MRP holds its earnings call tomorrow

As most of you may know, the U.S. is dealing with a structural housing deficit that has been getting worse over time. After the Great Financial Crisis, homebuilders essentially went into hibernation, to use a fitting example from the biology textbook. President Trump has been very public about this problem, as solving one of the biggest issues is on top of his list. 

Here’s what The Wall Street Journal reported on that:

Economists generally maintain that making housing more affordable requires building more homes. By some estimates, the U.S. is short roughly 4 million homes. But in recent weeks, the president has said that he does not want to add supply that brings down current property values. “We want to protect those values,” the president said. “We’re gonna do both.” - WSJ

The quote perfectly shows that he wants to find a balance between easing supply constraints and protecting home values. Easing constraints by building more would be great for younger people. Dragging down prices would be bad for older people with home equity. 

Either way, they are reducing regulations to improve supply. That’s bullish for homebuilders and one of the reasons why I am long housing-related stocks like QXO (QXO) and Carlisle Companies (CSL). However, neither of these pays a decent dividend yield. 

Moreover, homebuilders still face a massive logistical bottleneck: capital. 

Acquiring raw dirt, entitling it, and preparing it for construction requires billions of dollars. If we (the U.S.) are going to build our way out of this housing shortage, the industry needs a dedicated, highly efficient capital partner to finance these operations. 

As it turns out, there’s a new company in town, and it yields more than 9%! 

The Homebuilder's Dilemma: Capital Gravity

Before we get to the pick, you need to understand that homebuilders, in general, are super inefficient, as they are asset-heavy. 

In the traditional model, a builder buys a massive amount of raw land. That land then sits on the builder’s balance sheet as "dead money" for three to five years while it goes through the process of entitlement, zoning, and horizontal development. This includes moving dirt, building roads, laying sewers, and connecting utilities, among other minor things.

That is a waste of capital. Coca-Cola (KO), for example, doesn’t like it when its goods spend more than a few days in a warehouse. Homebuilders have dead capital for years. As you can imagine, Wall Street also prefers companies with more efficient business models. They want to see high returns on equity, returns on invested capital, and similar numbers. 

This has created a shift to OpCo/PropCo. This means there are now operating companies that run a business and property companies that own the real estate. This is happening all over the place, including in the leisure space, as Marriott and Hilton own the licenses but not the buildings. It also happens in oil, as Diamondback Energy spun off most of its mineral rights, which are basically drilling rights (similar to real estate). 

Millrose Properties (MRP): The PropCo of Housing

Millrose is a spin-off from housing giant Lennar Corp. (LEN). Roughly one year ago, the deal was closed, as Lennar had the goal to become leaner. Now, Millrose is a REIT that is entirely focused on owning institutional land for residential homebuilders, not just Lennar. 

Here’s what it said during the announcement:

With today's successful launch of Millrose Properties, we are very excited to advance Lennar's strategy [...] of becoming a pure-play land-light manufacturer of homes. The spin-off [...] is a significant milestone for Lennar and the industry, and we look forward to the Millrose team building a Lennar solution [...] that will drive accretive yield growth as it expands.

As we can see above, by acting as the premier land banker, Millrose allows homebuilders to operate with asset-light balance sheets. As a result, builders can focus purely on vertical construction and customer sales, while Millrose handles the capital-intensive burden of holding and developing the underlying land.

If you think this sounds a bit vague, you’re not alone, as this is a complex relationship. 

That’s what the next part is for. 

How the MRP Business Model Works 

Millrose has a strategy that relies on its proprietary “Homesite Option Purchase Platform.” It’s also called HOPP’R. Essentially, it turns MRP into a cash flow machine that generates very predictable income on a very consistent basis. 

Here’s how that works (based on the visualization above):

• First, a homebuilder (like Lennar) identifies a highly desirable parcel of land that it wants to use for a new community. However, they don’t buy it. Millrose buys it. Needless to say, Millrose does due diligence as well, as they want parcels with long-term viability and an attractive risk/reward. 

• To get access to the land, the homebuilder now pays Millrose an upfront deposit that is nonrefundable. That’s usually 10% to 15% of the total cost. In exchange, they now have the exclusive right to buy the finished lot back at a future date and a predetermined price. Now, the builder has an option without the weight on its balance sheet. 

• While Millrose holds these assets, it funds the horizontal development, which means the lot is developed with paved roads, sewers, and everything else. During this period, the homebuilder pays Millrose a monthly/quarterly option fee. This is similar to a high-yield payment on a bond that compensates Millrose for risks and capital expenses. 

• Once these lots are finished, the homebuilder buys them back in manageable tranches to manage their own inventory and demand. Now, they can build actual homes and sell them to buyers. 

• Once these properties (not the finished homes) are sold, Millrose takes that capital and buys new land. 

Moreover, even though this market is still very much pressured by weak fundamentals, Millrose is doing tremendously well. In 3Q25, for example, it got slightly more than $850 million in proceeds from takedowns (selling finished lots). Slightly more than 100% of this was put into new deals with Lennar. It also used debt to put another $770 million to work.

As we continue to expand our homebuilder relationships, we now partner with 12 distinct counterparties. Our invested capital outside Lennar reached $1.8 billion with homesite inventory and other related assets totaling $2 billion at a weighted average yield of 11.3%. - MRP 3Q25 Earnings Call

As we can see above, this was done at a yield of 11.1%. Its Lennar deals have a yield of 8.5% on new acquisitions. As of 3Q25, it now has a weighted average yield of 9.1% on an implied quarterly run rate of $188 million. Most of which comes from deals with Lennar. 

From these proceeds, Millrose pays management fees (salaries), interest expenses, and taxes. Almost everything at the bottom line is used for dividends. As of 3Q25, the company generated $122.5 million in adjusted funds from operations. $121.2 million of this went to dividends. This implies an annualized yield of 9.4%. In December, it hiked the dividend by 2.7%, which is roughly in line with the headline inflation rate. 

All of this is protected by a balance sheet with $1.6 billion in liquidity, a debt to capitalization rate of just 25%, and substantial growth in demand for lots. 

Why MRP is Massively Attractive for Income and Upside

In addition to offering a yield that not a single builder can compete with, there are other differences. For starters, there are more predictable cash flows, as MRP has deals with homebuilders that do not depend on home prices. If anything, homebuilders will first cut home sales prices, operating costs, or even remodel housing plans before canceling contracts. 

Moreover, because the leasing structure does not allow for cancellations without losing access to other lots, Millrose has a structure where it can pause payments in case builders run into trouble. This mainly applies to worst-case situations.
If a builder were to cancel, MRP would keep the deposit and the land. It would create temporarily dead capital for MRP, but it would still have the valuable land. 

However, that’s not what creates upside here. What matters is that spin-offs tend to be highly inefficient. In this case, roughly 80% of MRP went toward existing LEN shareholders. This included ETFs and fund managers who were forced to sell MRP because it’s a REIT and not a homebuilder. It would have messed with their strategies. 

Adding to that, the ROIC/WACC (return on invested capital vs. weighted average cost of capital) spread is currently negative at -6.2%, which reflects startup inefficiencies and heavy initial land investments. It is expected to widen over the decade as pricing power from exclusive option contracts and scale economies reduce capital intensity, pushing ROIC toward 12 to 15%. When adding that the company has a lot of room to put its skills to work, there’s a long runway for growth. I think this stock has room to run to $40, especially once higher demand further improves the AFFO yield (read: makes the dividend even more attractive due to a thicker layer of safety).

Unfortunately, as the overview above shows, a homebuilder has more upside, as it can use home pricing to its advantage. Millrose cannot do that. 

The good thing is that in a world where total supply will be boosted, pricing could be limited, which gives Millrose and its yield a competitive advantage from an investor point-of-view. 

But then again, it has more safety. If homebuilders encounter lower demand, they will stretch their takedown schedule with Millrose. As a result, Millrose will collect fees for longer before the final sale. That works too, especially as it provides safety. 

In tomorrow’s call, I expect some good news with regard to demand, even if it’s just a hint at improving sentiment among homebuilders in light of the administration’s push for more output. 

For now, here’s my takeaway:

Takeaway

As dramatic as this may sound, Millrose Properties represents a paradigm shift in residential real estate finance. 

By providing the critical capital that’s needed to solve the great American housing shortage, MRP is positioning itself as a major partner to the nation's top builders. While it starts with Lennar, others are quickly following. Moreover, with a massive dividend yield, a business model entirely insulated from vertical construction risk, and a temporarily depressed stock price driven by spin-off mechanics, Millrose offers one of the most compelling risk-reward high-yield setups in the market today. 

It may not be for everyone, but as an undervalued high-yield pick, I think it makes a lot of sense. 

The biggest risk here to keep in mind is a surge in rates, as this could make the housing recovery unsustainable.