Fitch Rates Pulte's Senior Notes Offerings 'BB+/RR4'; Outlook Positive

NEW YORK--()--Fitch Ratings has assigned a 'BB+'/RR4 rating to PulteGroup, Inc.'s (NYSE: PHM) offerings of $300 million of 4.25% senior notes due 2021 and $700 million of 5.50% senior notes due 2026. The Rating Outlook is Positive.

This issue will be ranked on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offering will be used to redeem or repay at maturity its 6.50% senior notes due May 1, 2016 ($465 million outstanding) and to use the remaining net proceeds for general corporate purposes, which may include share repurchases, repayment of other existing debt, and acquisition and development of land. A complete list of ratings follows this release.

KEY RATING DRIVERS

The current ratings and Positive Outlook reflect PHM's operating performance in 2014/2015 and current financial ratios (especially leverage and coverage) which compare well vs. its peers, its solid liquidity position and favorable prospects for the housing sector in 2016. Fitch believes that the housing recovery is firmly in place (although the rate of recovery remains well below historical levels and will likely continue to occur in fits and starts). The Outlook also takes into account the enhanced senior management team and the board's more shareholder-friendly strategy.

The rating for PHM reflects the company's broad geographic and product diversity, a long track record of adhering to a disciplined financial strategy and, somewhat more recently, an at times, aggressive growth strategy (via mergers and acquisitions). The merger with Centex in August 2009 further enhanced the company's broad geographic and product line diversity. Centex's significant presence in the first move-up and especially the entry-level categories complemented PHM's strength in both the move-up and active adult segment. PHM's Del Webb (active adult) segment is perhaps the best recognized brand name in the homebuilding business. The company also did a good job in reducing its inventory and generating positive operating cash flow during the severe housing downturn from 2007 through 2011 and since then.

PHM's future ratings and Outlook will be influenced by broad housing market trends as well as company-specific activity such as 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 and free cash flow trends and uses.

DEBT AND LIQUIDITY

The ratings and Outlook also take into account the company's successful execution of its debt repayment strategy following the merger with Centex in August 2009 and more recently. Subsequent to the merger the company repurchased $1.5 billion of senior notes through a tender offer. PHM also retired $898.5 million in debt in 2010, $323.9 million in 2011, $592.4 million in 2012, $462 million in 2013, $245.7 million in 2014 and $238.0 million in 2015. Remaining debt maturities are well laddered with $122.8 million scheduled to mature in October 2017 and $299.3 million due in 2032. As of Dec. 31, 2015, PHM had $754.2 million of unrestricted cash and equivalents and $2.08 billion of senior notes.

The reduced debt and growing profitability have enabled the company to improve its debt/EBITDA ratio from 14.3x at the end of 2010 to 1.9x at the end of 2015. During that same period, interest coverage improved to 8.3x from 0.9x.

As a cost saving measure and to provide increased operational flexibility, PHM voluntarily terminated its $250 million unsecured revolving credit facility effective March 30, 2011. Then on July 23, 2014, PHM entered into a senior unsecured RCF that matures on July 21, 2017. The facility provides for maximum borrowings of $500 million and contains an uncommitted accordion feature that could increase the size of the facility to $1 billion.

On Sept. 30, 2015, Pulte entered into a senior unsecured $500 million term loan agreement with an initial maturity date of Jan. 3, 2017, which can be extended at Pulte's option up to 12 months.

As is the case with other public homebuilders, PHM is using the liquidity accumulated over the past few years to maintain and where possible expand its land position and trying to acquire land at attractive prices.

In late July 2013, the board of directors reinstituted a quarterly dividend ($0.05 per share). The board had eliminated the $0.04 per share quarterly dividend in November 2008 to conserve cash. In October 2014, Pulte's board declared a 60% increase in its quarterly dividend to $0.08 per share. On Dec. 2, 2015, its board announced a further increase in its quarterly dividend to $0.09 per share.

In previous years, Pulte authorized and announced a share repurchase program. Pulte announced in October 2014 that its board approved an increase to its share repurchase authorization of $750 million and then a further increase of $300 million in December 2015. PHM repurchased 7.2 million shares (cost $118.1 million) in 2013, 12.9 million shares (cost $245.8 million) in 2014 and 21.2 million shares (cost $433.7 million) in 2015. The share repurchase authorization has $604.8 million remaining as of Dec. 31, 2015. Management has indicated that its first priority in allocating capital is to invest in its business, and then to return excess funds to shareholders in the form of dividends and share repurchases on a routine and systematic basis.

REAL ESTATE

As of Dec. 31, 2015, PHM controlled 138,079 lots, of which 69.5% are owned and the remaining 30.5% controlled through options. Total lots controlled represent an 8.1-year supply of total lots based on LTM closings, while the company owns 5.6-years of lots. The company's land position has historically been longer compared to other public homebuilders due to its Del Webb operations. PHM's active adult and certain master-planned communities can take from five to seven years or longer during their build-out.

During the first few years off the market bottom, the company was relatively subdued in committing to incremental land purchases because of its already sizeable land position. Of course, the acquisition of Centex in 2009 allowed the company to sharply increase its land position.

PHM spent $750 million on land and development in 2009, while Centex spent roughly $200 million. PHM spent $980 million on land and development in 2010 and $1.04 billion in 2011. The company paid out $924 million for land and development in 2012 - roughly 1/3 for land and 2/3 for development activities. PHM spent approximately $1.3 billion on real estate in 2013 with roughly 40% for land and 60% for development. For full year 2014 the company spent $1.8 billion on real estate: about 50% for land and 50% on development. This was approximately $200 million below the board's authorization level. In 2015, Pulte expended $1.2 billion for land and $1.1 billion on development. During 2016, Pulte has indicated that it plans to spend $1.6 billion on land, including the acquisition of certain homebuilding assets of John Wieland Homes and Neighborhoods. Development spending could be similar to land expenditures this year. (For perspective, PHM alone spent $4.6 billion on land and development in 2006.)

PHM continues to have meaningful development expenditures, partially due to its Del Webb active adult (retiree) operations, but largely related to its Pulte brand. Currently, fewer developed lots are available to buy; thus, more raw land, which will require development spending, is being acquired for its Pulte and Centex brands. This is also the case for other homebuilders.

Fitch is comfortable with PHM's land strategy given the company's cash 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. Additionally, Fitch expects management to be disciplined with the uses of its cash, refraining from significant share repurchases or one-time dividends to its stockholders that would meaningfully deplete its liquidity position.

THE INDUSTRY

Housing metrics increased in 2014 due to more robust economic growth during the last three quarters of the year (prompted by improved household net worth, industrial production and consumer spending), and consequently acceleration in job growth (as unemployment rates decreased to 6.2% for 2014 from an average of 7.4% in 2013), despite modestly higher interest rates, as well as more measured home price inflation. A combination of tax increases and spending cuts in 2013 shaved about 1.5pp off annual economic growth, according to the Congressional Budget Office. Many forecasters estimate the fiscal drag in 2014 was only about 0.25%.

Single-family starts in 2014 improved 4.8% to 648,000 as multifamily volume grew 15.6% to 355,000. Thus, total starts in 2014 were 1.003 million. New home sales were up a modest 1.6% to 436,000, while existing home volume was off 2.9% to 4.940 million largely due to fewer distressed homes for sale and limited inventory.

New home price inflation moderated in 2014, at least partially because of higher interest rates and buyer resistance. Average new home prices, as measured by the Census Bureau, rose 6.4% in 2014, while median home prices advanced approximately 5.4%.

Housing activity ratcheted up more sharply in 2015 with the support of a generally robust economy throughout the year. Considerably lower oil prices restrained inflation and left American consumers with more money to spend. The unemployment rate moved lower (5.0% in 2015). Credit standards steadily, moderately eased throughout 2015. Demographics were somewhat more of a positive catalyst. Single-family starts rose 10.3% to 715,000 as multifamily volume grew about 11.5% to 396,000. Total starts were just in excess of 1.1 million. New home sales increased 14.6% to 501,000. Existing home volume approximated 5.260 million, up 6.5%.

New home price inflation slimmed with higher interest rates and the mix of sales shifting more to first time homebuyer product. Average home prices increased 2.8%, while median prices rose 3.8%.

Sparked by a similarly growing economy the housing recovery is expected to continue in 2016. Although interest rates are likely to be higher, a robust economy, healthy job creation, demographics, pent-up demand, steep rent increases, and further moderation in lending standards should stimulate housing activity. More of those younger adults who have been living at home should find jobs and these 25- to 35-year-olds should provide some incremental elevation to the rental and starter home markets. First time buyers should be able to take advantage of less expensive mortgage insurance and lenders offering low downpayment programs. Housing starts should approximate 1.22 million with single-family volume of 0.80 million and multifamily starts of 0.42 million. New home sales should reach 574,000, up 14.6%. Existing home volume growth should again be mid-single digit (+4.0%).

Average and median home prices should rise 2.0%-2.5%.

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

KEY ASSUMPTIONS

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

--Industry single-family housing starts improve 11.5%, while new and existing home sales grow 14.6% and 4.0%, respectively, in 2016;

--PHM's revenues increase at a high-teens pace and homebuilding pretax margins erode 100-150 bps this year;

--The company's debt/EBITDA approaches 2x and interest coverage approximates 8x by year-end 2016;

--PHM spends close to $3.2 billion on land acquisitions and development activities this year;

--The company maintains a healthy liquidity position (above $1 billion with a combination of unrestricted cash and revolver availability).

RATING SENSITIVITIES

A positive rating action leading to a low investment grade rating may be considered if the recovery in housing appears likely for the next few years and meets or exceeds Fitch's current outlook, PHM at least maintains current credit metrics (particularly debt-to-EBITDA of 2x and interest coverage at or above 7x) and the company preserves a substantial liquidity position.

A negative rating action could be triggered if the industry recovery dissipates; PHM's 2016 and 2017 revenues drop meaningfully while the EBITDA margins decline below 12%; and PHM's liquidity position falls sharply, perhaps below $500 million, as the company pursues overly aggressive shareholder-friendly actions (e.g. dividends, share repurchase).

Fitch has the following ratings for PHM:

PulteGroup, Inc.:

--Long-term IDR 'BB+';

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

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

--Term loan 'BB+/RR4'.

Centex Corp.:

--Long-term IDR 'BB+';

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

The Rating Outlook is Positive.

RECOVERY RATING

In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The 'RR4' for PHM's senior unsecured debt supports a rating of 'BB+', the same as PHM's IDR, and reflects average recovery prospects in a distressed scenario.

Date of relevant committee March 6, 2015.

Additional information is available at '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, +1-212-908-0515
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA, +1-312-606-2311
Director
or
Committee Chairperson
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Curran, +1-212-908-0515
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA, +1-312-606-2311
Director
or
Committee Chairperson
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations, New York
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com