Dec 20 - Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Standard Pacific Corp. (NYSE: SPF) to ‘B’ from ‘B-'. Fitch has also revised SPF’s Rating Outlook to Positive from Stable. A complete list of rating actions follows at the end of this release.
The upgrade reflects SPF’s operating performance so far this year and its robust liquidity position. The rating is also supported by the company’s execution of its business model and geographic and product line diversity.
Risk factors include the cyclical nature of the homebuilding industry, SPF’s aggressive land strategy, and, although improving, still high leverage position.
The Positive Outlook takes into account the improving housing industry outlook for 2013 and also the above average performance relative to its peers in certain financial, credit and operational categories.
SPF is focused on growing its operations by investing in new communities, particularly in land-constrained markets. Following the significant reduction of its land supply during the 2006 -2009 periods, SPF began to increase its land holdings during 2010, 2011 and 2012. At Sept. 30, 2012, the company had 30,154 lots controlled, a 12.4% increase over the previous year and 57% growth over year-end 2009 land holdings. Its owned and optioned lot positions increased 19% and 18.6%, respectively, as compared to the third quarter 2011, while its joint venture lot position fell 55.6% year-over-year. Based on the latest twelve month closings, SPF controlled 9.7 years of land and owned roughly 7.7 years of land.
SPF increased its average active community count by 17% to 152 during 2011. The company ended the third quarter with 156 active selling communities, a 2.6% increase over year-end 2011 levels.
The company spent $437 million on land and development during 2011 compared with $336 million expended in 2010 and $158 million in 2009. SPF spent roughly $443 million through the first nine months of 2012 and expects total spending will be between $600 million and $700 million for the year. This is above the $400 million to $500 million the company had planned to spend earlier this year.
Fitch is comfortable with SPF’s aggressive land strategy given the company’s liquidity position. The company ended the third quarter of 2012 with $473.9 million of unrestricted cash and $200 million of availability under its unsecured revolving credit facility. Subsequent to the end of the third quarter, SPF amended its revolver, which increased the capacity from $210 million to $350 million and extended the maturity on $320 million of the commitments from February 2014 to October 2015. SPF’s debt maturities are well-laddered, with only $75 million of debt coming due through 2015 as of Sept. 30, 2012.
Fitch expects the company will be cash flow negative by about $250-300 million during 2012 and its cash position will decline to around $350 - 400 million at year-end 2012. Fitch anticipates the company’s cash outflow next year will be similar to 2012 levels and its cash position will decline further to between $75 million to $100 million at year-end 2013 as the company continues to invest in land and development. Fitch expects SPF in the intermediate term will maintain liquidity of at least $400 million from a combination of cash and revolver availability.
The company continues to have relatively heavy exposure in the state of California, generating approximately 55% of its year-to-date revenues and holding about 59% of the dollar value of its real estate inventory in this state. SPF also has operations in major metropolitan markets in Texas, Arizona, Nevada, Colorado, Florida and the Carolinas. The company has a substantial presence and ranks in the top 10 in most of the markets where it operates.
SPF constructs homes within a wide range of prices and sizes, with an emphasis on move-up buyers. During 2012, management estimates that 73% of its deliveries were directed to the move-up/luxury market, while 27% were to entry-level buyers. By comparison, 67% of its deliveries during 2010 were to move-up/luxury buyers, while 33% were directed to the entry-level market. The company’s strategy of focusing on the move-up segment has contributed to above average gross margins and EBITDA margins relative to its peers.
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 slow-growth economy with somewhat diminished distressed home sales competition, less competitive rental-cost alternatives, and new and existing home inventories at historically low levels, total housing starts should improve 27.6%, while new home sales increase 19.9% and existing home sales grow 9%. For 2013, total housing starts should increase 16.7%, while new home sales advance 22% and existing home sales improve roughly 7%.
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, cash position and especially free cash flow trends and uses.
The company’s ratings could be upgraded to ‘B+’ if the company performs in line with Fitch’s 2013 expectations, including revenue growth of about 35%, EBITDA margins of between 15%-16%, debt to EBITDA of around 6x and interest coverage in excess of 2x.
Negative rating actions could occur if the recovery in housing dissipates, resulting in revenues approaching 2011 levels, EBITDA margins of roughly 10%, interest coverage falling below 1x and liquidity declining below $200 million.
Fitch has upgraded the following ratings for SPF with a Positive Outlook:
--IDR to ‘B’ from ‘B-';
--Senior unsecured notes to ‘B/RR4’ from ‘B-/RR4’;
--Unsecured Revolving Credit Facility to ‘B/RR4’ from ‘B-/RR4’.
The ‘RR4’ Recovery Rating (RR) on the company’s unsecured debt indicates average recovery prospects for holders of these debt issues. Standard Pacific’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 debt holders. The Fitch applied a liquidation value analysis for these RRs.