Fitch Revises Meritage's Outlook To Positive; Affirms IDR at 'B+'
NEW YORK -- May 10, 2013
Fitch Ratings has affirmed the ratings for Meritage Homes Corporation (NYSE:
MTH), including the company's long-term IDR at 'B+'. Fitch has also revised
MTH's Rating Outlook to Positive from Stable.
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings and Outlook for MTH are influenced by the company's execution of
its business model, conservative land policies, geographic diversity and
healthy liquidity position. The Positive Outlook also takes into account our
expectation of further moderate improvement in the housing market in 2013 and
2014, share gains by MTH and hence volume outperformance relative to industry
trends as the market continues its shift to trade-up housing (Meritage's
strength) and much better profitability and sharply improved credit metrics.
MTH's sales are reasonably dispersed among its 15 metropolitan markets within
seven states. The company ranks among the top 10 builders in such markets as
Houston, Dallas/Fort Worth, San Antonio and Austin, TX; Orlando and Tampa, FL;
Phoenix, AZ; Riverside/San Bernardino, CA; Denver, CO; and Sacramento, CA. The
company also builds in the East Bay/Central Valley, CA; Las Vegas, NV; Inland
Empire, CA; Tucson, AZ; and Raleigh-Durham, NC. MTH also announced its entry
into the Charlotte, North Carolina market last year and reported its first
orders in that market during the fourth quarter of 2012. Currently, about 65%
-70% of MTH's home deliveries are to first- and second-time trade-up buyers,
30% - 35% to entry-level buyers, less than 5% are to luxury and active adult
IMPROVING HOUSING MARKET
Fitch's housing forecasts for 2013, assume a continued moderate rise off the
bottom of 2011. New home inventories are at historically low levels and
affordability is near record highs. In a slowly growing economy with still
above average distressed home sales competition, less competitive rental cost
alternatives, and low mortgage rates (on average), the housing recovery will
be maintained this year.
Fitch's housing estimates for 2013 are as follows: Single family starts are
forecast to grow 18.3% to 633,000, while multifamily starts expand about 19%
to 292,000; Single-family new home sales should increase approximately 22% to
448,000 as existing home sales advance 7.5% to 5.01 million.
Average single-family new home prices (as measured by the Census Bureau),
which dropped 1.8% in 2011, increased 8.7% in 2012. Median home prices
expanded 2.4% in 2011 and grew 7.9% in 2012. Average and median home prices
should improve approximately 5.0% and 4.0%, respectively, in 2013.
Industry challenges (although somewhat muted) remain, including continued
relatively high levels of delinquencies, potential of short-term acceleration
in foreclosures, and consequent meaningful distressed sales, limited supply of
developed lots in the most attractive markets, and restrictive credit
MTH employs conservative land and construction strategies. The company
typically options or purchases land only after necessary entitlements have
been obtained so that development or construction may begin as market
Under normal circumstances MTH extensively uses lot options, and that is
expected to be the future strategy in markets where it is able to do so. The
use of non-specific performance rolling options gives the company the ability
to renegotiate price/terms or void the option, which limits downside risk in
market downturns and provides the opportunity to hold land with minimal
However, as of March 31, 2013, only 19% of MTH's lots were controlled through
options - a much lower than typical percentage due to considerable option
abandonments and write-offs in recent years. Additionally, there are currently
fewer opportunities to option lots and, in certain cases, the returns for
purchasing lots outright are far better than optioning lots from third
Total lots controlled, including those optioned, were 21,029 at March 31,
2013. This represents a 4.6-year supply of total lots controlled based on
trailing 12-months deliveries. On the same basis, MTH's owned lots represent a
supply of 3.8 years.
MTH successfully managed its balance sheet during the severe housing downturn,
allowing the company to accumulate cash and pay down its debt as it pared down
inventory. The company had unrestricted cash of $325.0 million and investments
and securities of $88.9 million at March 31, 2013. The company's debt totaled
$881.2 million at the end of the first quarter.
In March 2013, MTH completed an offering of $175 million aggregate principal
amount of 4.50% senior notes due 2018. Concurrent with this offering, the
company announced a tender offer to repurchase any or all of its 7.731% senior
subordinated notes due 2017 and subsequently issued a call offer to repurchase
any and all remaining notes not tendered. As a result of the tender offer, as
of March 31, 2013, MTH had repurchased $16.7 million of the $99.8 million
outstanding. Subsequent to quarter-end, the company retired the remaining
untendered 2017 notes through the call for redemption.
MTH's next debt maturity isn't until March 2018, when its 4.50% $175 million
senior notes become due.
In July 2012, the company entered into a new $125 million unsecured revolving
credit facility maturing in 2015. There were no oustandings under the revolver
as of March 31, 2013.
MTH generated negative cash flow from operations during the past two years as
the company started to rebuild its land position. The company had negative
cash flow of $220.5 million during 2012 after spending $480 million on land
and development during the year. Fitch expects the company to moderately
increase its land and development spending during 2013, resulting in negative
cash flow of about $100 million - $150 million this year.
Fitch is comfortable with this strategy given the company's liquidity position
and debt maturity schedule. Fitch expects MTH over the next few years will
maintain liquidity (consisting of cash and investments and the revolving
credit facility) of at least $225 million - $250 million, a level which Fitch
believes is appropriate given the challenges still facing the industry.
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
--MTH's cash position.
Positive rating actions may be considered if the recovery in housing continues
at a healthy pace and shows durability; MTH shows sustained improvement in
credit metrics (such as homebuilding debt to EBITDA consistently below 5x);
and the company continues to maintain a healthy liquidity position (above $250
A negative rating action could be triggered if the industry recovery
dissipates; 2013/2014 revenues drop high-teens or greater while the pretax
loss is higher than 2011 levels; and MTH's liquidity position falls sharply,
perhaps below $200 million as the company maintains an overly aggressive land
and development spending program.
Fitch affirms the following ratings for MTH with a Positive Outlook:
--Long-term Issuer Default Rating (IDR) at 'B+';
--Senior unsecured debt at 'BB-/RR3'.
The Recovery Rating (RR) of 'RR3' on the company's senior unsecured debt
indicates good recovery prospects for holders of these debt issues. MTH'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 debtholders. Fitch applied a liquidation value analysis for
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012);
--'Liquidity Considerations For Corporate Issuers (June 12, 2007).
Applicable Criteria and Related Research
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Liquidity Considerations for Corporate Issuers
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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Robert Rulla, CPA
Sandro Scenga, +1-212-908-0278 (New York)
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