Fitch Affirms NVR's IDR at 'BBB+'; Outlook Stable
NEW YORK -- June 2, 2014
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 is NVR's relatively heavy exposure to the
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
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. Current debt-to-LTM EBITDA of 1.3x and LTM EBITDA
to interest incurred of 18.1x and extensive liquidity (cash and equivalents)
are supportive of the 'BBB+' rating level. Fitch expects these credit metrics
will slightly improve further by the end of 2014.
GENERALLY IMPROVING HOUSING MARKET
Comparisons are challenging through first-half 2014, and so far this year most
housing metrics seem to have been short of expectations and down somewhat from
a year ago. Though the severe winter throughout much of North America
restrained some housing activity, there is nonetheless an absence of
underlying consumer momentum so far this spring, perhaps due to buyer
sensitivity to higher home prices and finance rates and the slowing of job
growth at year end.
Housing metrics should improve for all of 2014 due to faster economic growth,
and some acceleration in job growth, despite somewhat higher interest rates as
well as more measured home price inflation. Single-family starts are projected
to improve 15% to 710,000 as multifamily volume grows about 9% to 335,000.
Thus, total starts this year should top 1 million. New home sales are forecast
to advance about 16% to 500,000, while existing home volume is flat at 5.10
million, largely due to fewer distressed homes for sale.
As Fitch noted in the past, the housing recovery will likely occur in fits and
SOME EROSION IN HOME AFFORDABILITY
The most recent Freddie Mac 30-year average mortgage rate was 4.12%, down 2
basis points (bps) sequentially from the previous week and about 71 bps higher
than the average rate during the month of January 2013, a recent low point for
mortgage rates. While the current rates are still well below historical
averages, the sharp increase in rates and considerably higher home prices in
2013/2014 have moderated affordability.
Fitch projects that mortgage rates will average 60-80 bps higher in 2014
(relative to 2013) as the Fed continues to taper and the economy strengthens.
New home price inflation should moderate in 2014, at least partially because
of higher interest rates. Average and median new home prices should increase
about 3.5% in 2014. However, Fitch's expectations of a more dynamic economic
expansion this year with stronger job growth will more than offset this
lessening in affordability. This will be particularly the case for the move-up
and active adult markets.
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. In addition, 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 finished lot
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.
NVR's gross margins are lagging 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 currently delivering homes that have a favorable land-cost
basis, including some 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 3.5-to-5
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 can
restrict growth only to markets where such a strategy is viable. However, NVR
has expanded its strategy to six new markets over the past six 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 12-month (LTM) period
ending March 31, 2014, cash flow from operations (CFFO) totaled $332.5
million. This compares with $270.2 million of CFFO during 2013. Fitch
currently projects CFFO will be in the $260 million-$280 million range during
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 back its
NVR resumed share repurchase activity later in 2010 buying $417.1 million. The
company repurchased $689.3 million of stock in 2011, $227.3 million during
2012, and $554.5 million during 2013. NVR repurchased $32.6 million of stock
during 1Q'14. As of March 31, 2014, the company had $405.5 million remaining
under its share repurchase authorization program. Fitch currently projects
share repurchases during 2014 will be moderately less than 2013 levels. Fitch
expects NVR will remain disciplined in its share repurchase activity in the
period ahead, especially while the housing recovery remains relatively
NVR ended 1Q'14 with $874.1 million of unrestricted cash and cash equivalents
and $599.1 million of recourse 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 will re-establish a credit facility at some point. In any
case, 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 the current outlook and if
credit metrics and liquidity are sustained meaningfully above Fitch's base
case projection while continuing to maintain a solid liquidity position.
A negative rating action could be triggered if the industry recovery
dissipates; 2014 and 2015 revenues each drop in excess of 20% while pretax
profitability drops below 2011 levels; and NVR's liquidity position falls
sharply, perhaps below $300 million as the company maintains an overly
aggressive share repurchase program and/or diverges meaningfully from its land
Fitch has affirmed NVR's ratings as follows:
--IDR 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' (May 14, 2014);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Liquidity Considerations for Corporate Issuers
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Fitch Ratings, Inc.
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Robert Rulla, CPA
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