Nov 21 (The following statement was released by the rating agency)
Fitch Ratings has assigned a 'BB-/RR3' rating to
Meritage Homes Corporation's (NYSE: MTH), proposed offering of $100 million of
senior unsecured notes. The offering is an add-on to its existing 7.15% senior
unsecured notes due 2020. The issuance will be equal in right of payment with
all other senior unsecured debt. Meritage intends to use the proceeds of the
notes offering for general corporate purposes, including the acquisition and
development of land and home construction.
The Rating Outlook is Positive. A complete list of ratings follows at the end of
KEY RATING DRIVERS
The ratings and Outlook for MTH are influenced by the company's execution of its
business model, conservative land policies, geographic diversity and healthy
liquidity position. The Positive Outlook also takes into account Fitch's
expectation of further moderate improvement in the housing market in 2013 and
2014, share gains by MTH and hence volume outperformance relative to industry
trends as the market continues its shift to trade-up housing (Meritage's
strength) and much better profitability and sharply improved credit metrics.
MTH's sales are reasonably dispersed among its 15 metropolitan markets within
seven states. During 2012, the company ranked among the top 10 builders in such
markets as Dallas/Fort Worth, San Antonio and Austin, TX; Orlando, FL; Phoenix,
AZ; Riverside/San Bernardino, CA; Denver, CO; and San Francisco/Oakland/Fremont
and Sacramento, CA. The company also builds in the Central Valley, CA; Houston,
TX; Inland Empire, CA; Tucson, AZ; Tampa, FL; and Raleigh-Durham and Charlotte,
NC. MTH also announced its entry into the Nashville, Tennessee market with its
August 2013 acquisition of Phillips Builders. Currently, Fitch estimates 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
IMPROVING HOUSING MARKET
Housing metrics have all showed improvement so far in 2013. For the first eight
months of the year, single-family housing starts improved 19.3%, while new-home
sales increased 20.4%. Existing home sales improved 11.8% for the first nine
months of 2013. The most recent Freddie Mac 30-year interest rate was 4.35%, 104
bps above the all-time low of 3.31% set the week of Nov. 21, 2012. The NAR's
latest monthly existing home affordability index was 164.3, moderately below the
all-time high of 213.6.
Fitch's housing forecasts for 2013 assume a continued moderate rise off the
bottom of 2011. New-home inventories are well below the norm and affordability
is near record highs. In a slowly growing economy with still above-average
distressed home sales competition, less competitive rental cost alternatives and
low mortgage rates (on average), the housing recovery will be maintained this
year and in 2014.
Fitch's housing estimates for 2013 follow: Single-family starts are forecast to
grow 16.8% to 625,000, while multifamily starts expand about 20% to 295,000;
single-family new-home sales should grow approximately 20% to 439,000 as
existing home sales advance 8.5% to 5.05 million.
Average single-family new-home prices (as measured by the Census Bureau), which
dropped 1.8% in 2011, increased 8.7% in 2012. Median home prices expanded 2.4%
in 2011 and grew 7.9% in 2012. Average and median home prices should improve
approximately 8% and 7.2%, respectively, in 2013.
As Fitch noted in the past, the housing recovery will likely occur in fits and
HIGHER MORTGAGE RATES AND HOME PRICES
The most recent Freddie Mac average mortgage rate was 4.35%, up 19 bps
sequentially from the previous week and about 90 bps higher than the average
rate during the month of April 2013, a recent low point for mortgage rates.
While the current rates are still well below historical averages, the sharp
increase in rates and rising home prices are moderating affordability. In the
case of MTH, whose average home price is roughly $340,700, assuming a 20% down
payment, a 100 bps rise in current mortgage rates will increase principal and
interest payment by about $165 each month or a 12.2% impact.
A couple of August and September housing metrics showed some weakness following
the increase in interest rates during the past six months. The Pending Home
Sales Index declined 5.6% to 101.6 in September from 107.6 in August and is 1.2%
lower than the 102.8 recorded in September 2012. New home sales in August grew
7.9% on a seasonally-adjusted basis to 421,000, compared with 390,000 during the
previous month. The July 2013 new home sales were 14.1% lower relative to June
2013. Additionally, the August 2013 estimate is the second lowest
seasonally-adjusted sales level so far this year. While Fitch does not expect
the current higher mortgage rates to derail the housing recovery, a continued
sharp increase in rates could further slow it down.
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 September 30, 2013, only 29% 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
Total lots controlled, including those optioned, were 25,046 at Sept. 30, 2013.
This represents a 5-year supply of total lots controlled based on trailing
12-months deliveries. On the same basis, MTH's owned lots represent a supply of
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 $177.6 million and investments
and securities of $92.8 million at Sept. 30, 2013. The company's debt totaled
$798.3 million at the end of the first quarter.
MTH's debt maturities are well-laddered, with the next debt maturity on March
2018, when its 4.50% $175 million senior notes become due.
In July 2012, the company entered into a new $125 million unsecured revolving
credit facility maturing in 2015. The facility was amended during the second
quarter of 2013, which increased the commitment to $135 million and extended the
maturity to 2016. There were no outstandings under the revolver as of Sept. 30,
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 $75 million - $125 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 $225 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.
A ratings upgrade may be considered if the recovery in housing continues at a
healthy pace 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;
2014 revenues drop high-teens or greater while the pretax loss is 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
Fitch rates the following with a Positive Outlook:
--Long-term Issuer Default Rating (IDR) 'B+';
--Senior unsecured debt 'BB-/RR3'.
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. Fitch applied a liquidation value analysis for the RR.