Fitch Rates D.R. Horton's Proposed $700MM Sr. Notes Offering 'BB'
NEW YORK -- January 30, 2013
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
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
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
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.
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;
--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.
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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Fitch, Inc., One State Street Plaza, New York, NY 10004
Robert Rulla, CPA
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