficient financial flexibility to manage our obligations across a wide range of market environments. That was an appropriate decision at the time. Since then, we have gained considerable experience managing the portfolio, including through large-scale M&A transactions. And one thing we have learned is that the portfolios we acquire in those transactions tend to have materially shorter durations, closer to two years rather than three. That distinction is important. Shorter duration portfolios generate a more rapid return of capital through home site takedowns, giving us greater visibility into the pace at which leverage can return to our target following an acquisition. So in many respects, this is simply a matter of math. We established a 33% debt to capital target against a portfolio with approximately three years of duration. When we acquire a portfolio with a duration closer to two years, we have greater confidence in our ability to temporarily operate above that target and return to it over a shorter period of time. Our experience managing these acquired portfolios has reinforced that confidence. To be clear, we are not announcing a change to our long-term leverage target today, nor have we made any decisions regarding a higher permanent leverage target. What we are recognizing is that the duration and cash flow characteristics of the asset should inform the amount of leverage we are comfortable carrying. and where shorter duration M&A portfolios allow us to return to our target leverage level relatively quickly. We believe it makes sense to retain the flexibility to temporarily exceed that target when the opportunity warrants. Our objective is not to maximize leverage. It is to optimize the use of our balance sheet while preserving the financial flexibility and credit quality that have been central to our business model from the beginning. So let me bring this back to the bigger picture. Our core business remains strong. We continue to have excellent visibility into our cash flows and no customer has walked away from an agreement or threatened to do so. We have been publicly discussing affordability challenges and the development of a new capital solution for more than a year. We committed just over 1% of our asset base to a deliberate pilot designed to develop whether we could develop a scalable bridge to homeownership. The initiative was approved by our independent board, supported by outside financial analysis, and structured with the intention of ultimately attracting third-party capital. Millrose does not pay management fees on the single-family rental investments under the management agreement. And we are proceeding deliberately, intending to evaluate the performance of the portfolio before determining whether to take the next step. We were not trying to become a single-family rental company. We were trying to develop a bridge to homeownership, and in doing so, we were seeking to make Millrose more resilient across interest rate cycles while addressing one of the most significant challenges facing our industry. That is entirely consistent with the mission we established for Millrose from the beginning. We remain committed to Milrose's core business model by continuing to believe that the bridge between renting and homeownership represents a meaningful opportunity for the broader housing industry. And finally, we're still in the lab. We continue to believe in the merit of finding a solution that meaningfully improves affordability. while aligning the interest of homebuyers, homebuilders, capital providers, and Milrosa shareholders. We will seek input from our investors and other stakeholders before continuing this effort and evaluate it in the context of our cost and availability of capital. In any event, this was never intended to be a meaningful use of our capital. In the meantime, our focus remains squarely on executing our core business, which continues to perform remarkably well. I'll now turn the call over to Rob.