NEW YORK, May 10, 2013 (BUSINESS WIRE) -- 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 (retiree) homebuyers.
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 qualification standards.
LAND STRATEGY
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 conditions dictate.
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 investment.
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 parties.
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.
LIQUIDITY/DEBT
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.
RATING SENSITIVITIES
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
--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 million).
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 the RR.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790916
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
http://cts.businesswire.com/ct/CT?id=bwnews&sty=20130510005796r1&sid=cmtx4&distro=nx
SOURCE: Fitch Ratings
Fitch Ratings Primary Analyst Robert Curran Managing Director +1-212-908-0515 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Robert Rulla, CPA Director +1-312-606-2311 or Committee Chairperson Megan Neuburger Senior Director +1-212-908-0501 or Media Relations: Sandro Scenga, +1-212-908-0278 (New York) sandro.scenga@fitchratings.com
Copyright Business Wire 2013
**********************************************************************
As of Monday, 05-06-2013 23:59, the latest Comtex SmarTrendA? Alert,
an automated pattern recognition system, indicated a DOWNTREND on
06-04-2012 for MTH @ $26.62.
For more information on SmarTrend, contact your market data
provider or go to www.mysmartrend.com
SmarTrend is a registered trademark of Comtex News Network, Inc.
Copyright A? 2004-2013 Comtex News Network, Inc. All rights reserved.
