NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings for Lennar Corporation (NYSE: LEN), including the company's Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is Stable. A complete list of ratings follows this release.
The ratings and Outlook for Lennar reflect the company's strong liquidity position and improving prospects for the housing sector this year. The ratings also reflect Lennar's successful execution of its business model, geographic and product line diversity, much lessened joint venture exposure, and the still challenging U.S. housing environment.
Builder and investor enthusiasm have for the most part surged so far in 2012, but housing metrics have not kept pace. The year-over-year comparisons have been consistently solidly positive, but month-to-month the statistics (single-family starts, new home and existing home sales) have been erratic and, at times, below expectations. However, these macro numbers in April were positive across the board: single-family starts (+4.0%), new home sales (+3.3%) and existing home sales (+3.4%).
In addition, single-family starts were up 3.2% in May as compared to April. Home prices have also been more encouraging of late, turning positive for some series: FHFA +1.8% March, CoreLogic +2.2% April (excluding distressed +2.6% April), Lender Processing Services (LPS) +0.9% March, but Case-Shiller's 20-city price index was flat in March. Also, in any case, for the large public homebuilders spring has so far been a resounding success. As Fitch noted in the past, the housing recovery will likely occur in fits and starts.
Fitch's housing forecasts for 2012 have been raised since the beginning of the year, but still assume a relatively modest rise off a very low bottom. Single-family housing starts are forecast to increase about 12%, while single-family new home sales expand approximately 10%.
Lennar has solid liquidity with unrestricted homebuilding cash of $792.2 million as of Feb. 29, 2012. The company also has a recently established, unsecured revolving credit facility of $410 million that expires May 2015. The company's debt maturities are well-laddered, with less than 16% of its total homebuilding debt maturing through 2014. Although the company has sufficient cash on hand to meet upcoming debt maturities, Fitch expects Lennar may access the capital markets to refinance these maturities. Lennar has demonstrated that it can access the capital markets, even during periods of distress.
Fitch expects Lennar will largely reverse its deferred tax asset allowance (DTA) of $561.3 million this fiscal year.
The company was the third largest homebuilder in 2011 and primarily focuses on entry-level and first-time move-up homebuyers. The company builds in 14 states with particular focus on markets in Florida, Texas and California. Lennar's significant ranking (within the top five or top 10) in many of its markets, its largely presale operating strategy, and a return on capital focus provide the framework to soften the impact on margins from declining market conditions. Fitch notes that in the past, acquisitions (in particular, strategic acquisitions) have played a significant role in Lennar's operating strategy.
During the past two years the company has reignited its 'Everything's Included' marketing platform to ensure that its homes offer the best value proposition in the marketplace. This platform targets the options and upgrades that are most desirable to homebuyers (as determined by market research) and includes them as standards in the price of the homes. This program eliminates major structural upgrades (i.e. homebuyers do not have the ability to move walls or plumbing, but can still request other non-structural options such as cabinetry), allowing the company to minimize its construction cycle time. Fitch notes that limiting options could also turn away potential customers who would like to customize their homes (beyond what Lennar may offer). At the peak of the cycle, approximately half of the company closings were under the 'Everything's Included' platform, while the other half was delivered under its Design Studio program, which allowed homebuyers to customize through upgrades and options. Management indicated that a vast majority of its deliveries going forward will be under the 'Everything's Included' platform.
Compared to its peers Lennar had above-average exposure to joint ventures (JVs) during this past housing cycle. Longer-dated land positions are controlled off balance sheet. The company's equity interests in its partnerships ranged from 10% to 50%. These JVs have a substantial business purpose and are governed by Lennar's conservative operating principles. They allow Lennar to strategically acquire land while mitigating land risks and reduce the supply of land owned by the company. They help Lennar to match financing to asset life. JVs facilitate just-in-time inventory management. Notwithstanding, Lennar has been substantially reducing its number of JVs over the last few years (from 270 at the peak in 2006 to 36 as of Feb. 29, 2012). As a consequence, the company has very sharply lowered its JV recourse debt exposure from $1.76 billion to $80.2 million ($55.6 million net of joint and several reimbursement agreements with its partners) as of Feb. 29, 2012. In the future, management will still be involved with partnerships and JVs, but there will be fewer of them and they will be larger, on average, than in the past.
The company did a good job in reducing its inventory exposure (especially early in the correction) and generating positive operating cash flow. In 2010, the company started to rebuild its lot position and increased land and development spending. Lennar spent about $600 million on new land purchases during 2011 and expended $225 million on land development spending during the year. This compares to $464 million of combined land and development spending during 2009 and $704 million in 2010. During the first quarter of 2012, Lennar purchased $212 million of new land and spent roughly $61 million on development expenditures. Fitch expects land and development spending for 2012 to be approximately 15% higher than in 2011. As a result, Fitch expects Lennar to be modestly cash flow negative this year. Fitch is comfortable with this strategy given the company's cash position, debt maturity schedule and proven access to the capital markets.
During 2010 the company ramped up its investments in its newest segment, Rialto Investments. More recently it has been harvesting the by-products of its efforts. This segment provides advisory services, due-diligence, workout strategies, ongoing asset management services, and acquires and monetizes distressed loans and securities portfolios. (Management has considerable expertise in this highly specialized business.) In February 2010, the company acquired indirectly 40% managing member equity interests in two limited liability companies in partnership with the FDIC, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). Lennar has also invested $64 million in a fund formed under the Federal government's Public-Private Investment Program (PPIP), which is focused on acquiring securities backed by real estate loans. On Sept. 30, 2010, Rialto completed the acquisitions of approximately $740 million of distressed real estate assets, in separate transactions, from three financial institutions. The company paid $310 million for these assets, of which $125 million was funded by a five-year senior unsecured note provided by one of the selling financial institutions. Rialto Investments had $595.5 million of debt, of which $111 million is recourse to Lennar. Rialto provides Lennar with ancillary income as well as a source of land purchases (either directly or leveraging Rialto's relationship with owners of distressed assets). Fitch views this operation as strategically material to the company's operation, particularly as housing activity remains at low levels.
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 early stages of recovery in housing is not sustained and the company prematurely steps up its land and development spending, leading to consistent and significant negative quarterly cash flow from operations and meaningfully diminished liquidity position. Positive rating actions may be considered if the recovery in housing is maintained and is much better than Fitch's current outlook, Lennar shows continuous improvement in credit metrics, and the company maintains a healthy liquidity position.
Fitch has affirmed the following ratings for Lennar with a Stable Outlook:
--IDR at 'BB+';
--Senior unsecured debt at 'BB+'.
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