NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to D.R. Horton, Inc.'s (NYSE: DHI) proposed offering of $400 million principal amount of senior notes due 2019. 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 and as growth capital.
The Rating Outlook is Positive. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings for DHI reflect the company's strong liquidity position, the successful execution of its business model, geographic and product line diversity and steady capital structure. Fitch expects further gains in industry housing metrics this year as the housing cycle continues to evolve. However, there are still challenges facing the housing market that are likely to moderate the early-to-intermediate stages of this recovery. Nevertheless, DHI has the financial flexibility to navigate through the sometimes challenging market conditions and continue to invest in land opportunities.
The Positive Outlook takes into account the favorable industry outlook for 2014 and DHI's above average performance relative to its peers in certain financial, credit and operational categories during the past two years. Fitch will closely monitor DHI's financial progress during the next few quarters to assess the appropriate rating.
Housing metrics all showed improvement in 2013. Preliminary data show that single-family housing starts increased 15.5% to 618,000. Existing home sales gained 9.2% to 5.09 million in 2013, while new home sales grew 16.6% to 428,000.
Average single-family new home prices (as measured by the Census Bureau), which dropped 1.8% in 2011, increased 8.7% in 2012 and rose 9.8% to $320,900 in 2013. Median home prices expanded 2.4% in 2011 and then grew 7.9% in 2012 and expanded 8.4% to $265,800 last year.
Housing metrics should increase in 2014 due to faster economic growth (prompted by improved household net worth, industrial production and consumer spending), and consequently some acceleration in job growth (as unemployment rates decrease to 6.9% for 2014 from an average of 7.5% in 2013), despite somewhat higher interest rates, as well as more measured home price inflation. A combination of tax increases and spending cuts in 2013 shaved about 1.5 percentage points off annual economic growth, according to the Congressional Budget Office. Many forecasters expect the fiscal drag in 2014 to be one-third that amount or less.
In any case, single-family starts in 2014 are projected to improve 20% as multifamily volume grows about 9%. Consequently, total starts in 2014 should top 1 million. New home sales are forecast to advance about 20%, while existing home volume increases 2%.
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.
Challenges (although somewhat muted) remain, including still relatively high levels of delinquencies, the potential for higher interest rates, and restrictive credit qualification standards.
DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt during much of the past six years. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.58 billion as of Dec. 31, 2011, a 71% reduction. More recently, DHI has been responding to the stronger housing market, expanding inventories and increasing leverage. Homebuilding debt at the end of the fiscal 2014 first quarter was $3.28 billion. As of Dec. 31, 2013, debt/capitalization was 43.8%. Net debt-capitalization was 37.1% at the end of the fiscal 2014 first quarter. On a pro forma basis (assuming $400 million of debt issuance and the repayment of $145.9 million of debt in January 2014), leverage as measured by debt to EBITDA is estimated to be about 3.9x for the latest 12 months (LTM) period ending Dec. 31, 2013.
DHI's earlier debt reduction was accomplished through debt repurchases, maturities and early redemptions. DHI repaid the remaining $145.9 million principal amount of its 6.125% senior notes on Jan. 15, 2014, its due date. In 2014, an additional $637.9 million of senior notes mature, including $500 million of 2% senior convertible notes. Fitch expects that the $500 million of senior convertible notes will likely convert into common stock this year. The company also has $157.7 million of senior notes coming due in February 2015.
DHI has solid liquidity with unrestricted homebuilding cash and equivalents of $801.1 million as of Dec. 31, 2013. On Sept. 7, 2012, DHI entered into a new $125 million five-year unsecured revolving credit facility. In early November 2012, the company announced that it had received additional lending commitments, increasing the capacity of the facility to $600 million. Currently, the facility size is $725 million with an uncommitted accordion feature that could increase the size of the facility to $1 billion, subject to certain conditions and availability of additional bank commitments. The facility also provides for the issuance of letters of credit. Letters of credit issued under the facility reduce available borrowing capacity and may total no more than $362.5 million in the aggregate. The maturity date of the facility is Sept. 7, 2018. At Dec. 31, 2013, there were no borrowings outstanding and $68.9 million of letters of credit issued under the revolving credit facility.
In early December 2012, DHI declared a cash dividend of $0.15 per share. This dividend was in lieu of and accelerated the payment of all quarterly dividends that the company would have otherwise paid in calendar 2013. In January 2014, DHI declared a quarterly cash dividend of $0.0375 per share.
DHI maintains a 6.9-year supply of lots (based on LTM deliveries), 72% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past six years as the company has written off substantial numbers of options and land owners are less inclined to use options. Fitch expects DHI to continue rebuilding its land position and increase its community count.
The primary focus will be optioning (or in some cases, purchasing for cash) or developing in small phases finished lots, wherein DHI can get a faster return of its capital. DHI's cash flow from operations during fiscal 2013 (ending Sept. 30, 2013) was a negative $1.23 billion. In fiscal 2014, Fitch expects DHI to be cash flow negative by $500 million-$600 million as the company continues to spend substantial amounts on land and development activities.
The ratings also reflect DHI's relatively heavy speculative building activity (at times averaging 50%-60% of total inventory and 55.4% at Dec. 31, 2013). DHI has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand).
A key focus is on selling these homes either before construction is completed or certainly before a completed spec has aged more than a few months. This has resulted in consistently attractive margins. DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is generally more comfortable with the more moderate spec targets of 2004 and 2005, wherein spec inventory accounted for roughly 35%-40% of homes under construction.
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;
--Free cash flow trends and uses; and
--DHI's cash position.
Fitch would consider taking positive rating actions if the recovery in housing persists, or accelerates and DHI shows steady improvement in credit metrics (such as debt to EBITDA leverage consistently at or below 4x), while maintaining a healthy liquidity position (in excess of $1 billion in a combination of unrestricted cash and revolver availability). If the current pace of improvement continues over the next six-to-nine months, an upgrade could be warranted.
Conversely, negative rating actions could occur if the recovery in housing dissipates and DHI 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 $500 million).
Fitch currently rates DHI as follows:
--Long-term Issuer Default Rating 'BB';
--Senior unsecured debt 'BB'.
The Rating Outlook is Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'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