Millrose Properties, Inc. (MRP) Earnings Call Transcript

[Audio Gap] priorities have made capital efficiency and necessity and our permanent capital platform was created to respond to that very need. Homebuilders cannot simply stop their production activity because near-term demand moderates. The communities that they expect to deliver in 2028 and 2029 require land acquisition and development decisions today. The Melrose platform allows builders to continue investing for long-term growth while preserving balance sheet flexibility and improving capital efficiency. We believe this is more than a cyclical response to today's market. It reflects a structural evolution in how builders think about capital allocation. That evolution is playing out visibly across the sector, with public builders owned and controlled lot positions trending low for 4 consecutive quarters. Builders are not chasing land at any cost. They are rightsizing land inventory to match demand and are now more regularly outsourcing ownership to third-party capital providers like ourselves. Turning to our second quarter results. Our invested capital reached approximately $8.8 billion at quarter end. Importantly, we recycled approximately $1 billion during the quarter, capital return from builder takedowns and development loan repayments, and redeployed it into approximately $1.1 billion of new opportunities at underwriting standards that have not moved. That velocity of deployment held to a consistent underwriting bar is what a mature permanent capital platform is designed to produce. There were no option terminations across the platform this quarter. and in fact, 0 option terminations since the inception of Mill Rose platform. Every counterparty has honored every option contract as scheduled. Against a backdrop where several public builders have continued to record walkaway charges on parcels they chose to abandon the durability of our portfolio reflects both the quality of our underwriting and the strength of our builder relationships. We now serve 18 third-party counterparties, including several of the nation's largest homebuilders with approximately 32% of invested capital deployed outside of our founding [ Lennar ] master program agreement. We added 2 new counterparty relationships this quarter. Among them is a new land banking relationship with J.P. a wholly owned subsidiary of Sumitomo Forestry, which represents our first expansion into multifamily assets. This is a meaningful new use case for the platform and it opens additional runway across the residential housing ecosystem. Beyond expanding our counterparty set, we are also finding new ways to deploy capital across the platform. In May, we announced our intent to provide land banking capital in support of Dream Finders Homes, proposed acquisition of Beazer Homes. While there is currently no agreement in place between those 2 parties, we believe the announcement illustrates a broader strategic roll mill Rose is beginning to play, not just supporting organic growth at our counterparties but facilitating capital-efficient consolidation across the industry. With M&A activity accelerating across the homebuilding sector, we expect further opportunities to demonstrate that capability. quarter was $127.6 million or $0.77 per diluted share, driven by higher recurring option fee income on growing invested capital base. That figure absorbed the first day of quarter early repayment of approximately $284 million of development loans, which Garrett will unpack in more detail. Our run rate AFFO exiting the quarter was approximately $0.80 per share at the high end of our previously provided exit run rate guidance. At the same time, we continue looking for opportunities to improve our business internally. Our technology platform and operating infrastructure have matured, and we have turned increasing attention to how our business operates at. at every level. We are focused on making sure every dollar of capital is working as hard as possible, and we expect that focus to show up in our results over time. We maintain a strong capital foundation with approximately $1.4 billion of available liquidity and a conservative balance sheet. Finally, we declared our sixth consecutive quarterly dividend increase raising the dividend to $0.77 per share. The dividend is fully supported by recurring AFFO and represents an annualized yield of approximately 8.8% on book equity. We believe the consistency of our dividend growth reflects the durability of our earnings model and our confidence in the platform's long-term trajectory. With that, I'll turn the call over to Rob for an operational update.

Thank you, Darren. Our platform had another strong quarter across capital deployment, portfolio management and capital recycling. We remain focused on deploying capital into high-quality opportunities while maintaining the underwriting discipline that defines our business and on making the platform more productive as it scales. We ended the quarter with approximately 143,771 home sites across 877 communities in 30 states, serving 19 counterparties after adding 2 new relationships during the quarter. As Darren mentioned, we're excited about a new land banking relationship with JPI, a wholly owned subsidiary of Sumitomo Forestry, which represents another expansion of the use cases for the Mill Rose platform across the residential housing ecosystem. The continued diversification of the portfolio beyond our foundational Lennar relationship reflects the growing adoption of our permanent capital solution across the home building industry, our counterparties continue to perform, and we again saw no option terminations across the portfolio amidst approximately $1 billion of net repayment proceeds in the quarter. While it's easy to make broad statements about the national housing market, our continued strong performance is a reminder that housing is highly local and property specific. Housing profitability can vary widely by location, product type and land basis. That's why our data-driven systematic approach to underwriting is so crucial. As you'll hear further from Stephen Hemsley, we track home sales in real time and benchmark against proprietary lot pricing data sets, adjusting for specific submarkets and lot sizes that quantitative discipline is what underpins the durability of the portfolio and our confidence in it. Capital recycling was again a defining feature of the quarter. Roughly $1 billion came back to us from takedowns and development loan repayment. We redeployed all of it and more into approximately $1.1 billion of new deals with a modest revolver draw funding the difference. Operational execution remains 1 of our key differentiators. The combination of our technology platform, experienced team and disciplined processes let us evaluate a high volume of opportunities efficiently and proactively manage risk across a geographically diverse portfolio. As we scale, we keep sharpening those processes to drive further efficiency and ultimately, stronger returns for our shareholders. That scale continues to strengthen our competitive position. Managing a portfolio of this size requires sophisticated systems, deep market knowledge and operating infrastructure built over many years, capabilities that become increasingly valuable as builders seek experienced institutional capital partners that same scale and infrastructure also position us to support capital efficient M&A across the industry. As Darren noted, the potential opportunity with Dream Finders homes is 1 example of how our platform can help facilitate strategic transactions. And with industry consolidation accelerating, we're optimistic about further opportunities to demonstrate that capability going forward. Turning to portfolio composition. Bolenormaster program agreement continues to provide a stable foundation, representing approximately 68% of invested capital. The remaining 32% is deployed through our other agreements, which remain the primary driver of growth and diversification across counterparties and geographies. These other agreements generated a weighted average yield of approximately 10.6% during the quarter. In today's market, we've prioritized higher-quality opportunities, stronger builders, less development complexity and a greater margin of safety, a mix shift towards lower-risk assets strengthens the durability of our recurring income. These option rates are generally floating and subject to contractual floors, which protect the yield on our invested capital if benchmark rates decline while remaining poised to benefit in the event that benchmark yields increase going forward. Looking ahead, our priorities are unchanged: disciplined capital deployment, food and portfolio management and expanding relationships with high-quality counterparties. We continue to explore additional applications for the platform that meet our criteria for AFFO accretion. And our pipeline is active. Our opportunity set continues to grow, and we remain as focused on how the business operates as we are on the capital we deployed. With that, I'll turn the call over to Stephen, who will provide you an update on the housing market and why our constructive stance has not changed.

Thanks, Rob, and good morning, everyone. I'll start with a brief operational and macro update on the housing industry, followed by our view on the industry and how we are navigating current market conditions. Builders continue to exercise disciplined cost control and inventory management in a challenging market, incentives, while still elevated, appear to be trending in the right direction. Cycle times have also broadly recovered from the post COVID supply chain disruptions. We view these as constructive developments for the industry as they indicate builders are iterating their operating models in real time. leaner spec inventory and improved cycle times are giving builders more flexibility to match starch with demand as it materializes, rather than being forced to discount aged, completed homes a dynamic that is supporting margins even without a meaningful improvement in top line demand. We also see a very disciplined land market with public builders owned and controlled lot position is trending lower for 4 consecutive quarters. This is a meaningful positive rather than chasing land at any cost to defend volume, builders are rightsizing land inventory to match current demand. Just as notably, underwriting hurdles have not budged even as builders continue to transact. Over the past 4 quarters, new Mill rose transactions have carried an average underwritten gross margin of approximately 21%, a standard that has held consistent across every price point. The steadiness of the underwriting bar even amid a softer demand backdrop is a clear sign that builders are prioritizing return discipline over growth for growth's sake. The inventory picture across the industry is constructive, with existing home inventory stabilizing and new home standing inventory declining, existing home supply, in particular, has stabilized meaningfully from a year ago when it was growing rapidly, especially in Florida and Texas, the simultaneous growth of existing and new inventory placed considerable pressure on the industry in the second half of 2025, but much of that pressure has since subsided. This combination is constructive for the industry because it removes a key source of competitive pressure builders were facing on 2 fronts at once: growing resale competition and a new home market carrying its own elevated standing inventory. With the existing home supply no longer expanding rapidly and new home standing inventory working lower, builders face less competing supply and fewer completed unsold homes of their own, supporting a more stable footing than the environment that prevailed a year ago. Consumer confidence and affordability constraints remain the primary factors shaping the industry conditions with mortgage rates fluctuating meaningfully through the quarter. Affordability is frequently cited as the defining headwind and at a headline level, that framing is fair, but treated as 1 uniform constraint, it obscures how bifurcated the market actually is. Demand strength varies enormously by submarket, by price point and by product type, often meaningfully within the same MSA. The right question is not whether affordability is a headwind, it is but where within that headwind, a specific asset can still perform. We believe what ultimately matters is the ability to cure a product that finds willing buyers. That starts well before the home is ever built, with the right land in the right location at the right basis and extends through creating the right product for that specific submarket, whether that's age-targeted communities or homes engineered around the optimized cost structure. When those elements come together, demand follows, even in a market where affordability is a headline concern, the demographics reinforce this. Today's buyers skew older and carry more accumulated wealth and several powerful economic trends continue to support the balance sheet of the U.S. consumer. The ongoing transfer of wealth from the baby boomer generation, historically high employment, steady wage growth and strong asset and equity performance. These are durable tailwinds concentrated among precisely the buyers driving today's transactions. This is why we underwrite deal-by-deal rather than to a market average, a generalized read on affordability would tell you to be cautious everywhere. Our approach with vast proprietary data sets and an unmatched land pricing data set tells us where demand is real, we're land basis and product line up and where a specific asset can outperform regardless of the broader narrative. Our scale of approximately 877 communities across 30 states, serving 19 counterparty relationships gives us a unique advantage of being able to underwrite diligently at a local level. That discipline and insight is what lets us navigate a bifurcated market with confidence. I'll now pass the call off to Garrett to discuss our financial performance.

Thank you, Stephen, and good morning, everyone. Our second quarter results reflect what happens when permanent capital meets disciplined underwriting. Every dollar we deploy translates directly into recurring income for our shareholders. For the second quarter, we reported net income of approximately $125.9 million or $0.76 per diluted share driven primarily by $195.4 million in recurring option fee income generated from our growing invested capital base, together with $1.5 million in development loan income. As we've discussed previously, adjusted funds from operations, or AFFO, remains the best measure of the recurring earnings power of our business. FFO for the quarter was approximately $127.6 million or $0.77 per diluted share, reflecting continued growth in recurring option fee income on a higher average invested capital base. On the first day of the quarter, approximately $284 million of development loans were repaid early. We redeployed that capital during the quarter into new opportunities at our current underwriting standards. Because the repayment occurred at the start of the quarter, reported AFFO reflects a partial period of reinvestment. Our run rate AFFO exiting the quarter was approximately $0.80 per share at the high end of our exit run rate AFFO guidance range and a better representation of the platform's underlying earnings power of the fully redeployed base. Book value per share was $35.24 at quarter end. Management fee expense totaled $29.9 million calculated transparently at 1.25% of gross tangible assets. Interest expense was approximately $40 million and income tax expense was approximately $2.5 million. During the quarter, we declared our sixth consecutive quarterly dividend increase, raising the quarterly dividend to $0.77 per share or approximately $127.9 million in the aggregate. The dividend continues to be fully supported by our recurring earnings and reflects our confidence in the long-term cash-generating ability of the platform. On the balance sheet, we ended the quarter with approximately $9.7 billion of total assets and approximately $8.8 billion of invested capital. Our debt-to-capitalization ratio remained approximately 30% and and we are in the process of finalizing a deal with our lending partners to reduce the borrowing rate on our revolving credit facility by 25 basis points in exchange for a fee. We ended the quarter with approximately $485 million outstanding under our revolving credit facility, $34 million of cash and approximately $1.4 billion of available liquidity, providing ample financial flexibility to support our active deployment pipeline. With that, I'll turn the call back to Darren.

Thanks, Garrett. Before we open the line up for questions, I'd like to leave you with a few closing thoughts. This quarter reinforced what the numbers have shown every quarter since inception. Demand for our permanent capital solution remains robust. Our partnerships are durable, our underwriting capability is differentiated by proprietary technology and institutional scale and the platform keeps growing. Those fundamentals continue to position us well regardless of where we are in the housing cycle. We are deeply engaged with our homebuilder counterparties. The quarter continued to demonstrate that there are ways to deploy our platform creatively in response to builder needs while generating returns that need our standards. We expect to continue finding those opportunities and fulfill an expanding role as a strategic capital partner to homebuilders. Before I close, a word on the broader picture, the United States remains structurally short several million housing units and the process of moving raw land through zoning, entitlement and development approvals has never been more difficult or more time consuming. That scarcity is not cyclical. It is a durable secular tailwind, it supports the underlying value of the land that Mill rose already owns, all of which benefits from all necessary entitlements and discretionary approvals. It is 1 of the most important and most underappreciated features of this platform. Those secular tailwinds are offset in the near term by cyclical headwinds. A elevated mortgage rates and what is broadly labeled affordability. As Stephen mentioned, affordability is a composite statistic that obscures the ways the market is actually adjusting, buyers are getting older, homes are getting smaller and a substantial wealth transfer from older to younger generations is quietly supporting demand at the point of sale. It is unquestionably a tough market, particularly at the first-time buyer segment, but the builders are meeting it with the ingenuity and age old tools, including rate buy-downs, product mix shifts, community level incentives and floor plans that are rightsized for current market conditions. Looking ahead, we remain focused on disciplined capital deployment, deepening our counterparty relationships and expanding the ways this platform serves the residential housing ecosystem. Our pipeline is active -- our opportunity set continues to grow and our underwriting standards remain unchanged. I'd like to thank our builder partners for their continued trust and our shareholders for their continued support. We have built something that did not exist before, and we are just getting started. We appreciate your interest in Mill Rose and look forward to updating you on our progress next quarter. With that, operator, please open the line for questions.

[Operator Instructions] Your first question from the line of Julien Blouin with Goldman Sachs.

Yes. I just wanted to check, generally, how should we think about the yields on the multifamily land banking deals are they sort of similar to the non-Lennar activity? And then do you foresee sort of similar additional structures with other developers going forward?

Yes, sure. Rob, thank you for the question, Julien, and -- so -- to your first question, yes, the yields of that multifamily product are totally consistent with the rest of our other agreements, land banking deals outside of the Lunar master program agreement. So certainly accretive to our yields. And as we said, something that we're really excited about to use a very similar structure and economics of our just brid-and-butter land banking product to another, certainly a very large portion of the homebuilding market. And then in terms of going forward, yes, I think we're certainly looking forward to potentially do more of that anywhere that we can get the yield and the earnings that's accretive to our AFFO and help provide capital efficiency for residential developers. We'll certainly evaluate that within the constraints of all of our risk evaluations in underwriting.

Yes. I'd add, Julian, this is Darren. Look, it's incumbent upon us to to continue to disrupt ourselves, disrupt the market and develop new use cases for land banking. It all starts with making sure we're protecting capital. and we have additional margin of safety in everything we do. So making sure we're at first protecting capital and then getting the returns that we and our investors have come to expect. But I would think in the next months and quarters, we'll continue to push out and find new structures and new use cases to deepen our relationships with our existing partners as well as to find ways of targeting a new class of partner.

Got it. And then I was wondering, are you sort of setting aside deployment capacity for the proposed Dream Finders Beazer deal? Or put another way, if sort of another opportunity came your way? Would you be willing to sort of pivot to supporting that deal and sort of taking your leverage to the 33% or slightly above that sort of limit you've set?

Yes, it's a good question. And quite candidly, it's something that we, as a management team, continue to think through what is an appropriate leverage target. We're not changing anything today on this call. But when we put the leverage target in place, it was very much into the unknown -- we didn't know what the -- how the portfolio would behave. We didn't know how our systems would function relative to the behavior of the portfolio. And we didn't know how the non-Lennar third-party deals would come together and what the duration of those deals would look like? And if you go into the prepared materials slides that we prepared you'll see on Page 9 that the average duration associated with the non-Lennar deals is certainly lower than the Leonard yields. And we haven't had 1 builder walk away or threaten to do so. So we have a lot more comfort in the consistency. We've always had comfort, but we have a lot more comfort in the consistency of the timing of the cash flows so we are definitely thinking through what is an appropriate target. We always thought about leverage in terms of downside protection and making sure we can inoculate our debt in the ordinary course, regardless of the market conditions. And that hasn't changed. We want to make sure that we never put ourselves in a position where we're destabilizing our asset base because of leverage. But in view of kind of some of those facts that I just spoke about, we are thinking through what is an appropriate leverage target in the ordinary course. We certainly feel more comfortable, which we've talked about. In the context of M&A, taking our leverage target beyond the 33% because a lot of the land that we've acquired in Rauch Coleman and Land Sea was much more developed quick turning. So we know that if we pause our purchases, we'll be able to generate cash rather quickly to pay down debt. To answer your specific question about where we kind of husbanding cash reserving cash to make it available, that certainly is part of our priority of capital deployment. And so we're definitely thinking through an eye towards capital deployment for the entire year. And what we've seen in other M&A, the timing isn't certain over any month. But over the year, we have a high degree of predictability. I don't know, Rob, if there's anything to add. No. I think just reiterating that we had $1 billion in net takedown proceeds, including the development loan repayment this month. We've had similar sort of substantial -- take Tom proceeds as we've talked about in the past, as you can see in the materials since the founding of the company, I think we've seen a as Darren alluded to, generally faster turning more mature, faster velocity of cash generation across the portfolio, again, with no option terminations than we initially felt we might encounter before the company existed -- and so that's going to inform the way we think about capital planning and leverage going forward.

Next question is from the line of Eric Wold with Citigroup.

And on I guess to follow up on the multifamily. I guess, is there a certain LTV that you're underwriting to? I'm just curious, you mentioned the structure a couple of times being similar. So I was curious about the LTV that you're underwriting to in general and whether the structure will have deposits, term fees, cross pooling so similar to what you had in the homebuilding space because obviously, you look at some of your peers in the REIT space, the apartment REITs, they've had this preferred and mezz lending business, I mean, have had to take back a good number of assets over the last couple of years. So just trying to understand how you're going to structure the security enhancement, the risk mitigation and how you're thinking about the risk here versus the homebuilding side.

Yes. Sure, Eric, it's Rob. Happy to answer. So it's focused on the land and the horizontal improvements, right? So it is almost identical and structure to the rest of our land banking agreements. It's just obviously a different product with effectively rather than individual home sites it's obviously a single property. More in structure, think of it as like our yard lead business with Taylor as we described in the past, single tax lot. Ultimately, where it includes many of the features you mentioned just as all of our land bank contracts to deposits, a fixed option rate on the investment balance work exactly the same way. And ultimately, just like in our our single-family bread and butter homebuilding business, we're evaluating what the ultimate value of the community is making sure there is enough development margin for the counterparty in that transaction, such that they are financially incentivized to take down the land once it's fully developed from us. And if for whatever reason they don't, we make sure that net of the deposit we hold from the counterparty, we feel really good about our net land basis that we would own it free and clear in that scenario ahead. So it's a great relationship. It's a great organization. We have a huge amount of respect and they've really enjoyed working with the JPI team and we're looking forward to a lot of good things there. But yes, totally consistent in structure with the rest of our business. Eric, it's Darren, isn't -- maybe to your question, this isn't a one-size-fits-all -- it all starts with the land. It starts with the basis relative to the selling price of the units -- it's part of our due diligence is like plan B, C and D, what would we do with the land if we were to take it back, who else could we bring in to transition that land to bring it to its the project to bring it to its intended use. So we're going to be very, very selective as to what projects we consider in multifamily, for many of the reasons that at least the thrust of your question would suggest.

Makes sense. And they're all for sale, not rental? Or would you consider rental as low?

No, they are rental. That's Okay. And then -- if you look at the $0.80 I think you're guiding to for quarterly AFFO run rate, can you just talk about sort of what that implies in terms of average invested capital related average yield and sort of where that brings your leverage, especially since I think you kind of made some comments before about maybe temporary willingness to go above that 33% leverage level. Yes. The way to think about that is that's just the math of -- the yield we're at today and our portfolio on the last day of the quarter, right, on June 30, if the portfolio just behaved exactly with those investment balances at those yields and that same cost of debt annualized, that's where we're going forward. That's what we're communicating sort of the quarter end run rate and so ultimately, what that's really showing you is that the difference between the natural kind of linear ramp of the portfolio over the quarter, particularly with a little noise from that early development loan repayment. Give us a sense of where we are today. And so it doesn't take into account any information or expectation about the third quarter so far. Any changes? Got it. And then I guess last question. about the leverage levels. I think we've talked in the past about potentially getting investment-grade rating. I guess, have you received any guidance from the rating agencies in terms of what do they want to see, whether it's sort of leverage levels or other things that they're looking at to determine whether investment grade rating is appropriate and as you think through like the benefit of having an investment-grade rating, is it sort of worth it in terms of the reduced debt spread -- or do you think it actually is probably better just to have a little bit of a higher spread and have that flexibility to be able to lever up a bit? Yes. It's a really good question. The investment-grade rating is important to us. it is among our priorities. We think the business itself and the consistency of the business justifies it. We're not here to front run the agencies and in terms of what their own opinions are and where they ultimately get to. But I do think as we continue to operate the business in the way we've operated it with the consistency that the business has shown with the debt levels that we're discussing, it certainly puts us in a very good position to argue for investment grade. Having said that, as we said, making sure we have ample financial flexibility to operate the business. We ourselves are learning how the portfolio behaves. We now have full quarters of watching the portfolio come together in terms of the existing Lennar land and how it's performed as well as building out our counterparty relationships organically in the ordinary course and then through M&A. And so we have more insight today than we did at the time that we were spun out and so we want to make sure that we're being very thoughtful, just like we are in terms of like debottlenecking some of the systems and processes inside of the company we're thinking about making sure that we're being as optimal, we're optimizing our leverage profile relative to the performance of the portfolio. So to answer your question, investment grade is important to us. It is a priority among a number of priorities. We're not going to do anything to jeopardize kind of the posture of the portfolio. we have no announcements to make today to push us outside of that 33% debt to cap. We're just being as transparent as we have been in the past, in terms of relooking at our portfolio and rethinking our leverage target in view of the actual operating history we've had. And again, this operating history, the recent has occurred, as Stephen talked about against the backdrop for the last 2 years of an uncertain and volatile housing market. So we've gotten a chance to see how the portfolio behaves at a time when the markets have dealt us a number -- the sector, a number of headwinds. So we've been able to watch this portfolio behave under scrutiny.

Your next question is from the line of Craig Kucera with Lucid.

I think the last few quarters, you thought you might deploy that $2 billion of capital by year-end. Can you give us some insight into your pipeline and what you think you will deploy? Or is it too difficult at this point?

Yes, sure. Well, maybe just to reiterate, the way we framed it is we sort of had 2 different scenarios we talked through in terms of our guidance. 1 was $1 billion of net increase, assuming we didn't raise equity, given the leverage constraints that we set for ourselves, and then $2 billion is sort of the natural pipeline and what it would result in if we could. So -- if we were unconstrained, if we were unconstrained exactly by capital. But while -- on the 1 hand, we know we live in a finite capital world, although we're thinking through that, particularly from a leverage perspective, as Darren alluded to, nothing has changed but our expectations for the pipeline. We certainly have some potential lumpy M&A opportunities that we're optimistic about. It's unclear if those are going to happen. But generally speaking, pipeline is still strong. We're just seeing as much demand as ever from builders who need to maintain even in this environment, a good multiyear land control pipeline and planned for years out and they're looking for capital efficiency and doing so and more and more see the value of a large institutional diversified public and transparent platform to be their partners. So nothing's changed about the general view of the pipeline. It's just we continue to evaluate all the opportunities we're seeing. In the context of our capital plan that we're thinking through.

Yes. And maybe to just fill out what Rob said, there is more demand for capital than there is capital available. So it allows us to be thoughtful and patient in deploying those dollars. But we are sort of on pace organically relative to the expectations that we set. I think we were just talking about this as the management team. Organically, we're probably putting plus or minus $400 million to work per quarter. With M&A, that number is probably closer to $500 million. And M&A has become part of our roster and so there's nothing that stops us from achieving that $2 billion target, again, unconstrained by capital that we've talked about. It really is just a -- it's making sure that we are not over levering our balance sheet, and we're not going to do anything dilutive as we've talked about from a capital -- from an equity capital raise perspective.

Okay. That's helpful. I found the JPI opportunity to be very interesting. I mean the addressable market in multifamily development is very large. Do you see expansion into the sector as a core strategy going forward? Or was this more of a one-off?