CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Standard Pacific Corp. (NYSE: SPF), 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 for SPF is influenced by the company's execution of its business strategy in the current moderately recovering housing environment, land policies, and geographic, price point and product line diversity. The company's rating is also supported by the company's adequate liquidity position and improving operating and credit metrics. Risk factors include the cyclical nature of the homebuilding industry and SPF's somewhat aggressive land strategy.
The Stable Outlook takes into account the cyclically improving housing outlook for 2015.
New home metrics should increase slightly in 2014 due to moderate economic growth during the last three quarters of the year (prompted by improved household net worth, industrial production and consumer spending), and consequently some acceleration in job growth (as unemployment rates decrease to 6.2% for 2014 from an average of 7.4% in 2013).
Single-family starts in 2014 are projected to improve 3.9% to 642,000 while multifamily volume grows 17.6% to 361,000. Thus, total starts this year should be just above 1 million. New home sales are forecast to edge up almost 1.5% to 436,000, while existing home volume is likely to decline 3.2% to 4.927 million due to fewer distressed homes for sale and limited inventory. New home price inflation should moderate in 2014. 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 (averaging 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 about 18% to 757,000 and multifamily volume expands about 7% to 386,000. Total starts would be in excess of 1.1 million. New home sales are projected to increase 18% to 515,000. Existing home volume is expected to approximate 5.138 million, up 4.3%.
SPF's HOMEBUILDING OPERATIONS
SPF is geographically diversified with 179 active communities (as of Sept. 30, 2014) in 25 markets across 7 states. During 2013, management estimates that 73% of its deliveries were directed to the move-up/luxury market, while 27% were to entry-level buyers. By comparison, 67% of its deliveries during 2010 were to move-up/luxury buyers, while 33% were directed to the entry-level market. Management is targeting a community mix of 70% move-up, 15% luxury and 15% entry level and active adult.
The company has some concentration in the state of California, which represented about 47.7% of Sept. 30, 2014 YTD revenues, 64.4% of YTD homebuilding pre-tax income and about 43.7% of the dollar value of its real estate inventory. It is important to note that California is consistently among the top 3 states in home production within the U.S. and has numerous distinct sub-markets which do not typically perform in unison. California was the first big state market to enter the past downturn and is one of the first major states to establish itself in the recovery.
In addition, the company also has an established track record in the state of California and ranks among the top builders in certain of its submarkets. According to Builder Magazine, during 2013, the company ranked among the top 5 builders in Los Angeles/Long Beach/Sta. Ana, Riverside/San Bernardino, Sacramento, San Diego and San Francisco/Oakland/Fremont, CA markets. Furthermore, the company also ranked among the top 10 builders in markets such as Austin/Round Rock/San Marcos, TX, Miami/Ft. Lauderdale, Jacksonville and Tampa, FL markets, Denver/Aurora, CO and Charlotte, Raleigh and Durham/Chapel Hill, NC markets.
CONTINUED IMPROVEMENT IN FINANCIAL RESULTS
SPF reported stronger revenues so far this year. Homebuilding revenues increased 26.7% for the first nine months of 2014 as home deliveries grew 6.8% and the average sales price advanced 18.3% compared with the same period last year. The homebuilding gross margin (including interest and excluding impairment charges) also improved during the 2014 YTD period, growing 290 basis points (bps) to 26.3% compared with 23.4% during the first nine months of 2013.
New home orders have been weak so far in 2014. New home orders fell 0.8% for the first nine months of the year, although orders for the third quarter of 2014 were 4% higher year-over-year (YOY) as the company's average community count increased 10% compared with the third quarter of 2013. SPF ended the 2014 third quarter with 2,208 homes in backlog (up 2% YOY) with a value of $1.126 billion (up 16.8% YOY).
Fitch expects SPF's home deliveries in 2015 will approximate Fitch's forecast of a mid-teens growth in total housing starts.
Going forward, margins may come under pressure as labor and materials costs continue to trend higher. Additionally, there has been some slight uptick in selling incentives during the past quarter. According to SPF, selling incentives on new home orders increased 60 bps sequentially to 3.3% of the home sales price during 3Q'14 and is up 30 bps vs. 3Q'13. Selling incentives on homes delivered during 3Q'14 were 3.2%, flat compared with 2Q'14 and 20 bps higher than 3Q'13. Lastly, the gross margin of homes currently in backlog is 25.1%, 160 bps below the gross margin of homes in backlog at the end of 3Q'13.
Debt to EBITDA for the latest 12 months (LTM) ending Sept. 30, 2014 was 3.9x compared with 4.9x at the end of 2013 and 8.2x at the end of 2012. EBITDA to interest coverage was 3.1x for the Sept. 30, 2014 LTM period compared with 2.7x at year-end 2013 and 1.3x at the conclusion of 2012.
Subsequent to the end of the third quarter, SPF issued $300 million of 5.875% senior notes due 2024. On a pro forma basis, debt to EBITDA for the LTM period ending Sept. 30, 2014 was 4.6x. Fitch expects leverage will decline below 4.5x at the end of 2014 and will approach 4.0x at the conclusion of 2015.
The company's liquidity position has weakened somewhat relative to the end of 2013 as the company continues to increase land and development spending. As of Sept. 30, 2014, SPF had unrestricted cash of $15.3 million and no borrowings under its $450 million revolving credit facility that matures in July 2018. By comparison, the company had $355.5 million of unrestricted cash and no borrowings under its $470 million credit facility as of Dec. 31, 2013. Fitch expects SPF will have continued access to its revolver as the company currently has sufficient room under the financial covenants of the credit facility.
The recently issued $300 million of senior notes enhances the company's liquidity position. Fitch expects SPF will have liquidity of at least $450 million - $500 million (unrestricted cash plus revolver availability) during the next 12 months.
The company's debt maturities are well-laddered, with no major debt maturities until 2016, when $280.0 million of senior notes become due.
SPF is focused on growing its operations by investing in new communities, particularly in land-constrained markets. Total lots controlled increased 1.9% YOY and 1% compared with the previous quarter. As of Sept. 30, 2014, the company controlled 36,307 lots, of which 79.7% were owned and the remaining lots controlled through options and JV partnerships. Based on LTM closings, SPF controlled 7.5 years of land and owned roughly 6.0 years of land.
The company spent $687 million on land and development ($414 million for land and $273 million for development) during the first nine months of 2014 compared with $592 million ($377 million for land and $215 million for development) expended during the same period in 2013. SPF expects total land and development spending will be approximately $1 billion during 2014 and is targeting between $800 million and $1.2 billion during 2015. This compares with $808 million spent during 2013 ($494 million for land and $314 million for development), $711 million during 2012, $437 million during 2011, $396 million in 2010 and $158 million during 2009.
Fitch is relatively comfortable with this strategy given the company's adequate liquidity position, well-laddered debt maturity schedule and management's demonstrated ability to manage its spending. Fitch expects management will pull back on spending if the recovery in housing stalls or dissipates.
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 and especially free cash flow trends and uses, and the company's liquidity position.
Positive rating actions may be considered in the next 6-12 months if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, SPF shows continuous and sustained improvement in credit metrics (particularly debt-to-EBITDA approaching 4x and interest coverage exceeding 4x), and preserves a healthy liquidity position.
A negative rating action could be triggered if the industry recovery dissipates; SPF's 2015 revenues drop high-teens while the EBITDA margins decline below 15%; leverage exceeds 8x and SPF's liquidity position falls sharply, perhaps below $200 million.
Fitch has affirmed the following ratings with a Stable Outlook:
--Long-term Issuer Default Rating (IDR) at 'B+';
--Senior unsecured notes at 'B+/RR4';
--Unsecured revolving credit facility at 'B+/RR4'.
The 'RR4' Recovery Rating (RR) on the company's unsecured debt indicates average recovery prospects for holders of these debt issues. Standard Pacific'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 debt holders. Fitch applied a going concern valuation analysis for these RRs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage