CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Beazer Homes USA, Inc. (NYSE: BZH), including the company's Issuer Default Rating (IDR) at 'B-'. The Rating Outlook is Stable.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating and Outlook for BZH is based on the company's execution of its business model in the current moderately recovering housing environment, its land policies, and geographic diversity. The company's rating and Outlook is also supported by its solid liquidity position. The Stable Outlook also takes into account the improving housing outlook for 2014 and 2015.
Risk factors include the cyclical nature of the homebuilding industry, the company's high debt load and high leverage, BZH's underperformance relative to its peers in certain operational and financial categories, and its current over-exposure to the credit-challenged entry level market (an estimated 60% of BZH's customers are first-time home buyers).
Comparisons were challenging through first-half of calendar 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 restrained some housing activity, nonetheless, there was 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. But demographics, attractive affordability/housing valuations, and a slow, steady easing in credit standards should sustain and ultimately accelerate the upturn.
To reflect the subpar spring selling season, as well as the more guarded expectation for the next few months, Fitch recently tapered its macro housing forecast. Single-family starts are now projected to improve 9.5% to 677,000 (down from Fitch's previous forecast of a 15% improvement) and multifamily volume grows almost 12% to 343,000. Total starts this year should still slightly exceed 1 million. New home sales are forecast to advance about 8% to 465,000 (down from Fitch's prior forecast of 500,000), while existing home sales volume is expected to decline 5% to 4.835 million (down from Fitch's earlier estimate of 5.1 million), largely due to fewer distressed homes for sale.
New home price inflation should moderate in 2014, at least partially because of higher interest rates. Average and median new home prices should rise about 3.5% in 2014.
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (5.8% in 2015). Credit standards should steadily, moderately ease throughout next year. 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 21% to 819,000 as multifamily volume expands about 6.5% to 366,000. Total starts would be approaching 1.2 million. New home sales are projected to increase 20.4% to 560,000. Existing home volume is expected to approximate 5.075 million, up 5%.
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 2.5-3%.
Challenges remain including the potential for higher interest rates and restrictive credit qualification standards.
IMPROVING FINANCIAL RESULTS
BZH's homebuilding revenues for the first nine months of its 2014 fiscal year (ending June 30, 2014) increased 7.9% to $909.2 million as closings fell 4.2% while the average sales price advanced 12.6% to $279,300 during the period. Land sales totaled $8.6 million during 2014 YTD period compared with $6.2 million last year.
The homebuilding gross profit margins (excluding inventory impairments and lot option abandonments) also showed strong improvement, growing 350 bps to 19.5% during the YTD 2014 period compared with a 16% margin during the same period last year. SG&A as a percentage of sales increased to 14.6% during the nine-month period in 2014, up from 14.1% last year. Despite the strong results for the first nine months of the year, BZH reported a pre-tax loss of $27.1 million during the period, which included a $19.9 million loss on extinguishment of debt related to the company's debt refinancing this year. Fitch expects BZH will be unprofitable on a pre-tax basis during fiscal 2014 but should report pre-tax profits during fiscal 2015.
HIGH DEBT LOAD AND LEVERAGE
BZH had total debt of $1.5 billion at June 30, 2014. The company's credit metrics have been improving over the past two years but remain weak relative to its ratings. Leverage at the end of the June quarter was 13.8x compared with 17.4x at the end of fiscal 2013 and 53.5x at the end of fiscal 2012. EBITDA to interest coverage is also low at 0.9x for the LTM period ending June 30, 2014 compared with 0.8x in fiscal 2013 and 0.2x in fiscal 2012.
Fitch expects these credit metrics will improve in the next 12 -15 months, although leverage is expected to remain weak at around 9x - 10x and interest coverage is projected to improve to approximately 1.25x - 1.50x during fiscal 2015. The improvement in credit metrics will be driven by EBITDA growth as Fitch does not expect any meaningful debt repayment in the short to intermediate term.
BZH currently has an adequate liquidity position, which allows the company to meet interest payments and land and development spending requirements. BZH ended the June 2014 quarter with $206.5 million of unrestricted cash and no borrowings under its $150 million revolving credit facility. Fitch expects BZH will maintain cash and revolver availability of at least $250 - $300 million in the near to intermediate term. Furthermore, the company has no major debt maturities until 2016, when $172.9 million of sr. notes become due.
BZH maintains a 6-year supply of lots (based on last 12 months deliveries), 79.4% of which are owned, and the balance controlled through options. As is the case with other public homebuilders, the company is rebuilding its land position and trying to opportunistically acquire land at attractive prices. Total lots controlled increased 10.4% yoy and grew 1.5% compared with the previous quarter.
The company has been aggressive in its land and development spending following the successful execution of its capital markets transactions in 2012. BZH spent roughly $475.2 million on land purchases and development activities during fiscal 2013 compared with $185.6 million expended during fiscal 2012. Through the first nine months of fiscal 2014 (ended June 30, 2014), BZH spent $381.5 million for land and development activities. For all of 2014, management expects land and development spending will total $520 - $560 million.
As a result, Fitch expects BZH will be cash flow negative by about $225 million - $250 million this fiscal year.
Fitch is comfortable with BZH's land strategy given the company's liquidity 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.
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.
BZH's ratings are constrained in the intermediate term due to weak credit metrics and high leverage. However, positive rating actions may be considered if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, BZH shows continuous improvement in credit metrics (particularly debt-to-EBITDA consistently below 8x and interest coverage above 2x), and the company preserves a healthy liquidity position.
Negative rating actions could occur if the recovery in housing dissipates, resulting in BZH's revenues and operating losses approaching 2011 levels, and the company maintains an overly aggressive land and development spending program. This could lead to consistent and significant negative quarterly cash flow from operations and diminished liquidity position. In particular, Fitch will review BZH's ratings if the company's liquidity position (unrestricted cash plus revolver availability) falls below $200 million. Negative rating actions could also occur if the company's credit metrics do not improve much from current levels in a sustained housing recovery, including debt to EBITDA consistently remaining above 10x and interest coverage below 1x.
Fitch affirms the following ratings for BZH:
--Long-term IDR at 'B-';
--Secured revolver at 'BB-/RR1';
--Second lien secured notes at 'BB-/RR1';
--Senior unsecured notes at 'CCC+/RR5';
--Junior subordinated debt at 'CCC/RR6'.
The Rating Outlook is Stable.
The Recovery Rating (RR) of 'RR1' on BZH's secured credit revolving credit facility and second-lien secured notes indicates outstanding recovery prospects for holders of these debt issues. The 'RR5' on BZH's senior unsecured notes indicates below-average recovery prospects for holders of these debt issues. BZH's exposure to claims made pursuant to performance bonds and joint venture debt 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 debtholders. The 'RR6' on the company's junior subordinated notes indicates poor recovery prospects for holders of these debt issues in a default scenario. Fitch applied a liquidation value analysis for these recovery ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Liquidity Considerations for Corporate Issuers