Fitch Affirms D.R. Horton's IDR At 'BB '; Outlook To Positive
KEY RATING DRIVERS
The ratings for DHI reflect the company's successful execution of its business model, steady capital structure, and geographic and product line diversity. The company was an active consolidator in the homebuilding industry in the past, but has been much less acquisitive over the past 11 years. It appears the company will continue to be focused principally on harvesting the opportunities within its current and adjacent markets.
The ratings also reflect the company's relatively heavy speculative building activity (at times averaging 50% - 60% of total inventory and 48% at March 31, 2015). Historically, the company built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand). DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is somewhat more comfortable with the more moderate spec targets of 2004 and 2005, when spec inventory accounted for roughly 35% - 40% of homes under construction.
The Positive Outlook takes into account further moderate improvement in the housing market in 2015 and 2016 and the potential for share gains by DHI and hence volume outperformance relative to industry trends. The Outlook also considers the company's above-average performance from credit and operating perspectives during much of the past housing downturn and especially so far in the recovery. In particular, leverage should meaningfully improve in fiscal 2015 and 2016. DHI was one of the few public builders profitable in 2010 and 2011, reporting solid profits in 2012, 2013 and 2014, and should report stronger pretax and net income this fiscal year. DHI was the second builder to reverse its substantial federal deferred tax asset allowance (during FY 2012).
THE COMPANY
D.R. Horton was established in 1978 and completed its initial public offering in 1992. DHI has grown quite rapidly since its beginnings. From 1978 to 1987 its activities were exclusively in the Dallas/Ft. Worth area. The company has entered 82 markets since then through a combination of 'greenfield' entries and acquisitions and subsequently exited a few of the markets. Since 1978, DHI has made 21 acquisitions, almost all of these during the 1994 - 2002 period.
DHI acquired the homebuilding operations of Breland Homes in August 2012 for \\$105.9 million in cash. Breland Homes operated in Huntsville and Mobile in Alabama and along the gulf coast of Mississippi. In October 2013, the company acquired the homebuilding operations of Regent Homes, Inc. for \\$34.5 million cash. Regent operated in Charlotte, Greensboro and Winston-Salem, N.C. DHI acquired Crown Communities, the largest builder in Atlanta, on May 9, 2014. The company acquired Crown Communities, which also operates in South Carolina, for \\$209.6 million in cash. In April 2015, DHI acquired Pacific Ridge Homes in Seattle, Washington for \\$72 million in cash.
In calendar 2014, DHI was ranked the largest homebuilder in the U.S. based on closings and revenues, holding the #1 position based on home closings since 2002. The company has made only four relatively small acquisitions since 2003 and it appears that DHI may remain less acquisitive in the future as it focuses on harvesting the opportunities within its current and adjacent markets. The company operates in 27 states and 79 markets in the U.S. and has 40 homebuilding operating divisions.
GENERALLY IMPROVING HOUSING MARKET
Housing metrics increased in 2014 due to more robust economic growth during the last three quarters of the year (prompted by improved household net worth, industrial production and consumer spending), and consequently acceleration in job growth (as unemployment rates decreased to 6.2% for 2014 from an average of 7.4% in 2013), despite modestly higher interest rates, as well as more measured home price inflation. A combination of tax increases and spending cuts in 2013 shaved about 1.5pp off annual economic growth, according to the Congressional Budget Office. Many forecasters estimate the fiscal drag in 2014 was only about 0.25%.
Single-family starts in 2014 improved 4.8% to 648,000 as multifamily volume grew 15.6% to 355,000. Thus, total starts in 2014 were 1.003 million. New home sales were up a modest 1.6% to 436,000, while existing home volume was off 2.9% to 4.940 million largely due to fewer distressed homes for sale and limited inventory.
New home price inflation moderated in 2014, at least partially because of higher interest rates and buyer resistance. Average new home prices rose 6.4% in 2014, while median home prices advanced approximately 5.4%.
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing, relatively robust economy throughout the balance of the year. Considerably lower oil prices should restrain inflation and leave American consumers with more money to spend. The unemployment rate should continue to move lower (5.3% in 2015). Credit standards should steadily, moderately ease throughout 2015. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25 - 35-year-olds should provide some incremental elevation to the rental and starter home markets.
Single-family starts are forecast to rise about 17.3% to 760,000 in 2015 as multifamily volume expands about 7% to 381,000. Total starts would be in excess of 1.1 million. New home sales are projected to increase 18% to 515,000. Existing home volume is expected to approximate 5.152 million, up 4.3%.
New home price inflation should further taper off with higher interest rates and the mix of sales shifting more to first time homebuyer product. Average and median home prices should increase 3.0%-3.5%.
As Fitch noted in the past, the housing recovery will likely occur in fits and starts.
SOME EROSION IN HOME AFFORDABILITY
The Freddie Mac 30-year average mortgage rate (June 18, 2015) was 4.00%, down 4 basis points (bps) sequentially from the previous week and 59 bps higher than the average rate during the month of January 2013 (3.41%), a low point for mortgage rates. Current rates are still below historical averages and help moderate the effect of much higher home prices during the past few years. Income growth has been (and may continue to be) relatively modest.
Nevertheless, there has been some lessening of affordability as the upcycle in housing has matured. The Realtor Association's composite affordability index peaked at 207.3 in the first quarter of 2012, averaged 176.9 in 2013, 164.4 in 2014 and was 164.9 in April 2015.
Erosion in affordability is likely to continue as interest rates likely head higher in 2015 (as the economy strengthens). Fitch projects that mortgage rates will average 20 - 30 bps higher in 2015. Home price inflation should moderate this year reflecting the higher interest rates and the mix of sales shifting more to first time homebuyer product. However, average and median home prices should still rise within a range of 3.0% - 3.5% this year, pressuring affordability.
FINANCIALS
DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI aggressively reduced its debt during the downturn and early in the recovery. Homebuilding debt declined from roughly \\$5.5 billion at June 30, 2006 to \\$1.58 billion as of Dec. 31, 2011, a 71% reduction.
More recently, DHI has been responding to the stronger housing market, expanding inventories and increasing leverage. Homebuilding debt at the end of the fiscal 2015 second quarter was \\$3.55 billion.
As of March 31, 2015, debt/capitalization was 39.6%. Net debt/capitalization was 34.7% at the end of fiscal 2015 second quarter. Debt-to-EBITDA has improved from 5.7x at Sept. 30, 2012 to 4.0x at Sept. 30, 2013, 3.3x at Sept. 30, 2014 and 3.2x at March 31, 2015. Funds from operations (FFO) adjusted leverage was 6.6x at the end of fiscal 2012 and is currently 5.0x. Interest coverage rose from 3.35x at the end of fiscal 2012 to 4.75x in 2013, 5.4x at the conclusion of 2014 and 6.55x at the end of the fiscal 2015 second quarter. Fitch projects that debt-to-EBITDA should approximate 2.8x by the end of 2015 and be below 2.5x by the conclusion of 2016. Fitch also projects that at the end of 2015 interest coverage should come close to 7.5x.
DHI has solid liquidity with unrestricted homebuilding cash and equivalents of \\$665.8 million as of March 31, 2015.
The company has a \\$975 million senior unsecured revolving credit facility with an uncommitted accordion feature that could increase the size of the facility to \\$1.25 billion, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit with a sublimit equal to approximately 50% of the revolving credit commitment. Letters of credit issued under the facility reduce available borrowing capacity. The maturity date of the facility is Sept. 7, 2019. At March 31, 2015, there were \\$175 million of borrowings outstanding and \\$90.3 million of letters of credit issued under the revolving credit facility.
DHI continues to have access to capital markets. In February 2015, the company priced an offering of \\$500 million aggregate principal amount of 4.0% senior notes due Feb. 15, 2020.
DHI has well laddered debt with \\$542.6 million of senior notes maturing in 2016 and \\$350.0 million due in 2017.
In early December 2012, DHI declared a cash dividend of \\$0.15 per share. This dividend was in lieu of and accelerated the payment of all quarterly dividends that the company would have otherwise paid in calendar 2013. DHI resumed its normal quarterly cash dividends in calendar 2014.
REAL ESTATE
DHI spent \\$2.31 billion on real estate in 2014- 60% on land and 40% on development. The company expended \\$2 billion on land/lots in 2013 and spent about \\$640 million on development activities. DHI purchased \\$1.1 billion of land and lots in 2012 and spent approximately \\$300 million on land development. The company spent \\$790 million on land and development activities in 2011, and about \\$830 million during 2010, compared with \\$380 million paid in 2009. During the peak of the housing cycle, DHI spent \\$5.2 billion annually.
Through the first half of fiscal 2015, the company committed roughly \\$1.07 billion for real estate activities (55% on land and 45% on development). Fitch expects that land and development spending will approximate \\$2.35 billion for full-year fiscal 2015 - almost 60% for land and lots and 40% for development activities.
DHI maintains a 5.4-year supply of lots (based on LTM deliveries), 68.7% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past seven years as the company has written off substantial numbers of options and land owners are less inclined to use options. Fitch expects DHI to continue replenishing its land position and moderately increasing its community count. The primary focus will be optioning (or in some cases, purchasing for cash) or developing finished lots in relatively small phases, wherein DHI can get a faster return of its capital.
DHI's cash flow from operations during fiscal 2014 (ended Sept. 30, 2014) was a negative \\$661.4 million. In fiscal 2015, Fitch expects DHI to be slightly cash flow positive as spending on land and development activities levels out.
The ratings also reflect DHI's relatively heavy speculative building activity (at times averaging 50% - 60% of total inventory and 48% at March 31, 2015). DHI has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand).
A key focus is on selling these homes either before construction is completed or certainly before a completed spec has aged more than a few months. This has resulted in consistently attractive margins. DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is generally more comfortable with the more moderate spec targets of 2004 and 2005, when spec inventory accounted for roughly 35% - 40% of homes under construction.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--Industry single-family housing starts improve about 17%, while new and existing home sales grow 18% and almost 4.5%, respectively, in 2015;
--DHI's revenues increase at a 30% pace, but homebuilding EBITDA margins erode one percentage point this year, due to higher expenses (especially labor and material costs) and lesser home price inflation;
--The company's debt/EBITDA approximates 2.8x and interest coverage reaches about 7.5x by year-end 2015;
--DHI spends approximately \\$2.3 billion on land acquisitions and development activities this year;
--The company maintains an adequate liquidity position (well above \\$350 million) with a combination of unrestricted cash and revolver availability.
RATING SENSITIVITIES
Future ratings and Outlooks will be influenced by broad housing market trends as well as company-specific activity, such as:
--Trends in land and development spending;
--General inventory levels;
--Speculative inventory activity (including the impact of high cancellation rates on such activity);
--Gross and net new order activity;
--Debt levels;
--Free cash flow trends and uses;
--DHI's cash position.
Fitch would consider taking further positive rating actions if the recovery in housing persists or accelerates and DHI shows steady improvement in credit metrics (such as debt-to-EBITDA leverage approaching 2x), while maintaining a healthy liquidity position (in excess of \\$1 billion in a combination of cash and revolver availability). Fitch would expect management to exercise discipline in managing its land and liquidity through the balance of the cycle.
Conversely, negative rating actions could occur if the recovery in housing dissipates and DHI maintains an overly aggressive land and development spending program. This could lead to sharp declines in profitability, consistent and significant negative quarterly cash flow from operations, and meaningfully diminished liquidity position (below \\$500 million).
LIQUIDITY
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings and assigned the following Recovery Rating for D.R. Horton, Inc. (NYSE: DHI)
--Long-term IDR at'BB+';
--Senior unsecured debt at 'BB+/RR4'
The Rating Outlook is Positive.
In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The Recovery Rating of '4' for D.R. Horton's unsecured debt supports a rating of 'BB+', and reflects average recovery prospects in a distressed scenario.
Комментарии