TEXT-Fitch revises D.R. Horton outlook to positive
June 27 - Fitch Ratings has affirmed its ratings for D.R. Horton, Inc. (NYSE: DHI), including the company's long-term IDR at 'BB'. Fitch has also revised DHI's Rating Outlook to Positive from Stable. A complete list of ratings follows this release. 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 better prospects for the housing industry this year. That being the case, there are still challenges facing the housing market that are likely to meaningfully moderate the early stages of this recovery. Nevertheless, DHI has the financial flexibility to navigate through the still challenging market conditions and continue to selectively and prudently invest in land opportunities. Builder and investor enthusiasm have for the most part surged so far in 2012. However, housing metrics have not entirely kept pace. Year-over-year comparisons have been solidly positive on a consistent basis. However, month-to-month the statistics (single-family starts, new home and existing home sales) have been erratic and, at times, below expectations. However, these macro numbers in May were generally positive: single-family starts (+3.2%), new home sales (+7.6%) and existing home sales (-1.5%). Home prices have also been more encouraging of late, turning positive for some series: FHFA +1.8% March, CoreLogic +2.2% April (excluding distressed +2.6% April), Lender Processing Services (LPS) +0.9% March, and Case-Shiller's 20-city price index (+1.3%) in April. Also, in any case, for the large public homebuilders spring has so far been a resounding success. As Fitch noted in the past, the housing recovery will likely occur in fits and starts. Fitch has raised its housing forecasts for 2012 since the beginning of the year. However, the forecast still assumes a relatively modest rise off a very low bottom. Fitch forecasts single-family housing starts to increase about 12%, with single-family new home sales to expand approximately 10%. DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt over the past few years. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.94 billion currently (including $350 million of 4.75% senior notes due 2017 issued in April 2012), a 65% reduction. Pro forma debt-capitalization is 41.8%. Net debt-capitalization is 26.6%. DHI has lowered its homebuilding debt levels meaningfully in each of the last three fiscal years (as shown below): --By $336.3 million in fiscal 2009; --By $991.3 million in fiscal 2010;and --By $497.2 million in fiscal 2011. This was accomplished through debt repurchases, maturities and early redemptions. Through the first six months of fiscal 2012 (ending March 31, 2012), DHI has repurchased an additional $10.8 million of senior notes. DHI has $172 million of senior notes maturing in May 2013. DHI's next major debt maturity is in January 2014, when $145 million of senior notes mature. DHI currently has solid liquidity with unrestricted homebuilding cash of $662.2 million and marketable securities of $299.1 million as of March 31, 2012. DHI maintains a 6.8-year supply of lots (based on last 12 months deliveries), 71.3% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past five years as the company has written off substantial numbers of 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) finished lots, wherein DHI can get a faster return of its capital. DHI's cash flow from operations during the LTM period ending March 31, 2012 was a negative $46.6 million. For all of fiscal 2012, Fitch expects DHI to be cash flow negative. The ratings also reflect DHI's relatively heavy speculative building activity (at times averaging 50-60% of total inventory and 50% at March 31, 2012). DHIhas 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; --Debt levels; --Free cash flow trends and uses; and --DHI's cash position. Negative rating actions could occur if the recovery in housing does not continue and DHI prematurely and aggressively steps up its land and development spending. This could lead to consistent and significant negative quarterly cash flow from operations and diminished liquidity position. Conversely, Fitch may consider taking positive rating actions if the recovery in housing persists, or accelerates and is significantly better than Fitch's current outlook. Fitch may consider positive rating action if the housing recovery persists and DHI shows continuous improvement in credit metrics while maintaining a healthy liquidity position. Fitch has affirmed the following ratings for DHI and revised the Rating Outlook to Positive: --Long-term IDR at 'BB'; --Senior unsecured debt at 'BB'.
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