Fitch Rates PulteGroup's $500MM Term Loan 'BB /RR4'; Outlook Positive
A complete list of ratings follows this release.
KEY RATING DRIVERS
The current ratings and Positive Outlook reflect PHM's operating performance in 2014/2015 and current financial ratios (especially leverage and coverage) which compare well versus its peers, its solid liquidity position and favorable prospects for the housing sector for the balance of 2015 and in 2016. Fitch believes that the housing recovery is firmly in place (although the rate of recovery remains well below historical levels and will likely continue to occur in fits and starts). The Outlook also takes into account the enhanced senior management team and the board's more shareholder-friendly strategy.
The rating for PHM reflects the company's broad geographic and product diversity, a long track record of adhering to a disciplined financial strategy and, somewhat more recently, an at times, aggressive growth strategy (via mergers and acquisitions). The merger with Centex in August 2009 further enhanced the company's broad geographic and product line diversity. Centex's significant presence in the first move-up and especially the entry-level categories complemented PHM's strength in both the move-up and active adult segment. PHM's Del Webb (active adult) segment is perhaps the best-recognized brand name in the homebuilding business. The company also did a good job in reducing its inventory and generating positive operating cash flow during the severe housing downturn from 2007 through 2011 and since then.
PHM's future ratings and Outlook will be influenced by broad housing market trends as well as company-specific activity such as 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 and free cash flow trends and uses.
DEBT AND LIQUIDITY
The ratings and Outlook also take into account the company's successful execution of its debt repayment strategy following the merger with Centex in August 2009 and more recently. Subsequent to the merger the company repurchased \\$1.5 billion of senior notes through a tender offer. PHM also retired \\$898.5 million in debt in 2010, \\$323.9 million in 2011, \\$592.4 million in 2012, \\$462 million in 2013 and \\$245.7 million in 2014. Remaining debt maturities are well laddered with \\$463.2 million due in 2016 and \\$122.8 million scheduled to mature in October 2017. As of June 30, 2015, PHM had \\$460.4 million of unrestricted cash and equivalents and \\$1.58 billion of senior notes.
The reduced debt and growing profitability have enabled the company to improve its debt/EBITDA ratio from 14.3x at the end of 2010 to 2.05x at the end of 2014 and 1.7x for the latest 12 months ending June 30, 2015. Interest coverage improved from 0.9x during 2010 to 6.7x during 2014 and 7.4x for the LTM period.
As a cost saving measure and to provide increased operational flexibility, PHM voluntarily terminated its \\$250 million unsecured revolving credit facility (RCF) effective March 30, 2011. Then on July 23, 2014, PHM entered into a senior unsecured RCF that matures on July 21, 2017. The facility provides for maximum borrowings of \\$500 million and contains an uncommitted accordion feature that could increase the size of the facility to \\$1 billion.
As is the case with other public homebuilders, PHM is using the liquidity accumulated over the past few years to maintain and where possible expand its land position and to acquire land at attractive prices.
In late July 2013, the board of directors reinstituted a quarterly dividend (\\$0.05 per share). The board had eliminated the \\$0.04 per share quarterly dividend in November 2008 to conserve cash. In October 2014, Pulte's board declared a 60% increase in its quarterly dividend to \\$0.08 per share.
PHM also announced in October 2014 that its board approved a share repurchase authorization of \\$750 million. PHM repurchased 7.2 million shares (cost \\$118.1 million) in 2013 and 12.9 million shares (cost \\$245.8 million) in 2014. During the six months ended June 30, 2015, PHM repurchased 15.3 million shares of its common stock for a total of \\$313.0 million. The share repurchase authorization has \\$425.4 million remaining as of June 30, 2015. Management has indicated that its first priority in allocating capital is to invest in its business, and then to return excess funds to shareholders in the form of dividends and share repurchases on a routine and systematic basis.
Even with substantial land and development spending in 2015 as well as some moderate share repurchase activity and the higher dividend, Fitch expects PHM will end the year with a cash and equivalents position of at least \\$750 million.
REAL ESTATE
As of June 30, 2015, PHM controlled 136,334 lots, of which 70.2% are owned and the remaining 29.8% controlled through options. Total lots controlled represent an 8.0-year supply of total lots based on LTM closings, while the company owns 5.6-years of lots. The company's land position has historically been longer compared to other public homebuilders because of its Del Webb operations. PHM's active adult and certain master-planned communities can take from five to seven years or longer during their build-out.
During the first few years off the market bottom, the company was relatively subdued in committing to incremental land purchases because of its already sizeable land position. Of course, the acquisition of Centex in 2009 allowed the company to sharply increase its land position.
PHM spent \\$750 million on land and development in 2009, while Centex spent roughly \\$200 million. PHM spent \\$980 million on land and development in 2010 and \\$1.04 billion in 2011. In 2012 it spent \\$924 million for land and development - roughly 1/3 for land and 2/3 for development activities. PHM spent approximately \\$1.3 billion on real estate in 2013 with roughly 40% for land and 60% for development. For full-year 2014 the company spent \\$1.8 billion on real estate: about 50% for land and 50% on development. This was approximately \\$200 million below the board's authorization level. The board has authorized \\$2.4 billion in real estate expenditures for 2015 with more than 50% targeted for development activities. (For perspective, PHM alone spent \\$4.6 billion on land and development in 2006.)
PHM continues to face meaningful development expenditures, partially due to its Del Webb active adult (retiree) operations, but largely related to its Pulte brand. There are fewer developed lots available to buy; thus, more raw land, which will require development spending, is being acquired for its Pulte and Centex brands. This is also the case for other homebuilders.
Fitch is comfortable with PHM's land strategy given the company's cash position, debt maturity schedule, proven access to the capital markets, and management's demonstrated discipline in pulling back on its land and development activities during periods of distress. Additionally, Fitch expects management to be disciplined with the uses of its cash, refraining from significant share repurchases or one-time dividends to its stockholders that would meaningfully deplete its liquidity position.
THE INDUSTRY
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. 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, as measured by the Census Bureau, 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 (average 5.3% in 2015). Credit standards should steadily and 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 12.5% to 729,000 as multifamily volume expands 7.3% to 381,000. Total starts would be in excess of 1.1 million. New home sales are projected to increase 20% to 523,000. Existing home volume is expected to be approximately 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%.
Fitch expects further improvement in 2016, with total housing starts projected to rise 12.3%, new-home sales to advance 18%, and existing home sales to grow 5% for the year.
Challenges remain, including the potential for higher interest rates and restrictive credit qualification standards.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:
--Industry single-family housing starts improve 12.5%, while new and existing home sales grow 20% and 4.3%, respectively, in 2015;
--PHM's revenues increase by low- to mid-single digits and homebuilding EBITDA margins moderately erode this year;
--The company's debt/EBITDA approaches 2x and interest coverage is approximately 7x by year-end 2015;
--PHM spends close to \\$2.4 billion on land acquisition and development activities this year;
--The company maintains a healthy liquidity position (above \\$1 billion with a combination of unrestricted cash and revolver availability).
RATING SENSITIVITIES
Positive rating actions leading to a low investment-grade rating may be considered if the recovery in housing appears likely for the next few years and meets or exceeds Fitch's current outlook; PHM at the least maintains current credit metrics (particularly debt-to-EBITDA of 2x and interest coverage at or above 7x) and the company preserves a substantial liquidity position.
A negative rating action could be triggered if the industry recovery dissipates; PHM's 2015 revenues drop in the high-teens while EBITDA margins decline below 12%; and PHM's liquidity position falls sharply, perhaps below \\$500 million, as the company pursues overly aggressive shareholder-friendly actions (e.g. dividends, share repurchase).
FULL LIST OF RATINGS
Fitch currently has the following ratings:
PulteGroup, Inc.:
--Long-term IDR at 'BB+';
--Senior unsecured notes at 'BB+/RR4';
--Unsecured revolving credit facility at 'BB+/RR4.
Centex Corp.:
--Long-term IDR at 'BB+';
--Senior unsecured debt at 'BB+/RR4'.
The Rating Outlook is Positive.
RECOVERY RATING
In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The 'RR4' for PHM's senior unsecured debt supports a rating of 'BB+', the same as PHM's IDR, and reflects average recovery prospects in a distressed scenario.
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