Fitch Affirms NVR's IDR at 'BBB+'; Outlook Stable
NEW YORK -- June 26, 2013
Fitch Ratings has affirmed the ratings for NVR, Inc. (NYSE: NVR), including
the company's Issuer Default Rating (IDR) at 'BBB+'. The Rating Outlook is
Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating and Outlook for NVR reflect the strong credit protection measures,
solid free cash flow generation and balance sheet liquidity that results from
its unique operating model. The ratings also reflect NVR's capacity to
withstand a meaningful housing downturn and manage effectively in an often
challenging housing environment. The cyclical nature of homebuilding is
reflected in the ratings as are NVR's relatively heavy exposure to Washington
D.C. and Baltimore markets. Fitch also takes into account NVR's track record
through the past few recessions, and its, at times, active share repurchase
The rating also considers NVR's capital structure, solid liquidity position
and Fitch's level of confidence with regard to its operating model under
various economic conditions. Debt to EBITDA of 1.75x and proforma EBITDA to
interest expense (assuming full year of interest expense) of 14.2x and
extensive liquidity (cash and equivalents) are supportive of the 'BBB+' rating
level. Fitch expects these credit metrics will improve slightly during 2013.
Housing metrics all showed improvement so far in 2013. For the first five
months of the year, single-family housing starts improved 23.6% and existing
home sales expanded 11%. New home sales increased 29.2% during the January-May
period in 2013. The most recent Freddie Mac 30-year interest rate was 3.93%,
62 bps above the all-time low of 3.31% set the week of Nov. 21, 2012. The
NAHB's latest existing home affordability index was 183.1, short of the
all-time high of 207.3. 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.
Challenges (although somewhat muted) remain, including continued relatively
high levels of delinquencies, potential for short-term acceleration in
foreclosures, and consequent meaningful distressed sales, and restrictive
credit qualification standards.
NVR utilizes an operating model in which land is primarily controlled through
rolling options with fixed deposits sourced from independent land developers.
Land is not purchased until construction is set to begin. As a consequence,
NVR occasionally may be able to participate in land appreciation, while
minimizing capital outlays. This enables NVR to significantly reduce the risk
of downside volatility.
On a limited basis NVR has acquired several raw parcels of land to be
developed into finished lots. Additionally, the company has also obtained
finished lots using joint ventures. This does not represent a change in NVR's
disciplined approach in controlling finished lots through options, but is
representative of several unique strategic opportunities.
Over 75% of NVR's inventory is represented by relatively liquid pre-sold work
in process that is less vulnerable to significant declines in value in periods
of economic stress. In a downturn, write-downs would primarily be limited to
forfeiture of option deposits, a fraction of total land value (typically 5% -
10%). Alternatively, NVR seeks to renegotiate option contracts to realign the
proposed land purchase price with prevailing market conditions, thereby
averting severe gross margin compression.
On the contrary, NVR's gross margins may lag some of its peers during this
housing recovery as most of the large public builders started to rebuild their
land positions during 2010 and are delivering homes currently that have
favorable land cost basis, including land that was impaired during the
downturn. NVR's just in time operating model necessitates that the company
pays current market value for the land in its delivery pipeline.
NVR's short-dated inventory position turns over rapidly (about four-to-five
times), enhancing operating cash flow. NVR's inventory turnover ratios are
consistently and considerably higher than those of its peers.
Because of its operating model, NVR is reliant on third party land developers
to prepare finished lots and sell them under option to NVR. This strategy may
restrict growth only to markets where such a strategy is viable. However, NVR
has expanded its strategy to six new markets over the past five years. By
establishing a significant presence in its markets, NVR positions itself as
the preferred land purchaser and forges relationships with key local
Fitch believes that, if options were to become unattainable in NVR's markets,
bondholders would be well protected due to the strong cash flow dynamics of
NVR's model. Without land reinvestment requirements, NVR produces significant
cash with which to retire its debt. For the latest-twelve-month (LTM) period
ending March 31, 2013, cash flow from operations totaled $95.5 million. This
compares with $264.4 million of cash flow from operations during 2012. Fitch
currently projects cash flow from operations will be in the $150 million -
$200 million range during 2013.
NVR has historically been an aggressive purchaser of its stock, buying back
approximately $3.1 billion of its stock from 2001 through 2007. From fourth
quarter-2007 (4Q'07) through 1Q'10, NVR refrained from buying its stock.
NVR resumed share repurchase activity later in 2010 buying $417.1 million. The
company repurchased $689.3 million of stock in 2011 and $227.3 million during
2012. NVR did not repurchase stock during the 1Q'13. As of March 31, 2013, the
company had $392.6 million remaining under its share repurchase authorization
program. Fitch currently projects share repurchases during 2013 will be
somewhat similar to 2012 levels. Fitch expects NVR will remain disciplined in
its share repurchase activity in the period ahead, especially while the
housing recovery remains relatively fragile.
NVR ended 1Q'13 with $1.08 billion of unrestricted cash and cash equivalents
and $600 million of debt.
Effective Oct. 27, 2010, NVR voluntarily terminated its $300 million unsecured
revolving credit facility, which was scheduled to mature on Dec. 6, 2010.
Fitch expects NVR to re-establish a credit facility at some point. However,
Fitch anticipates that the company will keep more cash on the balance sheet
than in the past.
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
Fitch currently does not expect the company's ratings and/or Outlook to change
in the next 12 - 18 months. However, a Positive Outlook may be considered if
the recovery in housing is significantly better than Fitch's current outlook
and the company is able to demonstrate that it can sustain, over the
intermediate term, credit metrics that are meaningfully better than Fitch's
current expectations, while continuing to maintain a solid liquidity position.
Negative rating actions could occur if the recovery in housing dissipates and
NVR maintains an overly aggressive share repurchase program and/or diverges
meaningfully from its land operating model. This could lead to consistent and
significant negative quarterly cash flow from operations and meaningfully
diminished liquidity position (below $300 million).
Fitch has affirmed NVR's ratings as follows:
--Issuer Default Rating at 'BBB+';
--Senior unsecured debt at 'BBB+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
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 Rulla, CPA
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