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
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
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
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
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
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.