Levitt Corporation

Levitt Corporation: Gold Nematodes and "Active Adults"
by Dan Ferris
The Rude Awakening
Wall Street, New York
Wednesday, November 30, 2005

Dan Ferris discusses the Levitt Corporation.

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Golden Nematodes and "Active Adults"
By Dan Ferris

"Every 7 seconds another boomer turns 50," BullMarket.com
reports. "There were approximately 78 million baby boomers
born between 1946-1964. The numbers increase 56% every
year, and will until 2011. As the largest consumer spending
group - $900 billion a year, boomers will control the vast
majority of the nation's wealth within the next 20 years."

One likely beneficiary of all that spending will be Levitt
Corporation (NYSE: LEV), a builder of "active-adult"
communities.

Watching the baby boomers stamp their ever-growing
financial footprint on the world has been, and will
continue to be, like watching a pig go through a python.
Only difference is, with the python, the lump gets smaller.
With the boomers, the lump is going to get bigger. Much
bigger. And it's going to leave its giant footprint all
over the housing market.

Jeff Jenkins, deputy director of the seniors housing
council for the National Association of Home Builders, says
that since 2001, when the first boomers became age-
qualified for 55-plus communities, the impact has been
"staggering."

"According to our figures," says Jenkins, "people age 55
and over accounted for more than 207,000, or about one-
fifth, of the 1.1 million new-home purchases made in 2003.
The active adult market accounted for an estimated $51
billion in new-home sales in 2003."

Levitt Corporation: Every Market a Retirement Opportunity

Levitt Copr, therefore, seems very well positioned to cash
in on this trend.

The company does most of its building in Florida right now,
but CEO Alan Levan knows that the boomers aren't choosing
retirement destinations based on weather so much anymore.
"People think of Florida as a place for retirement," Levan
explains, "but most people who retire, retire 50 miles from
where they live. (So) every market is an opportunity."

Levan is right. Maybe he's even been talking to Bill Parks,
former architecture director for Del Webb Corporation, an
active adult community developer. Parks tracks the housing
preferences of baby boomer retirees for housing developers.
His work shows that, all of a sudden, markets nobody cared
about before have become ripe for resort-type development.

When Parks started tracking boomers in the mid-1990s, half
of all active adult communities were in Sunbelt states like
Florida, Arizona, and southern California. Today, three-
quarters of active adult communities are outside the
Sunbelt.

That's why Levan is transforming Levitt Corporation from a
Florida-focused homebuilder into a national homebuilder.
Last year, Levitt bought Bowden Homes, the largest
homebuilder in Memphis, Tennessee. For the next three or
four years, Levitt will acquire small, mostly family-run
homebuilders that will cost between $25 and $50 million.

Starting around 2008 or 2009, Levitt will probably start
looking to buy publicly-traded companies. An investment in
Levitt, therefore, is an investment in management's vision
of the future – a future full of active adult communities.

Levitt earned a place in American history as the "inventor"
of the planned suburb. In 1947, company founder, William
Levitt, converted farmland on Long Island, New York, into
the famous "Levittown." [Editor's note: In the "Did You
Notice" section below, Dan Ferris presents the fascinating
history of Levittown.]

Just as the Levittowns of old were built for the returning
soldiers, the new Levittowns will be constructed for their
retiring offspring, the largest, wealthiest generation in
history, 78 million strong.

So far, all I've talked about is Levitt's Homebuilding
division, which consists of the two operating subsidiaries
we've already mentioned. But that's not even half of what
the company owns.

The other major division is the land division, operated by
Levitt's Core Communities, LLC subsidiary. Core's two big
projects are both on Florida's Treasure coast, on the
Atlantic Ocean in southern central Florida. St. Lucie West
sits on 4,600 acres and includes over 6,000 homes, hundreds
of acres of lakes, championship golf courses, a major
league baseball stadium, 200 businesses, and a college
campus. St. Lucie West was the sixth best-selling master-
planned community in the U.S. last year, and third-best
selling in Florida.

But I'm less concerned with what Core Communities does than
what it owns. Even assuming a modest value for all of
Levitt's housing lots, it looks like the land alone is
worth more than what the entire company is selling for
today. A modest price for these lots would be $50,000 for
each lot. I'll assume that the Homebuilding Division's lots
are worth half that, since some of them are outside
Florida.

If you add all that together at $50,000 each for the Land
Division lots and $25,000 each for the Homebuilding
Division lots, you get a total value of $852,375,000. The
entire company is selling for less than $600 million,
including all of its outstanding debt.

Dan Ferris discusses the Levitt Corporation.

My land value calculations for Levitt assign ZERO value to
the Homebuilding Division's backlog of 1,899 homes, on the
balance sheet at a value of $522,785,000. Valuing the land
solely by making a lowball fair market estimate also has
the advantage of eliminating the capitalized interest and
construction costs on the balance sheet.

There's a lot of valuable land here. And it's not out in
the middle of nowhere, awaiting a speculator. It's under
development and it's being actively marketed.

That's enough to get me interested in this stock. But the
next piece of the puzzle is what turns me into a raging
bull.

Levitt Corporation: Bluegreen Corporation

Levitt Corporation owns 31% of the outstanding shares of
another NYSE-traded company, Bluegreen Corporation (NYSE:
BXG). Bluegreen develops timeshare resorts, golf
communities and residential land. The best thing about this
for investors is that you can check the fair value of
Levitt's Bluegreen stake simply by looking up a stock
quote. Levitt owns 9,517,325 shares of Bluegreen. As
yesterday's close, Levitt's 31% stake in Bluegreen was
worth about $147 million.

Levitt bought 8.3 million shares of Bluegreen in April 2002
for about about $53.8 million (~$6.48 per share). Then it
received 1.2 million shares in connection with the spinoff
in exchange for Levitt common stock and a $5.5 million
promissory note, which has since been repaid.

In fact, when you buy Levitt shares, you're getting about
$830 million of net assets – based on my conservative
estimates - for a price less than $600 million. That's a
28% discount. Here's what it looks like:

Aside from the 28% discount to net asset value, there's
another way to understand how cheap Levitt is right now.
Levitt sells for roughly 7 times earnings. Last year,
Warren Buffett paid almost 14 times earnings for a
manufactured housing seller, Clayton Homes. And Lennar paid
23 times earnings for a land development company, Newhall
Land & Farming.

I think it's safe to say that an asset-rich homebuilder is
worth more than 7 times earnings, especially when that
homebuilder is targeting the wealthiest, fastest-growing
client base in the nation.

[Joel's Note: There is no shortage of investment ideas,
just like this, at the fingertips of Dan's readers. In
fact, here is another tiny real estate company set to make
keen eyes a tidy some. Don't let them have all the fun.
Have a look for yourself here:

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Did You Notice...?
By Dan Ferris

Perhaps we should credit the Golden Nematode for the
invention of the suburbs.

It was that most humble of creatures that destroyed the
potatoes, cucumbers, and cabbages that grew on Long Island
farms in the mid-twentieth century. With the land ruined,
the farmers had little choice but to sell it off cheaply.
William Levitt saw an opportunity. Before he joined the
Navy in World War II, Levitt started buying up Long Island
farmland. Levitt bought 200 acres from a potato farmer for
$225 an acre. The contract included an option to buy 200
more acres a year, with the price rising 10% a year.

Toward the end of World War II, Levitt knew the returning
U.S. soldiers would create a housing boom. He instructed
the family to keep buying land on Long Island. Levitt's
father had founded the company in 1929. It built a couple
of luxury homes on Long Island. During the 1940s, Levitt &
Sons then built 2,000 homes for Navy personnel in Norfolk,
Virginia.

The combination of experiences: building for navy
personnel, building on Long Island, going off to war to
work in the Navy's construction unit, the Seabees... it all
came together in William Levitt's mind. He was going to
build homes for thousands of soldiers.

But there was one missing piece of the puzzle.

Everybody knew that there'd be a housing boom after WWII.
The Great Depression had discouraged housing developers
from building. It was easy to see that the war would end,
and soldiers who had left home as mere boys would return to
the U.S. en masse, marry and start families. William Levitt
knew that he had to come up with some kind of an edge over
other homebuilders.

For inspiration, Levitt looked to Henry Ford. If only you
could build homes like that, he thought... Levitt figured
out how to do it. Instead of moving vehicles past assembly
line workers, Levitt would move the workers from home to
home, with piles of lumber and other materials dispersed
strategically among them.

It worked. Levitt turned a business notorious for wasted
time and materials into a paragon of efficiency. Levitt's
brother, Alfred, became a self-taught architect. He
designed a home that would accommodate brother William's
standardized construction method. It was a two-bedroom Cape
Cod style house with an unfinished, expandable attic, built
on a 60-by-100-foot lot. Every kitchen had a Thermopane
insulated window, a two-way fireplace, a Bendix washing
machine, and a built-in 12 and a half inch Admiral TV.
The Levitts used their innovative, assembly line methods to
build 30-40 homes per day. They built a total of 17,400
homes on their Long Island land, and Levittown, New York
was born. It was the first master-planned community, the
progenitor of suburban developments that surround U.S.
cities today.

The first homes in Levittown became available in October
1947. They were available for rent only, with an option to
buy after one year for $6,990. The Levitts realized that
Americans wanted to own their homes, but that loans were
hard to come by. So they and other homebuilders lobbied
Congress. The result was the 1948 Housing Bill. It extended
mortgage terms to 30 years and allowed anyone to buy a
house with 5% down. It completely eliminated the down
payment for veterans of WWII.

Levitt began offering homes for sale in March 1949. With no
advertising but word of mouth, over 1,000 couples waited as
long as four days in the March cold in front of the Levitt
& Sons sales office. Between 1945 and 1950, Levitt & Sons
built five other Long Island housing projects. They also
built two other Levittowns in the 1950s, one in
Pennsylvania and one in New Jersey. William Levitt became
known as, "The Father of Suburbia."

The same confluence of circumstances that gave birth to the
Levittowns is present today: a demographic tsunami of
demand, cheap land and widely available financing. The
children of Levittown are among us, and they're rich. The
new Levittowns won't be built 30 at a time. They'll be
customized to include the amenities that the children of
Levittown demand: hot tubs, designer kitchens, breakfast
nooks... you name it.

[Joel's Note: Most of the juice was been sucked from the
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right here:

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