Oct 18 - Fitch Ratings has assigned a 'BB+' rating to Lennar Corporation's
(NYSE: LEN) proposed offering of $350 million principal amount of
senior notes due November 2022. This issue will be ranked on a pari passu basis
with all other senior unsecured debt. The notes will be guaranteed by some of
Lennar's subsidiaries, but those guarantees may be suspended or released under
certain circumstances. Net proceeds from the notes offering will be primarily
used for working capital and general corporate purposes, which may include the
repayment or repurchase of some of its outstanding senior notes or other
indebtedness. A full list of ratings is provided at the end of this release.
The ratings and Outlook for Lennar reflect the company's strong liquidity
position and improved prospects for the housing sector this year and in 2013.
The ratings also reflect Lennar's successful execution of its business model,
geographic and product line diversity, much lessened joint venture exposure, and
the still challenging U.S. housing environment.
So far this year, housing metrics have been steadily growing on a year-over-year
(yoy) basis. The yoy gains for single-family starts and new home sales have been
sustaining the momentum of earlier this year. And most months' seasonally
adjusted statistics for single-family starts, new homes, and existing home sales
have also been advancing. Builders' confidence has surged. Investors are
enthused. However, as Fitch has noted in the past, recovery will likely occur in
fits and starts.
Fitch's housing forecasts for 2012 have been raised a few times this year, but
still assume a below-trend line cyclical 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 home inventories at historically
low levels, single-family housing starts should improve about 19%, while new
home sales increase approximately 19.5% and existing home sales grow 8.5%.
Further moderate improvement is forecast for 2013.
Lennar has solid liquidity with unrestricted homebuilding cash of $692 million
as of Aug. 31, 2012. The company also has an unsecured revolving credit facility
of $500 million that expires May 2015. The credit facility may be increased to
$525 million, subject to additional commitments. As of Aug. 31, 2012, the
company had a $150 million letter of credit and reimbursement agreement with
certain financial institutions, which may be increased to $200 million, and also
another $50 million letter of credit and reimbursement agreement with certain
financial institutions that had a $50 million accordion feature. The company's
debt maturities are well-laddered, with about 25.6% of its senior notes (as of
Aug. 31, 2012) maturing through 2015.
The company was the third largest homebuilder in 2011 and primarily focuses on
entry-level and first-time move-up homebuyers. The company builds in 16 states
with particular focus on markets in Florida, Texas and California. Lennar's
significant ranking (within the top five or top 10) in many of its markets, its
largely presale operating strategy, and a return on capital focus provide the
framework to soften the impact on margins from declining market conditions.
Fitch notes that in the past, acquisitions (in particular, strategic
acquisitions) have played a significant role in Lennar's operating strategy.
Compared to its peers Lennar had above-average exposure to joint ventures (JVs)
during this past housing cycle. Longer-dated land positions are controlled off
balance sheet. The company's equity interests in its partnerships generally
ranged from 10% to 50%. These JVs have a substantial business purpose and are
governed by Lennar's conservative operating principles. They allow Lennar to
strategically acquire land while mitigating land risks and reduce the supply of
land owned by the company. They help Lennar to match financing to asset life.
JVs facilitate just-in-time inventory management. Nonetheless, Lennar has been
substantially reducing its number of JVs over the last few years (from 270 at
the peak in 2006 to 36 as of Aug. 31, 2012). As a consequence, the company has
very sharply lowered its JV recourse debt exposure from $1.76 billion to $66.8
million ($48.2 million net of joint and several reimbursement agreements with
its partners) as of Aug. 31, 2012. In the future, management will still be
involved with partnerships and JVs, but there will be fewer of them and they
will be larger, on average, than in the past.
The company did a good job in reducing its inventory exposure (especially early
in the correction) and generating positive operating cash flow. In 2010, the
company started to rebuild its lot position and increased land and development
spending. Lennar spent about $600 million on new land purchases during 2011 and
expended about $225 million on land development during the year. This compares
to roughly $475 million of combined land and development spending during 2009
and about $704 million in 2010. During the first three quarters of 2012, Lennar
purchased approximately $757 million of new land and spent roughly $223 million
on development expenditures. Fitch expects land and development spending for
2012 to be 50% or more higher than in 2011. As a result, Fitch expects Lennar to
be moderately cash flow negative this year. Fitch is comfortable with this
strategy given the company's cash position, debt maturity schedule and proven
access to the capital markets.
During 2010 the company ramped up its investments in its newest segment, Rialto
Investments. More recently it has been harvesting the by-products of its
efforts. This segment provides advisory services, due-diligence, workout
strategies, ongoing asset management services, and acquires and monetizes
distressed loans and securities portfolios. (Management has considerable
expertise in this highly specialized business.)
In February 2010, the company acquired indirectly 40% managing member equity
interests in two limited liability companies in partnership with the FDIC, for
approximately $243 million (net of transaction costs and a $22 million working
capital reserve). Lennar had also invested $69 million in a fund formed under
the Federal government's Public-Private Investment Program (PPIP), which was
focused on acquiring securities backed by real estate loans. During the three
months ended Aug. 31, 2012, the AB PPIP fund started unwinding its operations
and as a result the company received $71.5 million in distributions. As of the
end of August, the carrying value of Lennar's investment was $12.5 million.
Monetization of the remaining securities in the AB PPIP fund is being finalized
and liquidating distributions are expected during the fourth quarter of 2012.
On Sept. 30, 2010, Rialto completed the acquisitions of approximately $740
million of distressed real estate assets, in separate transactions, from three
financial institutions. The company paid $310 million for these assets, of which
$124 million was funded by a five-year senior unsecured note provided by one of
the selling financial institutions. Rialto Investments had $594.8 million of
debt, of which $111 million is recourse to Lennar. Rialto provides Lennar with
ancillary income as well as a source of land purchases (either directly or
leveraging Rialto's relationship with owners of distressed assets). Fitch views
this operation as strategically material to the company's operation,
particularly as housing activity remains at relatively low levels.
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 the company's cash
position. Negative rating actions could occur if the early stage of the housing
recovery is not sustained and the company steps up its land and development
spending prematurely, leading to consistent and significant negative quarterly
cash flow from operations and a meaningfully diminished liquidity position below
$700 million. Positive rating actions may be considered if the recovery in
housing is maintained and is much better than Fitch's current outlook, Lennar
shows continuous improvement in credit metrics, and maintains a healthy
Fitch currently rates Lennar as follows:
--Issuer Default Rating at 'BB+';
--Senior unsecured debt at 'BB+'.
The Rating Outlook is Stable.