Jan 7 - Fitch Ratings has assigned a 'BBB-' rating to M.D.C. Holdings,
Inc.'s (NYSE: MDC) proposed offering of $250 million principal amount of
senior unsecured notes due 2043. The new issue will be equal in right of payment
with all other senior unsecured debt. Proceeds from the notes issuance will be
used for general corporate purposes. The Rating Outlook is Stable. A complete
list of ratings follows at the end of this release.
MDC's ratings are based on the company's execution of its business model in the
current moderately recovering housing environment, cautious land policies and
solid liquidity. During the past cycle the company noticeably improved its
capital structure, pursued conservative capitalization policies, and positioned
itself to withstand the recently concluded sharp, long-lasting housing
correction. Significant insider ownership of 26% aligns management's interests
with the long-term financial health of MDC.
MDC underperformed relative to other low investment-grade industrial companies
in recent years in an admittedly very harsh housing environment and trailed its
homebuilding peers for much of 2011 in certain metrics. However, the company has
come up with an effective strategy to close its relative performance gap and
move to consistent profitability. Its financial and operating execution during
the past four quarters indicates clear progress in meeting its expense
containment and profitability objectives.
The Stable Outlook takes into account the improving housing outlook for 2013.
However, the industry growth rate this year reflects 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%.
The company employs conservative land and construction strategies. MDC's
priority is to acquire finished lots using rolling options, finished lots in
phases for cash or, if the potential returns justify the risk, land for
development. MDC does not typically buy more than a three-year supply of land in
any market and when it acquires lots, the company currently focuses on land that
it can start building on within a short time. The long-term goal is to maintain
a two- to three-year supply of land, increase land under option, and reduce land
owned. At the end of the September 2012 quarter, MDC controlled 10,428 lots, a
6% decrease from the year-ago period. Approximately 86% of the total lots are
owned with the remaining 14% controlled through options. This represents a
3.1-year supply of total lots controlled and a 2.6-year supply of owned land
based on trailing 12-month deliveries.
The company's policy of, whenever possible, purchasing predominantly finished
lots and lots available for immediate development enhances balance sheet
liquidity, which has been reflected in solid inventory turnover averaging 1.4x
over the 2002 to 2011 period.
MDC successfully managed its balance sheet during the severe housing downturn,
allowing the company to accumulate cash as it pared down its inventory. As of
Sept. 30, 2012, MDC had homebuilding unrestricted cash of $235.3 million and
marketable securities totaling $503.8 million compared to total debt of $744.6
MDC has been re-building its land position, supported by its strong liquidity.
MDC spent approximately $227 million on land and development in 2009. The
company purchased about $380 million of land and expended $40 million on land
development in 2010, and $280 million on land and development in 2011. Fitch
estimates that MDC spent about $350 million on land and development activities
in 2012 and could potentially invest as much as $550 million in 2013. The
increased land acquisition activity is consistent with the acceleration in home
deliveries and net home order activity, which increased roughly 28% and 47%,
respectively, through the first nine months of 2012.
MDC had negative cash flow from operations ($50 million) for the latest 12
months ended Sept. 30, 2012 as the company continued with reasonably substantial
land acquisition activities. For all of 2012, Fitch expects the company to be
cash flow negative by $75 million-$100 million. Fitch expects MDC will continue
to be cash flow negative by roughly $100 million-$150 million in 2013 as the
company builds its inventory.
Fitch is comfortable with MDC's growth strategy given the company's cash
position, existing land supply, debt maturity schedule and proven access to the
capital markets. Fitch expects management to pull back on its land spending if
market conditions deteriorate from current levels. Additionally, management is
expected to be disciplined with the uses of its cash, refraining from
significant share repurchases or one-time dividends to its stockholders that
would meaningfully deplete its liquidity position. In December 2012, MDC
declared a dividend of $1.00 per share to accelerate payment of calendar-year
2013 dividends. This dividend is in lieu of declaring and paying regular
quarterly dividends in 2013.
Effective June 30, 2010, MDC voluntarily terminated its $50 million revolving
credit facility. Consistent with Fitch's comment on certain homebuilders'
termination and reduction of revolving credit facilities, in the absence of a
revolving credit line a consistently higher level of cash and equivalents than
was typical should be maintained on the balance sheet, especially in these still
uncertain times. As the housing market continues its recovery, Fitch expects MDC
will establish a revolving credit facility to enhance its liquidity position.
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 and especially free cash flow trends and uses, and the
company's cash position.
MDC's ratings are constrained in the intermediate term because of relatively
high leverage metrics. However, positive rating action may be considered if the
recovery in housing is significantly stronger than the agency's current outlook,
if the company's operating and credit metrics are well above Fitch's
expectations for 2013 and 2014, and liquidity is largely maintained. In
particular, debt leverage would need to approach 2 times (x) and Funds from
operations (FFO) interest coverage would need to exceed 6x in order to take
positive rating actions.
A negative rating action could be triggered if the industry recovery dissipates;
MDC's 2013 revenues drop by the mid-teens while the pretax loss approaches
levels of 2010 and 2011; and MDC's liquidity position falls sharply, perhaps
below $500 million.
Fitch currently rates MDC as follows with a Stable Outlook:
--Issuer Default Rating 'BBB-';
--Senior unsecured debt 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers