Fitch Rates Woodside's Proposed $40MM Sr. Notes Offering 'B/RR4'

NEW YORK--()--Fitch Ratings has assigned a 'B/RR4' rating to Woodside Homes Company, LLC's (Woodside) proposed offering of $40 million principal amount of 6.75% senior unsecured notes due 2021. This offering is an add-on to the company's existing $220 million 6.75% senior unsecured notes due 2021. Proceeds from the notes offering will be used for general corporate purposes, including land acquisitions. The Rating Outlook is Stable.

A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings and Outlook for Woodside reflect the company's execution of its business model in the current housing environment, improving financial and operating results, customer and price point diversity, adequate liquidity position, and the cyclically improving industry outlook for 2014. While the company has an established presence in Arizona, Nevada, Texas and Utah, the company's operations remain heavily weighted to California, albeit spread out through a variety of submarkets.

THE INDUSTRY

Comparisons are challenging through first-half 2014, and so far this year most housing metrics seem to have defied expectations and fallen somewhat from a year ago. Though the severe winter throughout much of North America has restrained some housing activity, nonetheless, there is an absence of underlying consumer momentum this spring, perhaps due to buyer sensitivity to home prices and finance rates and the slowing of job growth at year end.

Nevertheless, housing metrics should improve in 2014 due to faster economic growth, and some acceleration in job growth, despite somewhat higher interest rates, as well as more measured home price inflation. However, Fitch has recently tapered its forecast to reflect the subpar spring selling season. Single-family starts are now projected to improve 15% to 710,000 as multifamily volume grows about 9% to 335,000. Thus, total starts this year should top 1 million. New home sales are forecast to advance about 16% to 500,000, while existing home volume is flat at 5.10 million, largely due to fewer distressed homes for sale.

OPERATING ENVIRONMENT

There has been some short-term volatility in certain housing metrics following the increase in interest rates (and higher home prices) during the past nine months as well as harsh winter weather conditions in some parts of the country.

For the public homebuilders in Fitch's coverage, net order gains substantially slowed or turned negative during the second half of 2013 following strong gains in the first half of the year. On average, net orders for these builders fell 2.1% during the fourth quarter of 2013 (4Q'13) compared with a 1.5% increase during 3Q'13, a 16.8% improvement during 2Q'13, and a 28.2% growth during 1Q'13. Fitch expects weak order comparisons continued during the 1Q'14.

The company's new home orders fell 5.3% during the second half of 2013 following a 14.3% increase during the first half of 2013. Woodside ended 2013 with 386 homes in backlog, a 7.8% improvement compared with the same period last year. The value of backlog was 27% higher year-over-year.

While there has been some weakness in housing activity so far in 2014, Fitch expects the housing recovery will continue over the course of the full year 2014. As Fitch noted in the past, the housing recovery will likely occur in fits and starts.

LIQUIDITY

Woodside currently has adequate liquidity, with $88.1 million of unrestricted cash on the balance sheet as of Dec. 31, 2013. As of April 24, 2014, there were no borrowings under its $40 million unsecured revolving credit facility. The proposed debt issuance will further enhance the company's liquidity profile, allowing the company to fund increased land and development spending.

On Jan. 29, 2014, the company entered into a new $30 million unsecured revolving credit facility that matures on January 29, 2017. The facility has an accordion feature that allows the revolver to be increased up to $100 million, subject to obtaining additional lender commitments. In March 2014, the facility was upsized to $40 million.

MANAGEMENT STRATEGY

Woodside emerged from bankruptcy at the end of 2009 with a new senior management team and successfully recapitalized its balance sheet during the third quarter of 2012, raising $127.7 million of debt and $75 million of equity. During the third quarter of 2013, the company issued $220 million of senior unsecured notes due 2021 and repaid $127.7 million of 9.75% senior secured notes due 2017.

Following its emergence from bankruptcy, the management team focused on the company's core homebuilding operations and transitioned from a national builder to a western regional homebuilder, with operations in California, Nevada, Arizona, Utah and Texas. As part of this process, the company sold projects and land holdings in five Eastern Divisions in the states of Florida and Minnesota and in metropolitan Washington DC.

Woodside has a relatively heavy exposure to California, albeit spread out through a variety of submarkets. The state of California represented about 55% of 2013 closings. Fitch expects the reliance on California will remain material in the near to intermediate term, although its significance is expected to diminish slightly as the company's land acquisitions during 2012 and 2013 were weighted more heavily to markets outside California.

As of Dec. 31, 2013, Woodside controlled 8,697 lots, of which 5,189 (59.7%) were owned and 3,508 (40.3%) were controlled through options. On a trailing 12-month basis, Woodside controlled 5.8 years of land and owned 3.4 years of land.

As is the case with other large homebuilders, the company is rebuilding and enhancing its land position and trying to opportunistically acquire land at attractive prices. Total lots controlled as of Dec. 31, 2013 increased 54.4% year-over-year (yoy), driven by a 180% growth in optioned lots and an 18.5% rise in owned lots.

IMPROVING FINANCIAL RESULTS

The company's financial results and credit metrics improved in 2013 relative to 2012 levels. Woodside reported a 17.9% increase in home deliveries during 2013 and homebuilding revenues grew 39.4% compared to 2012. Fitch-calculated EBITDA margins improved 480 bps to 12.8% during 2013 compared with 2012.

Leverage as measured by debt to Fitch-calculated EBITDA improved to 3.9x at the end of 2013 from 4.8x at the conclusion of 2012. On a pro forma basis, assuming the company issues $40 million of senior notes, leverage will increase to 4.6x. Interest coverage advanced to 3.9x during 2013 from 2.2x during 2012. Fitch expects these credit metrics will improve slightly during 2014.

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 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.

The Outlook or rating for Woodside could be raised in the next 12 months if the company performs in line with Fitch's expectations (including leverage consistently in the 4.0x-4.5x range and interest coverage sustaining above 3x), the various housing metrics are trending towards Fitch's macro forecast and the company has liquidity (combination of cash and revolver availability) of at least $75 million.

Negative rating actions could occur if the recovery in housing dissipates; revenues fall in the 15%-20% range; and Woodside maintains an overly aggressive land and development spending program. This could lead to consistent and significant negative quarterly cash flow from operations and meaningfully diminished liquidity position (below $40 million).

The 'RR4' Recovery Rating (RR) on the company's unsecured debt indicates average recovery prospects for holders of these debt issues. Woodside's exposure to claims made pursuant to performance bonds and the possibility that part of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debt holders. Fitch applied a liquidation value analysis for these RRs.

Fitch currently rates Woodside with a Stable Outlook as follows:

--Long-term IDR 'B';

--Senior unsecured notes 'B/RR4'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827657

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA, +1 312-606-2311
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran, +1 212-908-0515
Managing Director
Fitch Ratings, Inc.
or
Committee Chairperson
Craig Fraser, +1 212-908-0310
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA, +1 312-606-2311
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran, +1 212-908-0515
Managing Director
Fitch Ratings, Inc.
or
Committee Chairperson
Craig Fraser, +1 212-908-0310
Managing Director
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com