NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to D.R. Horton, Inc.'s (NYSE: DHI) proposed offering of $300 million principal amount of senior notes due 2017. This issue will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offering will be used for general corporate purposes.
Fitch currently rates DHI as follows:
--Long-term Issuer Default Rating (IDR) 'BB';
--Senior unsecured debt 'BB'.
The Rating Outlook is Stable.
The ratings and Outlook for DHI reflect the company's strong liquidity position, the successful execution of its business model, geographic and product line diversity and steady capital structure. While Fitch expects better prospects for the housing industry this year, there are still significant challenges facing the housing market, which are likely to meaningfully moderate the early stages of this recovery. Nevertheless, DHI has the financial flexibility to navigate through the still challenging market conditions and continue to selectively and prudently invest in land opportunities.
Certain recent economic/construction related statistics, such as consumer confidence, mortgage rates, household formations, multifamily starts, existing home sales, pending home sales, housing inventories, and foreclosures were improving and/or above consensus. A few key statistics such as job growth, single-family housing starts, new home sales, home prices (CoreLogic, Case Shiller) were declining/short of expectations. Overall, the current setting is much like at the beginning of 2011.
Fitch's housing forecasts for 2012 have been raised since the beginning of the year but still assume a modest rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 10% to 474,000, while new home sales increase approximately 5.6% to 328,000 and existing home sales grow 4% to 4.43 million.
The company successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt over the past few years. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.59 billion currently, a 71% reduction.
DHI lowered its homebuilding debt levels by $336.3 million, $991.3 million and $497.2 million during fiscal 2009, 2010 and 2011, respectively, through debt repurchases, maturities and early redemptions. Through the first six months of fiscal 2012 (ending March 31, 2012), the company has repurchased an additional $10.8 million of senior notes. DHI has $172 million of senior notes maturing in May 2013, and then the next major debt maturity is in January 2014, when $145 million of senior notes mature.
DHI currently has solid liquidity with unrestricted homebuilding cash of $662.2 million and marketable securities of $299.1 million as of March 31, 2012.
DHI maintains a 6.8-year supply of lots (based on last 12 months deliveries), 71.3% of which are owned and the balance controlled through options. (The options share of total lots controlled is down sharply over the past five years as the company has written off substantial numbers of options.) Fitch expects the company will continue to rebuild its land position and increase its community count, although the primary focus will be optioning (or in some cases, purchasing for cash) finished lots wherein the company can get a faster return of its capital. DHI's cash flow from operations during the LTM period ending March 31, 2012 was a negative $46.6 million. For all of fiscal 2012, Fitch expects DHI to be moderately cash flow negative.
The ratings also reflect the company's relatively heavy speculative building activity (at times averaging 50-60% of total inventory and 50% at March 31, 2012). The company has historically 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 generally more comfortable with the more moderate spec targets of 2004 and 2005, wherein spec inventory accounted for roughly 35-40% of homes under construction.
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, and the company's cash position. Negative rating actions could occur if the recovery in housing does not continue and the company prematurely and aggressively steps up its land and development spending, leading to consistent and significant negative quarterly cash flow from operations and diminished liquidity position. Positive rating actions may be considered if the recovery in housing is sustained and is significantly better than Fitch's current outlook, DHI shows continuous improvement in credit metrics, and the company maintains a healthy liquidity position.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers