Fitch Rates Lennar's Proposed Sr. Notes Offering 'BB+/RR4'; Outlook Positive

NEW YORK--()--Fitch Ratings has assigned a 'BB+/RR4' rating to Lennar Corporation's (NYSE: LEN) proposed offering of senior notes due 2021. This issue will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offerings will be used for general corporate purposes, including the repayment of debt, which may include the repayment or repurchase of its 6.5% senior notes due 2016.

KEY RATING DRIVERS

The ratings for Lennar are based on the company's strong track record over the past 36 plus years, geographic diversity, customer and product focus, generally conservative building practices and effective utilization of return on invested capital criteria as a key element of its operating model. Additionally, there has been continuity in Lennar's management during this housing cycle and Fitch considers this management team to be the deepest among the public builders within its coverage.

The Positive Outlook reflects Lennar's operating performance in 2014 and 2015 and projected 2016 financial ratios (especially leverage and coverage), solid liquidity position and favorable prospects for the housing sector during 2016 and probably 2017. Fitch believes that the housing recovery is firmly in place (although the rate of recovery remains well below historical levels and the recovery will likely continue to occur in fits and starts).

THE INDUSTRY

Housing activity has ratcheted up more sharply in 2015 with the support of a steadily growing economy throughout the year. Total housing starts grew 10.8% during 2015, while existing home sales and new home sales were up 6.5% and 14.6%, respectively.

Sparked by a slightly faster growing economy, the housing recovery is expected to continue in 2016. Although interest rates are likely to be higher, a more robust economy, healthy job creation and further moderation in lending standards should stimulate housing activity. Single-family starts should improve 11.5% and multifamily volume gains 6.3%. New and existing home sales should increase 14.6% and 4%, respectively.

Average and median home prices should rise 2%-2.5%.

Challenges remain, including the potential for higher interest rates, and continued restrictive credit qualification standards.

LIQUIDITY/DEBT

The company's homebuilding operations ended fiscal 2015 with $893.4 million in unrestricted cash and equivalents. Homebuilder debt totaled $5 billion as of Nov. 30, 2015, up from $4.7 billion at fiscal year-end 2014.

At Nov. 30, 2015, Lennar had a $1.6 billion unsecured revolving credit facility (including up to $500 million for letters of credit) that matures in June 2019. As of Nov. 30, 2015, there were no borrowings under the credit facility. Also, the company had $315 million of letter of credit facilities with different financial institutions.

Lennar's debt maturities are well-laddered, with 17.2% of its debt maturing through 2017.

Debt leverage (debt/EBITDA) was roughly 3.7x at the end of 2015 compared with 4.0x at the conclusion of 2014. EBITDA-to-interest expense rose from 4.3x during 2014 to 4.7x in 2015. Fitch expects further improvement in these credit metrics this year.

HOMEBUILDING

The company was the second largest homebuilder in 2014 and primarily focuses on entry-level and first-time move-up homebuyers. In 2015, approximately 25% of sales were to the first time buyer, half to first time move up customers and the balance was a mix of second time move up, luxury and active adult. The company builds in 17 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.

As the cycle matures, Lennar is pivoting to a lighter land position and plans to reduce the number of years of land owned. It will shorten the tail of new land buys to 3-4 years. The company will endeavor to utilize rolling options and deferred take downs with sellers and land developers. Lennar will sell non-core holdings of land.

Compared to its peers, Lennar has had above-average exposure to joint ventures (JVs) during this past housing cycle. Longer-dated land positions are controlled off balance sheet. Lennar has substantially reduced its number of JVs over the last nine years (from 270 at the peak in 2006 to 34 at year-end 2015, of which three had recourse debt, seven had non-recourse debt and 24 had no debt). As a consequence, the company has very sharply lowered its JV recourse debt exposure from $1.76 billion to $11 million as of Nov. 30, 2015. 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.

INVENTORY

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. Approximately $1.4 billion was expended on land and $1.1 billion on development in 2014. In 2015, the company spent about $1.38 billion on land and $1.15 billion on development activities. Fitch expects that total real estate spending in 2016 could be flat to slightly lower this year.

The company was less cash flow negative in the last two years - $788.5 million in 2014 and $419.6 million in 2015 - than in 2013 ($807.7 million). The company could be cash flow positive in 2016.

Fitch is comfortable with this real estate strategy given the company's cash position, debt maturity schedule, proven access to the capital markets and willingness to quickly put the brake on spending as conditions warrant.

ANCILLARY BUSINESSES

Lennar has financial services operations that provide mortgage financing, title and other insurance and closing services. Lennar has also diversified its real estate activities beyond traditional residential single-family construction to include commercial real estate investment management and financing (Rialto), multifamily construction and large scale master-planned communities (FivePoint Communities). During 2015, these segments generated roughly 10% of consolidated operating earnings (before corporate general and administrative expenses).

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Lennar include:

--Industry single-family housing starts improve 11.5%, while new and existing home sales grow 14.6% and 4%, respectively, in 2016;

--The company's debt/EBITDA approximates 3.0x (or lower) and interest coverage is above 6.0x by year-end 2016;

--Land and development spending is flat to slightly lower this year;

--The company maintains an adequate liquidity position (well above $500 million) with a combination of unrestricted cash and revolver availability.

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 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.

Fitch would consider taking positive rating action if the recovery in housing accelerates and Lennar shows steady improvement in credit metrics (such as debt-to-EBITDA leverage consistently less than 3x), while maintaining a healthy liquidity position (in excess of $1 billion in a combination of cash and revolver availability) and begins generating positive cash flow from operations starting in 2016 as it moderates its land and development spending.

Conversely, negative rating actions could occur if the recovery in housing dissipates and Lennar maintains an overly aggressive land and development spending program. This could lead to sharp declines in profitability, consistent and significant negative quarterly cash flow from operations, higher leverage and meaningfully diminished liquidity position (below $500 million).

FULL LIST OF RATINGS

Fitch currently rates Lennar Corp. as follows:

--Long-term IDR 'BB+';

--Senior unsecured debt 'BB+/RR4';

--Unsecured revolving credit facility 'BB+/RR4'.

The Rating Outlook is Positive.

In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The Recovery Rating of '4' for Lennar's unsecured debt supports a rating of 'BB+', and reflects average recovery prospects in a distressed scenario.

Date of relevant committee Aug. 19, 2015.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings
Primary Analyst
Robert Curran
Managing Director
+1-212-908-0515
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
or
Committee Chairperson
Jack Kranefuss
Senior Director
+1-212-908-0791
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Curran
Managing Director
+1-212-908-0515
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
or
Committee Chairperson
Jack Kranefuss
Senior Director
+1-212-908-0791
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com