Fitch Rates Meritage's Proposed Sr. Unsecured Notes Offering 'BB-/RR3';
CHICAGO -- November 21, 2013
Fitch Ratings has assigned a 'BB-/RR3' rating to Meritage Homes Corporation's
(NYSE: MTH), proposed offering of $100 million of senior unsecured notes. The
offering is an add-on to its existing 7.15% senior unsecured notes due 2020.
The issuance will be equal in right of payment with all other senior unsecured
debt. Meritage intends to use the proceeds of the notes offering for general
corporate purposes, including the acquisition and development of land and home
The Rating Outlook is Positive. 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
Fitch's 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
MTH's sales are reasonably dispersed among its 15 metropolitan markets within
seven states. During 2012, the company ranked among the top 10 builders in
such markets as Dallas/Fort Worth, San Antonio and Austin, TX; Orlando, FL;
Phoenix, AZ; Riverside/San Bernardino, CA; Denver, CO; and San
Francisco/Oakland/Fremont and Sacramento, CA. The company also builds in the
Central Valley, CA; Houston, TX; Inland Empire, CA; Tucson, AZ; Tampa, FL; and
Raleigh-Durham and Charlotte, NC. MTH also announced its entry into the
Nashville, Tennessee market with its August 2013 acquisition of Phillips
Builders. Currently, Fitch estimates 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 (retiree) homebuyers.
IMPROVING HOUSING MARKET
Housing metrics have all showed improvement so far in 2013. For the first
eight months of the year, single-family housing starts improved 19.3%, while
new-home sales increased 20.4%. Existing home sales improved 11.8% for the
first nine months of 2013. The most recent Freddie Mac 30-year interest rate
was 4.35%, 104 bps above the all-time low of 3.31% set the week of Nov. 21,
2012. The NAR's latest monthly existing home affordability index was 164.3,
moderately below the all-time high of 213.6.
Fitch's housing forecasts for 2013 assume a continued moderate rise off the
bottom of 2011. New-home inventories are well below the norm 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 and in 2014.
Fitch's housing estimates for 2013 follow: Single-family starts are forecast
to grow 16.8% to 625,000, while multifamily starts expand about 20% to
295,000; single-family new-home sales should grow approximately 20% to 439,000
as existing home sales advance 8.5% to 5.05 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 8% and 7.2%, respectively, in 2013.
As Fitch noted in the past, the housing recovery will likely occur in fits and
HIGHER MORTGAGE RATES AND HOME PRICES
The most recent Freddie Mac average mortgage rate was 4.35%, up 19 bps
sequentially from the previous week and about 90 bps higher than the average
rate during the month of April 2013, a recent low point for mortgage rates.
While the current rates are still well below historical averages, the sharp
increase in rates and rising home prices are moderating affordability. In the
case of MTH, whose average home price is roughly $340,700, assuming a 20% down
payment, a 100 bps rise in current mortgage rates will increase principal and
interest payment by about $165 each month or a 12.2% impact.
A couple of August and September housing metrics showed some weakness
following the increase in interest rates during the past six months. The
Pending Home Sales Index declined 5.6% to 101.6 in September from 107.6 in
August and is 1.2% lower than the 102.8 recorded in September 2012. New home
sales in August grew 7.9% on a seasonally-adjusted basis to 421,000, compared
with 390,000 during the previous month. The July 2013 new home sales were
14.1% lower relative to June 2013. Additionally, the August 2013 estimate is
the second lowest seasonally-adjusted sales level so far this year. While
Fitch does not expect the current higher mortgage rates to derail the housing
recovery, a continued sharp increase in rates could further slow it down.
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 September 30, 2013, only 29% 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
Total lots controlled, including those optioned, were 25,046 at Sept. 30,
2013. This represents a 5-year supply of total lots controlled based on
trailing 12-months deliveries. On the same basis, MTH's owned lots represent a
supply of 3.5 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 $177.6 million and investments
and securities of $92.8 million at Sept. 30, 2013. The company's debt totaled
$798.3 million at the end of the first quarter.
MTH's debt maturities are well-laddered, with the next debt maturity on 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. The facility was amended during the second
quarter of 2013, which increased the commitment to $135 million and extended
the maturity to 2016. There were no outstandings under the revolver as of
Sept. 30, 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 $75 million - $125 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.
A ratings upgrade 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; 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 rates the following with a Positive Outlook:
--Long-term Issuer Default Rating (IDR) 'B+';
--Senior unsecured debt '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. 5, 2013);
--'Liquidity Considerations For Corporate Issuers (June 12, 2007).
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Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Robert Rulla, CPA
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