Millrose Properties Q3 2026 Earnings Call Transcript

Millrose Properties (NYSE:MRP) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Millrose Properties reported strong financial performance despite challenging housing market conditions, with significant cash flow visibility and no customer agreement terminations.

The company reached a milestone by diversifying its platform through the acquisition financing of Dream Finders, investing $1.1 billion and increasing its asset base outside the Lennar Master Program Agreement to 42%.

Guidance for the fourth quarter anticipates AFFO of $0.82 to $0.84 per share, marking a continued increase in recurring earnings power and the sixth consecutive quarterly AFFO increase.

Millrose is working on an affordability initiative aimed at developing a product bridging for-sale and for-rent markets, providing a pathway to homeownership for those unable to qualify for mortgages currently.

The company announced a $250 million share repurchase program, reallocating capital due to its shares trading at a discount, while maintaining a 90% earnings distribution to meet REIT requirements.

Operationally, the company ended the quarter with 157,000 home sites across 834 communities and expanded its client base to 22 distinct counterparties.

Management emphasized the strategic importance of the build-to-rent market and its potential to address housing affordability challenges, while remaining committed to their core business model.

Full Transcript

OPERATOR

Please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Jesse Ross, Millrose Properties’ Head of Financial Planning and Analysis. Jesse, please go ahead.

Jesse Ross (Head of Financial Planning and Analysis)

Good morning, and thank you for joining us to discuss Millrose Properties’ third quarter 2026 results. Joining me on the call today are Darren Richmond, our Chief Executive Officer; Robert Nitkin, our Chief Operating Officer; and Garrett 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.

Darren Richmond (Chief Executive Officer)

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 Millrose and the steps we are taking to further enhance shareholder value. Let me start with the most important point. Our business continues to perform remarkably well in the face of a challenging housing market and elevated interest rates. We continue to have strong visibility into our cash flows and, as of 9/30, not a single Millrose customer has walked away from an agreement. That resilience is reflected in our financial performance. Earlier this month we reached a major milestone in the diversification of our platform.

On October 20th, Dream Finders completed its acquisition of Beazer Homes and, in connection therewith, Millrose funded Dream Finders with approximately 1.1 billion of acquisition financing, a land banking investment in roughly 7,000 home sites—more than half of them finished—and a 12% preferred investment in Dream Finders. 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 the Dream Finders transaction in a compressed time frame alongside a public company merger. Rob will walk you through the details shortly. For the fourth quarter we expect AFFO of approximately $0.82 to $0.84 per share and year-end AFFO annual run rate above the 3.30 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 Millrose 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.

Garrett 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 home builder 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 were already in the lab developing new products that would complement our existing business and deepen our relationships with home 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 to address is real. Every day, 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 homebuilder counterparties. Importantly, credit quality has not deteriorated in a manner that would explain the magnitude of the problem.

FICO 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 homeownership. 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 Millrose’s shareholders while reinforcing our core business model.

Millrose has pioneered land banking as an institutional product. We have applied our platform to large-scale M&A, vertical construction, build-to-rent, and multifamily housing. Given that experience, we believe we’re 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 a mortgage today to occupy a home as a renter with a potential pathway to homeownership when circumstances allow.

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 build-to-rent is becoming an increasingly important component of home builder 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 build-to-rent communities is significant.

By expanding access to government-insured construction and permanent financing, the FHA is recognizing the growing role of build-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 Millrose platform.

For Millrose, every additional channel through which a home builder 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 build-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.

And 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, home builders 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 home builder 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. We held discussions with banks to understand the securitization process and the portfolio characteristics and minimum scale necessary to access the market. That work informed both the size of our investment and the financing architecture we wanted to optimize around. 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 28th, 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-rent 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 homebuilder 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 home builders we serve. Millrose 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 homeownership.

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. Millrose 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 designed 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 home builders to expand the source of capital available to the industry.

That is consistent with what Millrose has done since inception: identify inefficiencies in home builder finance and develop institutional capital solutions to address them. If we can help establish a more reliable and scalable source of capital for build-to-rent, we can create another channel of demand for our homebuilder 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 build-to-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 build-to-rent communities. I want to emphasize again that we were never trying to recast Millrose’s business model.

We view this as a corporate opportunity that was relevant to and adjacent to our core business. We still do. I 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-up J-curve for the capital vehicle.

When you combine the 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 approached the economics. We filed an 8-K on September 1 describing the relevant investment architecture, and amendments to our various agreements were signed on August 27. The initiative was reviewed and approved by our independent board and, 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 the appropriate decision while Millrose is evaluating a new product that had not yet been 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 is a 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 our REIT status, and direct 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 Lennar’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 Millrose 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 Millrose 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 spin, particularly in connection with M&A transactions such as Dream Finders’ acquisition of Beazer. We have discussed our thinking on this before, but I believe it bears repeating.

When Millrose 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 determine 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 Millrose’s core business model and continue 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 interests of home buyers, home builders, capital providers, and Millrose’s 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.

Robert Nitkin (Chief Operating Officer)

Thanks, Darren. Turning to our operating performance, we ended the quarter with approximately 157,000 home sites across 834 communities in 30 states. We continue to diversify our customer base, increasing to 22 distinct counterparties. Our portfolio continues to perform well despite the challenges facing the broader housing market. During the quarter we experienced no option terminations and received approximately $800 million in net repayment proceeds from home site takedowns and development loan repayments.

We redeployed those sale proceeds into new opportunities and continued to diversify our invested capital beyond the Lennar Master Program Agreement, increasing invested capital outside of the Lennar Master Program Agreement by $521 million to approximately $3.4 billion, excluding any build-to-rent investments. Other agreements generated a weighted average yield of approximately 10.8%, an increase from 10.6% last quarter. As we’ve discussed previously, our option agreements in this category are generally floating rate with contractual floors, which provide a measure of protection against declining benchmark rates while preserving participation in higher rates. Recently, higher SOFR base rates have had a positive impact on our returns, a trend that has continued into the fourth quarter. Based on the level of base rates at the start of the fourth quarter and pro forma for the transactions closed to date in the quarter, we expect an average yield of approximately 11% for these other agreements in the fourth quarter.

We continue to prioritize high quality counterparties, attractive land basis and transactions with manageable development risk. Our objective is not simply to maximize the nominal yields of new investments, it’s to generate attractive, durable returns while maintaining the underwriting standards that protect our capital. Turning to the Dream Finders transaction, on October 20th Dream Finders completed its acquisition of Beazer Homes and in connection, Millrose Properties completed the funding of its previously announced acquisition financing commitment. Millrose Properties provided approximately $1.1 billion of transaction funding through two complementary instruments. The first was approximately $580 million of land banking funding net of option deposits received.

The second was $488 million in funding for the purchase of Dream Finders preferred stock, net of original issue discount. The preferred investment was funded in two stages, $171 million at Millrose Properties’ execution of the subscription agreement on September 14 and the remaining $317 million at the October 20 acquisition closing. No Kennedy Lewis managed vehicles outside of Millrose Properties participated in any of these Dream Finders Beazer transactions.

Pro forma for this transaction, approximately 42% of our asset base is now invested outside of the Lennar Master Program Agreement, a significant diversification milestone for Millrose Properties. Let me elaborate on the two components of the transaction. First, the land banking investment. In a compressed time frame, our team underwrote, documented and closed the acquisition of a geographically diverse portfolio of approximately 7,000 home sites. More than half of those home sites are finished lots and the portfolio has a weighted average life of approximately two and a half years. Executing a transaction of this scale alongside a public company acquisition requires a combination of lot-level underwriting, sophisticated technology, standardized documentation, and the ability to commit substantial capital with certainty.

These are capabilities we have spent years developing and we believe they meaningfully differentiate the Millrose Properties platform. More importantly, we believe the economics of the transaction are attractive for both parties. We acquired the home sites at a discount to their previously recorded book value, reflecting the valuation of the broader acquisition. Even in the current housing environment, we believe that acquisition basis supports attractive gross margins for Dream Finders as it takes down and builds on these home sites.

For Millrose Properties, we expect the investment to be highly accretive, including the option maintenance fees and the commitment fees earned for providing the transaction backstop through the M&A process. Second, the preferred investment. We evaluated the preferred as a complement to the land banking transaction and as a means of supporting the full financing requirements of the acquisition. The preferred carries a 12% dividend in addition to original issue discount and commitment fees.

We view its return and risk profile as consistent with our existing development lending business. Our underwriting focused on the asset coverage supporting the investment, including the owned home site and completed home inventory Dream Finders will hold following the acquisition. Together, these two investments allowed Millrose Properties to deliver a comprehensive capital solution to an important homebuilding partner. We believe the transaction represents an attractive contractual return opportunity for our shareholders while meaningfully diversifying our invested capital. The portfolio’s weighted average life of approximately two and a half years and high proportion of finished lots is consistent with our experience that portfolios acquired through M&A transactions generally have shorter durations than our original portfolio.

That difference has meaningful implications for capital recycling. Shorter duration assets return capital more quickly, providing a natural mechanism for reducing leverage following a large acquisition. And as we gain more experience managing these portfolios, we have greater confidence in our ability to temporarily exceed our leverage target in connection with an acquisition and return to that target through the ordinary course of business. As builders evaluate acquisitions, they increasingly need capital partners that can provide certainty of execution and efficiently underwrite large portfolios and deliver financing structures tailored to the transaction. Our permanent capital base, technology, infrastructure, and operating experience has allowed us to provide those solutions at scale. These transactions can also bring shorter duration assets onto our balance sheet, creating opportunities for attractive returns and accelerated capital recycling.

Looking ahead, our priorities remain consistent: disciplined capital deployment, active portfolio management, prudent balance sheet management, and continued diversification across high quality counterparties. Our pipeline remains active and we believe the opportunity to provide capital solutions across the residential housing industry continues to expand. We’re focused not simply on growing the size of Millrose Properties, but on improving the earnings power, capital efficiency, and durability of the platform as we grow.

I also want to provide some additional context on the evaluation and negotiation of the build-to-rent portfolio that Darren discussed. While these investments provide an opportunity to evaluate the operating and consumer dynamics that could inform a future path-to-homeownership product, their underwriting was not tied to the success of such a program. The investment decision was based on standalone rental economics, with projected returns independent of whether residents ever purchased their homes.

Our real estate team negotiated a portfolio purchase prioritizing projected initial operating income yield while filtering for high growth markets that we believe will benefit from outsized rent growth and leasing absorption. Going forward, we believe our ability to acquire newly constructed homes at a competitive basis with attractive initial yields, lower anticipated maintenance requirements, and multiple potential exit strategies represents a limited but compelling extension of our existing homebuilder finance platform.

This opportunity does not depend on home price appreciation. It’s grounded in the economics of our acquisition basis and the income these assets can generate. Our base case underwriting for the portfolio, based on achievable market rents, assumed an approximately 5% going-in capitalization rate with 3% annual net operating income growth for an unlevered internal rate of return of approximately 8%. With leverage modeled at 65% loan to cost at an interest rate of SOFR plus 120 basis points, the projected levered internal rate of return increased to a range of approximately 10% to 12%, depending on other operating assumptions.

This asset-level, limited-recourse leverage is in place today with $213 million funded against the assets, resulting in a $120 million use of Millrose Properties capital. As an additional valuation analysis overlay, we acquired third-party value opinions on the portfolio that support an average discount to market value in excess of 10%, further supporting our transaction pricing. Going forward, we will evaluate the economics of the investment on a leveraged basis as we gain insight into rental demand, consumer behavior, property management, maintenance costs and ultimately the potential pathway from renting to homeownership.

We have not entered into any new rental home purchase agreements to date subsequent to the end of the third quarter. With that, I’ll turn the call over to Garrett, who will take you through the financial review.

Garrett Rosenblum (Chief Financial Officer)

Thank you, Rob, and good morning, everyone. Despite a challenging housing market, our portfolio continues to generate predictable contractual income supported by disciplined underwriting, strong counterparty performance, and the continued deployment and recycling of permanent capital. For the third quarter, we reported net income of approximately 130 million, or $0.78 per diluted share, driven primarily by 209.5 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 said in prior quarters, adjusted funds from operations, or AFFO, remains the best measure of the recurring earnings power of our business. AFFO for the quarter was approximately 133.5 million, or $0.80 per diluted share, reflecting continued growth in recurring option fee income. On a higher average invested capital base, we are raising our end-of-year outlook. We currently anticipate AFFO in the range of $0.82 to $0.84 per share. This outlook reflects our expectations for the contribution of our existing portfolio, recent capital deployment, and the Dreamfinders acquisition, taking into account the timing of funding and the associated financing costs.

Book value per share was $35.24 at quarter end. Management fee expense totaled 30.3 million, calculated transparently at 1.25% of gross tangible assets. Interest expense was approximately 47.1 million and income tax expense was approximately 4.9 million. During the quarter, we declared our sixth consecutive quarterly dividend increase, raising the quarterly dividend to $0.79 per share, or approximately 131.2 million in the aggregate. The dividend remains fully covered by recurring AFFO.

On the balance sheet, we ended the quarter with approximately 10.6 billion of total assets and approximately 9.2 billion of invested capital. Our debt to capitalization ratio was approximately 36%. In September, we priced 1 billion of senior unsecured notes comprising 500 million aggregate principal amount of 6.5% notes due in 2029 and 500 million aggregate principal amount of 6.75% notes due in 2031. This financing strengthens our capital structure, enhances our financial flexibility, and positions us to support future growth opportunities while maintaining a disciplined approach to capital allocation.

On October 20, we completed the transaction associated with Dreamfinders’ acquisition of Beazer Homes. As Rob discussed, this included approximately 580 million of net land banking funding and 488 million of preferred instrument funding, including 171 million funded in September and the remaining 317 million funded at closing. As Darren outlined, we remain comfortable temporarily exceeding our 33% debt to capital target when supported by duration and capital recycling characteristics of an acquired portfolio.

Our financial priorities remain unchanged, providing ample liquidity, preserving our credit profile, while ensuring that we have the flexibility to support our existing counterparties and pursue attractive new opportunities with the financial flexibility to support our active deployment pipeline. Lastly, as Darren mentioned, subsequent to year end our board authorized the new $250 million share repurchase program reflecting our conviction in our book value and in the long-term cash-generating power of this platform. With that, I’ll turn the call back to Darren.

Darren Richmond (Chief Executive Officer)

Thank you, Garrett. Let me close with a few thoughts. Our core business continues to perform remarkably well. Our contractual cash flows remain intact, our counterparties continue to honor their commitments, and our balance sheet remains strong. We are incredibly proud of what we have built and remain focused on being the capital provider that home builders can rely on, particularly during challenging market conditions. The Millrose Properties business model was conceived in the aftermath of the global financial crisis. It was designed to be a permanent capital platform capable of not simply surviving, but flourishing across market cycles. That philosophy remains central to everything we do, but resilience does not mean standing still. While our business is in excellent shape today, we remain acutely aware of the forces shaping the housing market, particularly the impact of higher interest rates on affordability and home builder economics.

We believe our responsibility is to anticipate those challenges rather than wait for them to become problems. That may mean refining our existing strategies, developing new products, or pursuing opportunities adjacent to our core business. It may also mean reconsidering how we allocate capital to maximize long-term shareholder value. None of that represents a departure from our original mission. It reflects our commitment to making the business more durable, more adaptable, and more valuable over time.

Our affordability initiative was born from that same philosophy. We saw a growing problem facing our customers and prospective home buyers, and we began developing a potential solution. We continue to believe in that opportunity even as we evaluate the most appropriate way to pursue it. We are not interested in managing Millrose Properties simply for the conditions that exist today. We are building a business designed to succeed through the conditions we cannot yet predict.

And we intend to remain proactive, disciplined, and thoughtful in doing so. With that, let’s open it up to questions.

OPERATOR

We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Julian Bluein with Goldman Sachs. Your line is open. Please go ahead.

Julian Bluein (Analyst at Goldman Sachs)

Hey, thank you for taking the question. I just wanted to touch on the rental strategy. I just want to get a sense of how you’re thinking about the path from here. Should we think about it as, for now, the program is paused as you sort of assess the returns on that program? And then in terms of what it takes to prove out those returns, I mean, I would imagine that you actually have to wait till the home is sold to a buyer on the back end, since that will be an important determinant of the eventual returns on the program.

And then maybe just looking at leverage, I think you ended the quarter around 36%. I think probably pro forma for Dreamfinders–Beazer’s will be closer to 40%. Does that feel like a good sort of go-forward level, or should we think about potentially future takedown proceeds going towards paying down debt?

Darren Richmond (Chief Executive Officer)

Yeah, Julian, it’s Darren. Thanks for the question. Just in short, the answer to your question is yes. This was meant to be a crawl, walk, run approach where we acquired communities, both scattered site and built-to-rent. And it now comes down to observing the behavior, observing the rents. I will say that while it’s early, the feedback we’re getting from renting these out is that the rental rates are pacing well above what we underwrote. So the returns that Rob spoke to, it does look like they will ultimately be better.

I want to correct one notion because I think there’s just tremendous confusion. One notion I want to correct is that this initial pilot program was not—and I want to repeat, was not—a rent-to-own pilot program. This was really about buying scattered site, observing the rental rates, observing the asset management, and getting feedback from the customer and the returns. And then the second element was traditional BTR. Again, what we’re trying to do was understand leasing dynamics, resident retention, construction costs.

This was a prerequisite to a program that we were also working on, which was a rent-to-own program. And that program sat at the intersection of the for-rent and for-sale markets. And so that was going to be more of a future state. So I just want to be really clear. But to get to your original question, you used the word pause. I wouldn’t disagree with that, but it was always meant to be observe, which is exactly the status we’re in right now. That’s exactly right. It’s going to be using those proceeds to pay down debt to get back to home around 33% debt to cap. Because the reality is there’s a lot more M&A out there in the marketplace. And so the operating posture for us could be to scale up in these moments where we can be a solution provider by moving quickly and constructing solutions to fit the needs of the acquisition target. We can get paid more. The returns are better, and not just the returns from a headline option rate perspective, but also the credit enhancements we’re able to get.

So the right posture for us would be to, from time to time, scale up, using leverage to do that and then to reprioritize those cash flows as they come in to repay debt. It’s not just about serving the interest of the equity holders, but making sure—sorry to interrupt—but making sure that we’re also being true to the credit side of our balance sheet and to the rating agencies. It is a priority for us to move towards getting upgraded over time. So we’re trying to navigate both being a solution provider in the marketplace, taking advantage of opportunities when they come, but not becoming over-reliant on debt to fuel our growth.

Julian Bluein (Analyst at Goldman Sachs)

Okay, thank you very much. I’ll get back in the queue.

OPERATOR

Your next question comes from the line of Eric Wolf with Citi. Your line is open. Please go ahead.

Eric Wolf (Analyst at Citi)

Hey, thanks. So I think people might be just a little confused because, you know, in the prepared remarks—obviously I understand the points you made about the SFR business—but it did sound like you wanted to continue to grow that business. At least that was my perception of your prepared remarks. But then a moment ago it seemed like you said that the pause may be appropriate. So I’m just trying to clarify whether you’re expecting to buy more homes in the near term above the 330 million, whether you expect to keep the investment balance right at that for some time, and then how long you think it’s going to take to evaluate whether this business is what you thought it would be.

Right. I mean, it seems like it takes beyond the lease-up. Right. You have to understand NOI growth where you can on all the homes. So just trying to understand the specifics around how long you think it’ll take to evaluate it before you grow it again.

Darren Richmond (Chief Executive Officer)

Yeah, thank you for the question, Eric. Yes, so the point I think we were trying to make is that we really believe in the ultimate outcome of a program. But again, the prerequisite is getting this in place and observing it. You know, just to clarify, this initial pilot—it’s the 330 million basis of the SFR you mentioned. There’s also an additional contracted but not yet closed BTR communities portion of it that’s laid out in all of the notes in the earnings presentation.

And so you may see some increases as a result of that. But in terms of new contracting, we’re going to continue to evaluate this because we just take the use of our capital seriously in terms of making sure that, in order to get to the place where we can credibly get a rent-to-own program in place that we really believe in, we’ve got to make sure that we can accretively operate a landlord rental housing business and observe all of the things that Darren mentioned.

Yeah, and Eric, just to fill in, I mean if you go to page 16 in our deck, we pointed out the SFR assets relative to our asset base to kind of highlight the absurdity of the focus on this. This is 1% of our assets. It’s never going to be a meaningful amount of our asset base. We pioneered land banking as an institutional product. We extended into using it for wide scale M&A in the sector. We extended it and pioneered using it for multifamily. This was just another effort of thinking through capital as a tool to create an outcome.

It was never meant to be a pivot in our business. And so I want to be really clear, no matter what we decide to do, this is going to be an immaterial, near meaningless amount of capital we use. I kind of equate it to, if you were a chip company designing computer chips, it wouldn’t be crazy to buy computers to see how those chips perform. And for us, yeah, we’re land bankers and we finance land. So we don’t need to see how the house performs, but understanding how the consumer interacts with the house, how the financing comes together, how the rent, how the asset management helps us to inform potential solutions that we can create. The goal of all of this is really not to be in the single-family rental business.

The goal of this was to reinforce our business with interest rates pressing through 5% on the 10-year. Our business is intact and flourishing. But what happens at 6%, 7% or 8%? And so we wanted to make sure we were reinforcing our business today, thinking through all the solutions available to the homebuilders we serve to make sure that there was no backup in the system as interest rates do continue to move higher. So it was a pilot program. It was exactly meant as that. We were going to pause naturally to get feedback from it. But I will say one thing we’re going to add is speaking to our investors before we foreclose on any further action here.

Eric Wolf (Analyst at Citi)

Right. And I guess that would be my second question because even if it’s an immaterial sort of portion of your capital earnings, it’s having a material impact on your stock. So I guess the question is, going forward, are there other things that you’re considering? Obviously you put the buyback in place, shareholder-friendly thing. Are there other things that you’re considering, whether it’s getting more feedback from the market or anything else, to try to alleviate the overhang that this has created on your stock?

Darren Richmond (Chief Executive Officer)

Yeah, and I appreciate that. This was never meant to be a distraction. I think in most cases, if a company spent 1% of their assets buying durable assets that have their own return, I think most people would say, you know what, that makes total sense. In view of how this came out, this was not information we controlled. We don’t want this to be a distraction. We don’t want this to interfere with the good work that we’ve done to this point. We don’t want this to distract, and that’s why we spent so much time on talking about this from the core business, which remains highly functioning.

I mean, here we are a company that’s taking up guidance yet again, increasing the dividend yet again. And maybe on that point of dividend, because I think our words are being parsed, we’re not looking to step back on the dividend quantum that we’re paying out. So we may not, on the 90/10, change the quantum of the payout. We may just reprioritize the excess from the most recent quarter to stock buyback. The other element, which is a bigger element to the buyback, is really the lost priority capital, as it relates to Lennar, which can be quite meaningful.

And that’s why we feel very comfortable with the $250 million program to start. Because if you think just 10% of our dividend is about $50 million a year, that would carve out in the 250. But the more meaningful buyback is going to be related to the lost capital priority. So I actually think that’s a really good statement by itself and shouldn’t be lost, that here we are willing to use Lennar capital to the extent it’s lost for the benefit of buying back shares. It shrinks our balance sheet, it shrinks the management fees to Kennedy Lewis, but it’s definitely in the best interest of our shareholders.

Eric Wolf (Analyst at Citi)

Thanks. That makes sense. Second queue as well. Thank you. Yes, understood. I’m going to let the others ask and I’ll get back in queue. Thank you.

OPERATOR

Your next question comes from the line of Craig Kucera with Lucid Capital Markets. Your line is open. Please go ahead.

Craig Kucera (Analyst at Lucid Capital Markets)

Yeah. Hey, good morning, guys. Appreciated the last comments on the dividend, but I want to circle back to the commentary. Are you saying that you’re basically going to reset the dividend to something like a 90% AFFO payout ratio with the remainder to buy back stock, or is this 90% of taxable income for the RE rules? And how does taxable income compare to AFFO?

Darren Richmond (Chief Executive Officer)

I think really what we’re saying, Craig, is that we’re going to preserve the optionality. We’re not stepping back. We don’t want to do any harm to the stock price. So if we’re not looking to cut the dividend, what we’re really saying is that the growth beyond the dividend we’re paying out this quarter is visible to us. I think you’ll see it. We obviously raised guidance. So the excess beyond the quantum we’re paying out today would be used for the share repurchase.

Does that make sense?

Craig Kucera (Analyst at Lucid Capital Markets)

Okay, that. That’s, yes, it does. It does make sense.

Darren Richmond (Chief Executive Officer)

This is meant to be a positive, not a negative, and not meant to be viewed as a cut in a dividend, but an and, not an or. We’re going to continue to pay out at the level we’re paying out and we’re going to do a buyback on the incremental.

Craig Kucera (Analyst at Lucid Capital Markets)

No, I appreciate that. It’s the clarity. The market kind of sold off when you were doing your commentary on the dividend, I think, so it’s helpful. You know, in the past you spent a bit more time talking about the housing market. It appears optically that some builders are seeing some firming, marginal improvement in gross margin, maybe lower volume. I’m just curious as to how you are characterizing what you’re seeing in the market today. And are any watch list negative markets that have popped up?

Darren Richmond (Chief Executive Officer)

Greg, I thank you for asking about our core business because that’s exactly what we’d like to talk about. It’s actually very interesting. Obviously with rates moving up through 5% on the 10-year has put renewed pressure on affordability. I think you’ve heard other builders talk about commentary recently about the business maybe searching for a new bottom. But fundamentally the market is in a much better condition than I think many spectators would either believe or understand.

If you look at single families, and we talked about this in the last few calls about a recalibration back to pre-COVID levels in terms of sales per community per month. And if you look at just the recalibration that’s taken place in the market, starts peaked—single-family starts peaked in December of 2020 and are off about 30%. New home sales peaked in October 2020 and are off about 34%. And the reason why I bring that up is because there’s been kind of a fundamental retracement of production to meet demand, and inventories themselves—single-family inventories—have come down as well.

And so what we’re seeing is, on the margin, builders coming into us to buy more land. And if we were holding this call or had the same question as of June 30th, we would have said that same-store sales, even though we don’t record it as that or report it as that, would have been down year on year, meaning our builder customers were looking to buy less land and put less land in service. So we grew through 6/30 because we had more customers and because of M&A. But if we were just looking on a same-store basis, we would have seen a downtrend in purchases.

Well, we’re now seeing a renewed level of interest on the part of our builder clients to reload their land portfolios. So fundamentally that supports the view that you’re talking about, where margins have largely troughed. Again, with this more recent interest rate spike, I think it’s creating some challenges, but I think net-net margins have started to stabilize in the industry.

Craig Kucera (Analyst at Lucid Capital Markets)

Okay, that’s helpful. Can you talk about what’s baked in the fourth quarter guidance regarding third-party investment outside of the Dream Finders transaction?

Robert Nitkin (Chief Operating Officer)

Yeah, sure, I’m happy to. It’s Rob. The majority is the impact of Dream Finders. Beezer, obviously, which hits in about halfway through—October 20th, that closed halfway through the fourth quarter. So the vast majority is growth through that and all of the returns that we’re quite, quite pleased with, as we discussed. And then there’s an additional smaller amount of just regular, normal-course other agreements growth. But the vast majority of that number is just driven by the economics on, you know, half a quarter of—

Darren Richmond (Chief Executive Officer)

Beezer, and I hate to bring this up, but it’s going to be asked: any friction from the rental assets that we bought are also baked into our guidance.

Robert Nitkin (Chief Operating Officer)

Yeah, I’ll also just add one thing which is that, like I spoke about in the prepared remarks, the average yield on that other agreements book was 10.6 last quarter, 10.8 this quarter, and we expect that increase to continue into the fourth quarter, like I talked about. And that’s not just SOFR and rising base rates, which it is rising, but that’s also just higher yields overall driven by the deals we’ve done, including Dream Finders, Beezer, in the fourth quarter.

So core margin is increasing and improving as well as the base rates.

Craig Kucera (Analyst at Lucid Capital Markets)

Okay, thanks. That’s it for me.

OPERATOR

Your next question comes from the line of Ryan Gilbert with BTIG. Your line is open. Please go ahead.

Ryan Gilbert (Analyst at BTIG)

Hi, thanks. Good morning, guys. I guess just, you know, first one on the change in dividend policy, and I appreciate all the additional color that you’ve provided in the Q&A because I think it was a little confusing at first. But if I just get to, you know, your current dividend of 79 cents, you know, divide that by 90%, that would get me to like around 88 cents of AFFO or distributable income per share. Is that kind of like what you’ve got visibility into?

Darren Richmond (Chief Executive Officer)

We’re not giving guidance like that. I think the point is, the dividend payout or any change to it would be made opportunistically. And so we’re just trying to communicate a flexibility, not— Not trying to suggest there’s an extrapolation into some earnings profile that we’re back-ending into. Yeah. Where our core earnings metric, you know, our core metric and KPI was and is earnings per share and ASO per share. And so, as earnings grow, we’re giving ourselves the optionality to use our capital most accretively as possible to drive earning per share. And that may be buying back shares with an appropriate amount. It may be rotation of some of the assets, Lennar or otherwise, like Darren alluded to, into share buybacks. And ultimately, there was a question about SFR and how we think about proving it out.

Our cost of capital matters and is a driver to how we think about allocation going forward. And we have to take into account what the market is telling us, our bondholders, our shareholders are telling us, in terms of our cost of capital and the use of that capital. And so by this share buyback approval, we now have the flexibility to use the capital that is as accretive as possible, given the share price and given the opportunities in front of us in any asset class.

Robert Nitkin (Chief Operating Officer)

Yeah. Like we may not direct any monies from the dividend to share buyback. And it may all come from Lennar priority capital. Yeah, I’d rather not give you a number because it’s still fluid. You will note, I think it’s on page eight, that the Lennar agreement, the amounts under the priority agreement, have continued to come down. And so we feel very comfortable about the $250 million target buyback. So without giving any specific numbers, I will tell you we feel very comfortable about the $250 million targeted buyback.

Yeah. I apologize if the comments were unclear. That is an as-rented yield based on the initial rent projected to be in place, that yield. And we’re projecting roughly six months until we get that portfolio rented. But our guidance includes the friction of carrying these homes. Exactly. Yeah. The maximum friction will be in the fourth quarter, which is included in the guidance we gave. And, again, we have a projection, we have an underwriting, but we’re going to evaluate it, and we’re going to evaluate the pace of leasing, the rate of leasing, how accretive it is, and how our cost of capital reacts to what we’re doing. And all those will be inputs into anything we do going forward, to the extent we do.

Yeah, we’re going to keep it to the metrics we’ve given so far, but we’re happy to continue to report going forward as the portfolio stabilizes.

OPERATOR

Thanks. Your next question comes from the line of Eric Wolf with Citi. Your line is open. Please go ahead.

Eric Wolf (Analyst at Citi)

Thanks. Just some other small ones on the rental program. Sorry to focus on it, but want to make sure people get their questions answered. You mentioned that the initial rental rates were coming out higher than you had underwritten lease so far. So I was curious, sort of what percent of the initial portfolio of over 1,200 homes had been rented thus far. And if you could just give a bit more detail on where you’re seeing rental rates relative to what you underwrote.

Darren Richmond (Chief Executive Officer)

We are. We are. I think there’s been about 10% of it rented. It is scaling, so every day there’s a wave of more rentals coming through. As of yesterday, I think it was about 10%, and I think we’re pacing up about 10% above what we underwrote from a rent perspective. And the other thing I’d say about the value of the homes we bought — and I think it’s pretty well laid out on page 16 — what I would note is the discounted nature of the average purchase price per home, and that includes all capitalized costs. And if you compare that number — the $280,000 a home — that compares pretty closely with where Invitation Homes trades at current value per home. So we know we bought these rights and we know they’re leasing well.

The goal of this was to not lose money during this experiment process, and we thought we’d make money. Again, it’s a pilot program and it was in the lab as an experiment, and there are a lot of learnings that we get as a company that far outweigh, necessarily, the total return associated with these homes.

Eric Wolf (Analyst at Citi)

Got it. And then, speaking of the total return, as I look at your core business, you sort of have like 10.5% to 11% unlevered yield, sort of fixed. So that’s presumably around the total return you get, super — just no credit loss. Do you think that the SFR business would ever be able to get up to that? I’m just trying to figure out — if you’re starting at around a 5% yield, you need pretty high growth or an increase in the home price to get to that same level of unlevered return. So just curious how you’re thinking about it for the initial portfolio of $330 million, that total return profile.

Darren Richmond (Chief Executive Officer)

Yeah. Eric, I think both Rob and I are chomping to answer this. I think it’s demonstrably cheaper to rent a home today than it is to buy. I think the rental inflation that we’re seeing across — again, we have access to proprietary data sources — is higher than what the market is anticipating. I think there are independent consulting groups that have their own expectations. So I think the answer is yes, we do expect we can see a world where these returns pace to the returns, if not better.

Now, the point is, the goal of this was not to try to make outsized returns on a rental product. The goal of this was to reinforce and pressure test our business, assuming rates continue to move higher through 6%, 7%, 8%. And are there things we could do today to reinforce our business? And we thought about it much more on an open architecture, that the learnings that we are gaining can be shared. Remember Kennedy Lewis? We have access to hundreds of blue-chip LPs.

So the learnings we get were really meant to be informative to the entire market, to try and drive capital into elements of the business that right now are kind of capital constrained. Do you understand? So we were trying to do no harm on one side but make sure that this is sort of a risk management tool as we look out into the future.

Eric Wolf (Analyst at Citi)

I understand. I guess, obviously, who knows exactly why the stock does what it does, but at the end of the day, I do think that people are concerned a bit about a perceived conflict of interest with your largest counterparty or customer. Can you maybe talk about how much of the initial capital that was initially spun off that’s already been taken down by Lennar, and then any thoughts on, going forward, the relationship there? Because I think the concern is that if this was perceived to be driven by Lennar, are there other things like a pause or some other things that they’re going to be taking that could be more material?

So this is an immaterial transaction because there’d be something that is more material. So maybe just talk about the initial spin, how much they’ve taken down thus far, underwriting for the last year and a half, and anything else you can say about the relationship with Lennar.

Darren Richmond (Chief Executive Officer)

Yeah, no, I think those are good questions because they get to the heart of the matter, so we’re not upset about answering them at all. Our relationship with Lennar is — I think — great. I mean, Lennar to us is one of 22 different counterparties that we deal with. Our relationship with everybody we serve, including Dream Finders, and the acquisition of Beazer — I mean, we really have become a very trusted partner to many of the builders out there.

And I’d go as far back as the group at RISE as well, in their purchase of Landsea. You learn very intimate details about the strategy of a company when you’re working side by side on an acquisition of another company. Now, in terms of Lennar pushing us into something, that is just categorically not true. We maintain a very good relationship, but it’s completely commercial and arm’s length. It’s backed up by the credit enhancements that we have in place with Lennar — not only the deposit that we have and the takedown schedules, but the pooling that we have with them — and we can spend as much time or as little time as you want on that.

Now, in terms of Lennar pushing us to do something because we were afraid of a pause, it’s kind of a ridiculous notion, and I don’t mean to be — I’m not being critical of the question you asked. We have about $6 billion of assets with Lennar. The build-out cost is about another $4 billion. And these are round numbers, so directionally it’s correct, but I’m sure they’re not auditably correct. So let’s say that’s $10 billion of land value. With development, it’s two to one needed to go vertical versus land.

So that’s like $30 billion of land and homes it would take to construct the entire portfolio to turn them into houses. And that doesn’t include margins. Do you really think we were trying to avoid $30 billion by buying net $100 million of homes? I mean, it’s like — it’s an incredibly bankrupt notion. It’s like trying to stop the flow of a river with a sponge. So it’s so far-fetched — us trying to prevent them from some behavior that is their unilateral right. If they want to pause, they could come to us and say, hey, we pause. So there’s no funny business that’s happening between us and them where we’re trying to get in front of some bad thing that was trying to happen to us. I understand the notion of how that became corrupted in the Twitter sphere and in the investment community, but it couldn’t be any further from the truth.

We undertook this pilot program because we were really working on an affordability solution, something that we’ve talked about very openly and honestly for the last year. Affordability is not a new phenomenon. And so it is very important that everybody in the industry make some investment, intellectually or otherwise, in trying to find a solution to a very complex societal problem. And so this was not us being pushed into something. This was not Lennar forcing us or forcing our hand.

This was done on an arm’s-length basis. We’ve been working with Lennar for about a year on an affordability program. We haven’t been bashful about saying that publicly and privately. So it made sense, as part of that, for us to have bought these homes. And the price that we were offered made sense to us. We vetted it through the board. We hired a tier-one investment bank who also spoke to our board on this opportunity. And so we’re comfortable in the light of day that what we did was right.

If I had to do it over again, I’d do it exactly the same way.

Robert Nitkin (Chief Operating Officer)

And just, you know, some of your questions, like I think allude to, you know, how do we feel about the quality of our current portfolio, the spin assets, et cetera? You know, I would just say in line with what Darren said, like everything has continued to perform. And you know, we’ve heard across the industry that land prices are sticky. We’re seeing the power we have in the value chain, which is one of the reasons we believe we haven’t had any terminations.

The stickiness of land in general and ultimately, you know, particularly net of all of the deposits that we hold. We continue to feel really good about the value that we have, not the least of which because we fairly often have builders coming to us looking to find deals on land, asking proactively, do you have any builders trying to renegotiate? You know, we would love to talk to you about that, and we haven’t had an opportunity to do that yet. But again, builders that we do business with, large builders, top 15 builders that we don’t do business with, come to us all the time and ask, you know, is there an opportunity for us to come in and take a position in some land that somebody else is trying to renegotiate? And that to us just speaks to the quality of land as a non-depreciating value-holding option on home prices with no maturity. One of the reasons we like it.

Plus it’s impossible to get land approved for development. And if we trace this back to the financial crisis, there were very few land-light builders—we could name them—and they were looking to buy land on a merchant basis even in the financial crisis. Today we have 22 clients at Millrose Properties, all of whom build on a land-light basis. So if we did end up with land, we feel very good about our basis, our underwriting, the deposits we have, the credit enhancements associated with it, that we feel like the land we own will be asset protected.

And that’s the same reason why we cycled through $800 million of our land in the last quarter without a client looking to terminate or renegotiate in the ordinary course of business. And that’s where the visibility is going into the fourth quarter and the first quarter of next year, is that we expect that our land will be taken down in the ordinary course on the schedule as it’s been outlined.

OPERATOR

There are no further questions at this time. I will now turn the call back to Darren Richmond, CEO and President, for closing remarks.

Darren Richmond (Chief Executive Officer)

Yeah, look, I want to thank everybody for their time today. The endurance of this call went much longer than what we normally do. I thank everybody for the questions that were asked. We are available and will be available as a management team to continue to answer questions today. And over the coming weeks, we were in a quiet period and couldn’t respond appropriately. But we do plan to make ourselves available to clarify any of the errors or omissions, misstatements that we have made or to correct any on the part of others.

Thank you again for your time, and particularly thank you to all the shareholders who came into us with notions of goodwill over the last couple weeks. We really appreciate it.

OPERATOR

This concludes today’s call. Thank you for attending. You may now disconnect.

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