More Semitic speculation: Get ready to catch the next wave, SUCKERS!

By MICHAEL CORKERY
In Indio, a small city east of Los Angeles, the supply of foreclosed houses for sale is plentiful. Even so, work crews are finishing a batch of new homes for Lennar Corp.

While the recession wiped out many small builders, mortgage lenders and homeowners, the nation's biggest builders have hung on, in part through favorable land deals, loan agreements and tax strategies.

Now, the worst appears to be over for most of them. Nationwide, new-home sales are showing signs of bottoming out. The stocks of the big home builders have rebounded from their November lows, and some have bolstered their cash and borrowing ability. Lennar and Toll Brothers Inc. each sold $400 million of bonds in April, and Ryland Group Inc. sold $230 million worth, a sign that some investors think these companies will make it.

A look at how Lennar navigated the worst housing crisis in decades reveals that timely land deals have been critical to its survival.

"Land can humble you," says Emile Haddad, Lennar's chief investment officer. "On the surface it looks like the simplest real-estate asset, but it's really the most complicated."

Lennar, based in Miami, was one of the largest home builders in states hit hardest by the housing collapse -- California and Florida. As the housing market was heading toward a cliff, it pulled off two complicated deals that got lots of risky land off its books before the market fell apart. The buyers: Morgan Stanley Real Estate Fund and the California Public Employees Retirement System, the giant pension fund known as Calpers.

Lennar also entered into joint ventures to buy land, reducing its risk by not guaranteeing most of the $5 billion borrowed by the ventures. Some analysts say these agreements could come back to haunt Lennar, financially and legally, as lenders and partners seek to recover losses from soured projects.

"The more joint ventures you have, the more partners you have that are likely to be struggling and angry,'' says Paul Puryear, a housing analyst at Raymond James & Associates. "It opens the door to a lot of disagreements."

Still, Lennar's shares are up 128% since November, although they remain about 88% below their January 2006 peak.

Other publicly traded home builders also dumped land during the crunch. By selling land at huge discounts to what it was once valued, big builders generated large losses for tax purposes. By applying those losses against profits during prior years, they have collected about $2.55 billion in tax refunds this year, according to Zelman & Associates, a housing-research firm.

With foreclosure activity continuing to hold down prices of new homes, Lennar doesn't expect the boom times to return anytime soon. But with land values now far below their peaks, Lennar and other big builders think the time is getting ripe to start investing in it again. Lennar hopes to eke out profits by building on low-cost land and by selling low-priced homes to first-time buyers.

Back to the Land
When the housing market cratered, Lennar put together a team to buy distressed housing assets. Lennar is now about to reinvest in some of the same California land it unloaded in its deal with Calpers in 2007. Next month, a federal judge is expected to decide whether to approve the bankruptcy reorganization plan for LandSource, the company that owns the land. Under the plan, Lennar will invest new capital to retain a stake. Calpers has walked away from the venture.

Getting inexpensive land will be critical to builders' future profitability because new-home prices aren't expected to rise substantially for many months. Lennar isn't the only big builder angling to take advantage of soft land prices. Ryland, a California builder, has teamed up with investment firm Oak Tree Capital Management to buy low-cost land. Toll Brothers has been speaking to lenders interested in unloading foreclosed real estate.

Big builders are benefiting in other ways from the high mortality of small and midsize builders. The smaller players had loans cut off by lenders and are dying off in droves, surrendering market share to the big players. As many as half of the nation's privately held builders have shut down during the housing bust, and many others are struggling to survive, according to a Credit Suisse estimate.

'Little Red Hen'
Still, the big builders are shadows of their boom-time selves. New homes sold at an annual rate of 352,000 in April, down from a peak of 1.89 million in July 2005. Lennar sold 15,735 houses in 2008, down from 47,032 in 2006. It reported revenue of $4.6 billion last year, compared with $16.3 billion two years ago, and it now employs about 4,000, down from 14,000 at the peak
Lennar has been around for 55 years. Under Chief Executive Stuart Miller, the company expects every employee, including top executives, to wear a company badge with their first name. Each staffer was encouraged to periodically recite in front of their colleagues a poem, "Scratchings From the Little Red Hen," about a bird that refuses to give up looking for worms while a white rooster sits idly and complains about how difficult it is to find food. The tail of the company jet had an image of a red hen.

When the housing bust hit and layoffs began, the weekly poetry recitals stopped and the hen disappeared from the plane.

Lennar's land strategy was honed during previous downturns. Over the years, builders have gone bust because they took on too much debt to buy land, then were left insolvent when land values plummeted. Lennar decided one way to avoid that fate was to spread the risk to others and limit the debt on its balance sheet.

In the mid-1990s, Lennar moved into California, gaining its first sizable foothold by purchasing land from oil giant Chevron and a bankrupt Canadian developer. Mr. Haddad, a Lebanese immigrant who joined Lennar as part of the deal, became a key land strategist in the state. The housing market was about to take off.

Lennar used joint ventures to persuade California's farming families and other big property owners to develop land they'd owned for generations. By forming partnerships with Lennar, many families could keep an ownership stake and participate in the upside as their citrus groves and cattle ranches were turned into housing developments.

Because Lennar typically owned 50% or less of each venture, or didn't hold voting control, Lennar says accounting rules required that it keep the debts off its balance sheet.

Lennar's chief executive, Mr. Miller, and his family also were able to profit from the real-estate deals through a company called LNR Property Corp. Started as a Lennar division that acquired and managed distressed commercial real estate, LNR was spun off in 1997 as a separate publicly traded company. Mr. Miller was its chairman and largest shareholder.

Private-equity firm Cerberus Capital Management bought 80% of LNR in 2004, leaving the Miller family with a 20% stake. The deal was valued at about $3.8 billion, which included about $1.76 billion of debt.

LNR took big ownership stakes in many of Lennar's California ventures. During the boom, Lennar and LNR bought big swaths of land: a shuttered naval shipyard in San Francisco, a former naval base in Orange County, and the 15,000-acre Newhall Ranch, outside of Los Angeles, which also included a small water company, a key asset in Southern California.

Facing a Crunch
By 2006, Lennar decided that the good times were nearing an end for the housing industry. That summer, Lennar began to cut home prices to boost sales and generate cash in preparation for a downturn. Lennar also looked for ways to jettison land.

Lennar was facing a potentially serious cash crunch, in part because it was on the hook to pay back as much as $1.7 billion in debt used to finance joint ventures.

Calpers, which manages pensions for California's state workers and public employees, was in the market for land. Lennar wanted to sell most of its stake in the Newhall Ranch.

In early 2007, Lennar and LNR agreed to sell 68% of the venture, called LandSource, to a Calpers investment vehicle for $970 million. At the same time, LandSource borrowed $1.5 billion, distributing cash to stakeholders. All told, Lennar and LNR each netted $707 million from the deal.

Sixteen months later, with the housing recession raging, LandSource sought bankruptcy protection, which wiped out Calpers's majority stake, along with the remaining stakes of Lennar and LNR. Calpers has said it never anticipated the housing downturn would be so severe.

Raising Cash
In late 2007, Lennar cut a second big deal that raised cash. It sold about 11,000 home sites for $525 million to a partnership it formed with Morgan Stanley Real Estate Fund. Because Lennar was valuing the land on its books at $1.3 billion, the deal generated a large loss that allowed Lennar to collect a $320 million tax refund.

Since then, the value of the land has declined by at least 35%, estimates Tom Reimers, president of Park Place Land Advisors, a land broker in Irvine, Calif.

"Considering all that has happened in the market, I think Morgan Stanley clearly wishes it hadn't done that deal," says Mr. Reimers. Morgan Stanley declined to comment.

The money raised from the two deals, coupled with the tax refunds, added to Lennar's cash reserves as the housing crisis hit.

In addition, Lennar bailed out of some joint ventures during the downturn. In some cases, it assumed some of the assets and debt and dissolved the venture. In others, it has been paying down the ventures' debts. All told, it has reduced the number to 95, from 261 in 2006.

Lennar now says only about $500 million of the $4 billion in debt on its off-balance-sheet ventures involves so-called recourse loans, meaning Lennar must pay back the loan if the venture defaults.

Rancor Among Partners
Some of the troubled ventures produced rancor.

"Lennar has proven to be a challenging corporate citizen," says Craig Ewing, director of planning services for Palm Springs, Calif. Lennar had stopped work on a 400-acre housing project it was developing there with a joint-venture partner, leaving streets unfinished and an 18-hole golf course not maintained, Mr. Ewing says.

Lennar says the project stalled after its partner filed for bankruptcy. Mr. Ewing says Lennar recently returned to finish some of the work.

Nicolas Marsch III, a real-estate developer in Southern California, is Lennar's partner on a joint venture outside San Diego called "The Bridges," an upscale housing development ringing a golf course.

Mr. Marsch has sued Lennar, claiming it mismanaged the property and for failing to pay him his share of profits. Lennar, which says Mr. Marsch has received at least $50 million, has countersued, and a trial is expected to begin later this week in San Diego Superior Court.

"When assets are under stress, it can create some tension with partners," says Mr. Haddad. "Overall, I feel very good about how our ventures have performed." Lennar says that less than 2% of the joint ventures are tied up in litigation with partners.

Lennar continues to pursue new joint-venture deals, such as its return to the busted LandSource deal. In LandSource's bankruptcy reorganization, Lennar has proposed buying 15% of a new venture that will hold most of LandSource's assets, including the 15,000 acres near Los Angeles, for $85 million. The rest of the venture would be owned by a group of LandSource's largest creditors.

The deal would value the land at about 18% of its value when Calpers made its 2007 deal with Lennar and LNR. The new venture would have $100 million in cash and no borrowed money.

"It will be one of the most financially sound real-estate companies in the country," Mr. Haddad maintains.

Write to Michael Corkery at michael.corkery@wsj.com