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Lennar sells portfolio previously valued at $1.3 billion for $525 million to joint venture owned 80% by Morgan Stanley.
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NEW YORK (CNNMoney.com) -- In another sign of the collapse of the market for new homes, builder Lennar Corp. has dumped a portfolio of 11,000 properties for 40 percent of their previously-stated book value.

Lennar (Charts, Fortune 500), the nation's largest builder in terms of revenue, is selling the properties to a joint venture it has established with the real estate arm of Wall Street bank Morgan Stanley (Charts, Fortune 500). Morgan Stanley will own 80 percent of the joint venture, while Lennar will own 20 percent.

Lennar announced the deal late Friday as its fiscal fourth quarter came to a close. It is selling the properties for $525 million, even though it said their book value as of Sept. 30 stood at $1.3 billion. Lennar also will receive fees for continuing to manage the properties, which include mix of raw land as well as partially and fully developed homesites.

The nation's home builders, including Lennar, have been hammered by the problems in the mortgage securities market and the downturn in housing. Last week, the government's report on new home sales reported a record glut of completed new homes for sale, and the biggest year-over-year drop in the median price of a new home in 37 years. Most builders have had to take large charges against their earnings as they revalued their holdings and walked away from options to buy additional land.

But the deal also suggests that bargain hunters on Wall Street might be willing to step in and try to grab some prime properties at a fraction of their previous value, despite widespread subprime mortgage losses that have rocked financial firms in recent months.

For Morgan Stanley, which manages $88.3 billion in real estate assets on behalf of its clients, the Lennar deal represents a relatively small bet. It also has not been as badly hit by the subprime problems as some of its rival firms, such as Merrill Lynch (Charts, Fortune 500) and Citigroup (Charts, Fortune 500), which took much bigger than expected subprime charges that resulted in the departures of their chief executives.

"This transaction provides us with increased liquidity and flexibility at an opportune time," said a statement from Stuart Miller, Lennar's president and CEO.

As a part of the transaction, Lennar has options and rights of first offer, giving it the chance to purchase certain finished homesites at current market values. It also could receive extra revenue if the joint venture exceeds financial targets on the sale of the properties.

The sale raised the possibility that Lennar's results in the just closed quarter could again be hit by a large charge for the reduced value of its holdings. Lennar took a $847.5 million third-quarter hit for valuation adjustments and writeoffs of options, a move that plunged the company into a loss more than six times what had been forecast by analysts.

Analysts had been forecasting that its fourth quarter loss would be only a $1.00 a share in the just completed period, which would be an improvement from the $1.24 a share it lost a year earlier an the $3.25 a share it lost in the third quarter. But as glut of new homes on the market continues to push prices significantly lower,

Charges due to reduced land and home valuations have caused most builders to report larger than expected losses in recent quarters. In October, credit rating agency Moody's downgraded the debt of Lennar, No. 2 builder Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status.

Last month Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 7 builder by revenue, reported that the sales pace during October "significantly deteriorated" in most of its markets, and its preliminary results also showed a sharp rise in cancellations. D.R. Horton (Charts, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss last week, but that followed a quarter with a much larger-than-forecasted loss.

Toll Brothers (Charts, Fortune 500) is due to report results Thursday, and the luxury home builder is forecast to report a 46 cent a share loss, its first loss of the current housing slump.