TEXT-Fitch rates Meritage's proposed $150MM sr. unsecured notes offering 'BB-/RR3'
Feb 27 - Fitch Ratings has assigned a 'BB-/RR3' rating to Meritage Homes Corporation's (NYSE: MTH) proposed offering of $150 million principal amount of senior unsecured notes due 2018. This issue will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offering will be used to repurchase or redeem all of the company's existing 7.731% senior subordinated notes due 2017, pay related premiums, fees and expenses and for general corporate purposes.
The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings and Outlook for MTH are influenced by the company's execution of its business model, conservative land policies, geographic and product line diversity, acquisitive orientation, healthy liquidity position and the improving industry outlook for 2013 and 2014.
MTH's sales are reasonably dispersed among its 15 metropolitan markets within seven states. The company ranks among the top 10 builders in such markets as Houston, Dallas/Fort Worth, San Antonio and Austin, TX; Orlando and Tampa, FL; Phoenix, AZ; Riverside/San Bernardino, CA; Denver, CO; and Sacramento, CA. The company also builds in the East Bay/Central Valley, CA; Las Vegas, NV; Inland Empire, CA; Tucson, AZ; and Raleigh-Durham, NC. MTH also announced its entry into the Charlotte, North Carolina market last year and reported its first orders in that market during the fourth quarter of 2012. Currently, about 65% -70% of MTH's home deliveries are to first- and second-time trade-up buyers, 30% - 35% to entry-level buyers, less than 5% are to luxury and active adult (retiree) homebuyers.
IMPROVING HOUSING MARKET
Fitch's housing forecasts for 2013 assume a modest rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new and existing home inventories at historically low levels, 2013 total housing starts should improve about 18.6% to 925,000, while new home sales increase approximately 22% and existing home sales grow 7.7%.
However, as Fitch has noted in the past, recovery will likely occur in fits and starts.
Challenges (although somewhat muted) remain, including continued relatively high levels of delinquencies, potential of short-term acceleration in foreclosures, and consequent meaningful distressed sales, and restrictive credit qualification standards.
MTH employs conservative land and construction strategies. The company typically options or purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate.
Under normal circumstances MTH extensively uses lot options, and that is expected to be the future strategy in markets where it is able to do so. The use of non-specific performance rolling options gives the company the ability to renegotiate price/terms or void the option, which limits downside risk in market downturns and provides the opportunity to hold land with minimal investment.
However, as of Dec. 31, 2012, only 16% of MTH's lots were controlled through options - a much lower than typical percentage due to considerable option abandonments and write-offs in recent years. Additionally, there are currently fewer opportunities to option lots and, in certain cases, the returns for purchasing lots outright are far better than optioning lots from third parties.
Total lots controlled, including those optioned, were 20,817 at Dec. 31, 2012. This represents a 4.9-year supply of total lots controlled based on trailing 12-months deliveries. On the same basis, MTH's owned lots represent a supply of 4.1 years.
MTH successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash and pay down its debt as it pared down inventory. The company had unrestricted cash of $170.5 million and investments and securities of $86.1 million at Dec. 31, 2012. The company's debt totaled $722.8 million at the end of the year. On a proforma basis assuming that the company redeems its $100 million of senior subordinated notes due 2017, MTH will have no major debt maturities until 2018, when its proposed offering of $150 million senior notes become due.
In July 2012, the company entered into a new $125 million unsecured revolving credit facility due 2015. There were no oustandings under the revolver at the end of 2012.
MTH generated negative cash flow from operations during the past two years as the company started to rebuild its land position. The company had negative cash flow of $220.5 million during 2012 after spending $480 million on land and development during the year. Fitch expects the company to moderately increase its land and development spending during 2013, resulting in negative cash flow of about $150 million-$200 million this year.
Fitch is comfortable with this strategy given the company's liquidity position and debt maturity schedule. Fitch expects MTH over the next few years will maintain liquidity (consisting of cash and investments and the revolving credit facility) of at least $200 million - $250 million, a level which Fitch believes is appropriate given the challenges still facing the industry.
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
--MTH's cash position.
Positive rating actions may be considered if the recovery in housing is better than Fitch's current outlook and shows durability; MTH shows sustained improvement in credit metrics (such as homebuilding debt to EBITDA consistently below 5x); and the company continues to maintain a healthy liquidity position (above $250 million).
A negative rating action could be triggered if the industry recovery dissipates; 2013 revenues drop high-single digits while the pretax loss is significantly higher than 2011 levels; and MTH's liquidity position falls sharply, perhaps below $200 million as the company maintains an overly aggressive land and development spending program.
Fitch currently rates MTH as follows with a Stable Outlook:
--Long-term Issuer Default Rating (IDR) 'B+';
--Senior unsecured debt 'BB-/RR3';
--Senior subordinated debt 'B-/RR6'.
The Recovery Rating (RR) of 'RR3' on the company's senior unsecured debt indicates good recovery prospects for holders of these debt issues. MTH'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 debtholders. The 'RR6' on MTH's senior subordinated debt indicates poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these RRs.
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