Jan 30 - Fitch Ratings has assigned a ‘BB’ rating to D.R. Horton, Inc.’s (NYSE: DHI) proposed offering of $400 million principal amount of senior notes due 2025 and $300 million of senior notes due 2020. These issues will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offerings will be used for general corporate purposes.
The Rating Outlook is Positive. A complete list of ratings follows this release.
The ratings for DHI reflect the company’s strong liquidity position, the successful execution of its business model, geographic and product line diversity and steady capital structure. Fitch expects further gains in industry housing metrics this year as the housing cycle continues to evolve. That being the case, there are still challenges facing the housing market that are likely to moderate the early stages of this recovery. Nevertheless, DHI has the financial flexibility to navigate through the sometimes challenging market conditions and continue to invest in land opportunities.
The Positive Outlook takes into account the improving industry outlook for 2013 and 2014 and also the company’s above average performance relative to its peers in certain financial, credit and operational categories during the past year.
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 standards.
DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt during much of the past six years. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.58 billion as of Dec. 31, 2011, a 71% reduction. More recently, DHI has been responding to the stronger housing market, expanding inventories and moderately increasing leverage. Homebuilding debt at the end of the fiscal 2013 first quarter was $2.42 billion. As of Dec. 31, 2012 debt/capitalization was 40.2%. (Debt/capitalization was 37.4% as of Dec. 31, 2011.) Net debt-capitalization was 33% at the end of the fiscal 2013 first quarter.
DHI’s earlier debt reduction was accomplished through debt repurchases, maturities and early redemptions. DHI has $172 million of senior notes maturing in May 2013. In 2014, $283.1 million of senior notes mature. Fitch expects that the company’s $500 million of 2% senior convertible notes will likely convert into common stock in 2014.
DHI has solid liquidity with unrestricted homebuilding cash of $546.4 million and marketable securities of $96.7 million as of Dec. 31, 2012. On Sept. 7, 2012, DHI entered into a new $125 million five-year unsecured revolving credit facility. In early November, the company announced that it had received additional lending commitments, increasing the capacity of the facility to $600 million. The facility has also been amended to include an uncommitted accordion feature which could increase the facility to $1 billion, subject to certain conditions and availability of additional bank commitments. The facility’s letter of credit sublimit is 50% of the revolving credit agreement, or $300 million.
In early December 2012, DHI declared a cash dividend of $0.15 per share. This dividend was in lieu of and accelerated the payment of all quarterly dividends that the company would have otherwise paid in calendar 2013.
DHI maintains an 8.9-year supply of lots (based on last 12 months deliveries), 66.5% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past six years as the company has written off substantial numbers of options. Fitch expects DHI to continue rebuilding its land position and increase its community count.
The primary focus will be optioning (or in some cases, purchasing for cash) or developing in small phases finished lots, wherein DHI can get a faster return of its capital. DHI’s cash flow from operations during fiscal 2012 (ending Sept. 30, 2012) was a negative $298.1 million. For all of fiscal 2013, Fitch expects DHI to be cash flow negative by more than $1 billion as the company almost doubles its land and development spending.
The ratings also reflect DHI’s relatively heavy speculative building activity (at times averaging 50-60% of total inventory and about 48% at Dec. 31, 2012). DHI has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand).
A key focus is on selling these homes either before construction is completed or certainly before a completed spec has aged more than a few months. This has resulted in consistently attractive margins. DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is generally more comfortable with the more moderate spec targets of 2004 and 2005, wherein spec inventory accounted for roughly 35-40% of homes under construction.
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
--DHI’s cash position.
Fitch would consider taking positive rating actions if the recovery in housing persists, or accelerates and DHI shows steady improvement in credit metrics following the debt offerings (such as debt leverage below 5x by FY end 2014), while maintaining a healthy liquidity position (in excess of $1 billion at FY end 2013 and 2014).
Conversely, negative rating actions could occur if the recovery in housing dissipates and DHI 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 $500 million).
Fitch currently rates DHI as follows:
--Long-term IDR at ‘BB’;
--Senior unsecured debt at ‘BB’.
The Outlook is Positive.