Jan 30 - Fitch Ratings has assigned a 'BB+' rating to Lennar Corporation's
(NYSE: LEN) proposed offering of a new issue of senior notes due 2018
and an additional amount of its 4.750% senior notes due 2022. These issues 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.
The Rating Outlook is Stable. A full list of ratings is provided at the end of
The ratings and Outlook for Lennar reflect the company's strong liquidity
position and improved prospects for the housing sector this year and in 2014.
The ratings also reflect Lennar's successful execution of its business model,
geographic and product line diversity, and much lessened joint venture exposure.
There are still challenges facing the housing market that are likely to moderate
the early stages of this recovery. Nevertheless, Lennar has the financial
flexibility to navigate through the sometimes challenging market conditions and
continue to invest in land opportunities.
Fitch's housing forecasts for 2012 were raised a number of times during the
course of the year but still reflected 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 and
existing home inventories at historically low levels, 2013 single-family housing
starts should improve about 18%, while new home sales increase approximately 22%
and existing home sales grow 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
Lennar has solid liquidity with unrestricted homebuilding cash of $1,147 million
as of Nov. 30, 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 Nov. 30, 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. There is also
an additional $200 million letter of credit facility with another financial
institution. The company's debt maturities are well-laddered, with about 23% of
its senior notes (as of Nov. 30, 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 Nov. 30, 2012). As a consequence, the company has
very sharply lowered its JV recourse debt exposure from $1.76 billion to $66.7
million ($49.9 million net of joint and several reimbursement agreements with
its partners) as of Nov. 30, 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 2012, Lennar purchased approximately $999
million of new land and spent roughly $302 million on development expenditures.
Fitch expects land and development spending for 2013 to be sharply higher than
in 2012. As a result, Fitch expects Lennar to be more than $500 million 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
During 2010, the company ramped up its investments in 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
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.
During the fourth quarter, Lennar finalized its last sales of the underlying
securities in the fund and made its final distributions to the partners,
including Lennar. On average the company had $61 million of its equity invested
in the fund and it has brought back all of that investment as well as profits
and fees totaling $112 million.
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. In December 2012, Lennar
completed the first closing of its second real estate fund with initial equity
commitments of approximately $260 million (including $100 million committed by
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
RENTAL ACTIVITIES AND LARGE MPCs
In addition to the homebuilding, financial services and Rialto operating
platforms, Lennar has been incubating a multi-family rental business strategy
(beginning in early 2011) as well as FivePoint Land Company which manages large,
complex master planned communities in the Western U.S. (including the former
Newhall Land and Farming Company).
The multi-family JV activities have a pipeline that exceeds $1 billion, and over
6,500 apartments. At Nov. 30, 2012, Lennar had approximately $30 million
invested in this business and expects that investment to rise to $100 million by
the end of fiscal 2013. The company's long term goal is to build a portfolio of
income producing apartment properties across the country.
GUIDELINES FOR FURTHER RATINGS ACTIONS
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
Positive rating actions may be considered if the recovery in housing is
maintained and is more robust than Fitch's current outlook, Lennar shows
continuous improvement in credit metrics (with leverage less than 3 times (x)
and interest coverage in excess of 5x), and maintains a healthy liquidity
Negative rating actions could occur if the recovery in housing dissipates and
Lennar maintains an overly aggressive land and development spending program.
This could lead to consistent and significant negative quarterly cash flow from
operations and meaningfully diminished liquidity position (below $700 million).
Fitch currently rates Lennar as follows:
--Issuer Default Rating 'BB+';
--Senior unsecured debt 'BB+'.
The Rating Outlook is Stable.