Fitch Rates Lennar's Proposed $350MM Senior Notes 'BB+'
NEW YORK -- October 18, 2012
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
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
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 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
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 liquidity position.
Fitch currently rates Lennar as follows:
--Issuer Default Rating at 'BB+';
--Senior unsecured debt at 'BB+'.
The Rating Outlook is Stable.
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
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Robert Curran, +1-212-908-0515
One State Street Plaza
New York, NY 10004
Robert Rulla, CPA, +1-312-606-2311
Craig Fraser, +1-212-908-0310
Brian Bertsch, New York, +1 212-908-0549
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