Fitch Ratings has affirmed the ratings for Beazer Homes USA, Inc. (NYSE:
BZH), including the company's Issuer Default Rating (IDR) at 'B-'. 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 BZH is based on the company's execution of
its business model in the current moderately recovering housing
environment, its land policies, and geographic diversity. The company's
rating and Outlook is also supported by its solid liquidity position.
The Stable Outlook also takes into account the improving housing outlook
for 2014 and 2015.
Risk factors include the cyclical nature of the homebuilding industry,
the company's high debt load and high leverage, BZH's underperformance
relative to its peers in certain operational and financial categories,
and its current over-exposure to the credit-challenged entry level
market (an estimated 60% of BZH's customers are first-time home buyers).
THE INDUSTRY
Comparisons were challenging through first-half of calendar 2014, and so
far this year most housing metrics seem to have defied expectations and
fallen somewhat from a year ago. Though the severe winter throughout
much of North America restrained some housing activity, nonetheless,
there was an absence of underlying consumer momentum this spring,
perhaps due to buyer sensitivity to home prices and finance rates and
the slowing of job growth at year end. But demographics, attractive
affordability/housing valuations, and a slow, steady easing in credit
standards should sustain and ultimately accelerate the upturn.
To reflect the subpar spring selling season, as well as the more guarded
expectation for the next few months, Fitch recently tapered its macro
housing forecast. Single-family starts are now projected to improve 9.5%
to 677,000 (down from Fitch's previous forecast of a 15% improvement)
and multifamily volume grows almost 12% to 343,000. Total starts this
year should still slightly exceed 1 million. New home sales are forecast
to advance about 8% to 465,000 (down from Fitch's prior forecast of
500,000), while existing home sales volume is expected to decline 5% to
4.835 million (down from Fitch's earlier estimate of 5.1 million),
largely due to fewer distressed homes for sale.
New home price inflation should moderate in 2014, at least partially
because of higher interest rates. Average and median new home prices
should rise about 3.5% in 2014.
Housing activity is likely to ratchet up more sharply in 2015 with the
support of a steadily growing economy throughout the year. The
unemployment rate should continue to move lower (5.8% in 2015). Credit
standards should steadily, moderately ease throughout next year.
Demographics should be more of a positive catalyst. More of those
younger adults who have been living at home should find jobs and these
25-35-year-olds should provide some incremental elevation to the rental
and starter home markets. Single-family starts are forecast to rise 21%
to 819,000 as multifamily volume expands about 6.5% to 366,000. Total
starts would be approaching 1.2 million. New home sales are projected to
increase 20.4% to 560,000. Existing home volume is expected to
approximate 5.075 million, up 5%.
New home price inflation should further taper off with higher interest
rates and the mix of sales shifting more to first time homebuyer
product. Average and median home prices should increase 2.5-3%.
Challenges remain including the potential for higher interest rates and
restrictive credit qualification standards.
IMPROVING FINANCIAL RESULTS
BZH's homebuilding revenues for the first nine months of its 2014 fiscal
year (ending June 30, 2014) increased 7.9% to $909.2 million as closings
fell 4.2% while the average sales price advanced 12.6% to $279,300
during the period. Land sales totaled $8.6 million during 2014 YTD
period compared with $6.2 million last year.
The homebuilding gross profit margins (excluding inventory impairments
and lot option abandonments) also showed strong improvement, growing 350
bps to 19.5% during the YTD 2014 period compared with a 16% margin
during the same period last year. SG&A as a percentage of sales
increased to 14.6% during the nine-month period in 2014, up from 14.1%
last year. Despite the strong results for the first nine months of the
year, BZH reported a pre-tax loss of $27.1 million during the period,
which included a $19.9 million loss on extinguishment of debt related to
the company's debt refinancing this year. Fitch expects BZH will be
unprofitable on a pre-tax basis during fiscal 2014 but should report
pre-tax profits during fiscal 2015.
HIGH DEBT LOAD AND LEVERAGE
BZH had total debt of $1.5 billion at June 30, 2014. The company's
credit metrics have been improving over the past two years but remain
weak relative to its ratings. Leverage at the end of the June quarter
was 13.8x compared with 17.4x at the end of fiscal 2013 and 53.5x at the
end of fiscal 2012. EBITDA to interest coverage is also low at 0.9x for
the LTM period ending June 30, 2014 compared with 0.8x in fiscal 2013
and 0.2x in fiscal 2012.
Fitch expects these credit metrics will improve in the next 12 -15
months, although leverage is expected to remain weak at around 9x - 10x
and interest coverage is projected to improve to approximately 1.25x -
1.50x during fiscal 2015. The improvement in credit metrics will be
driven by EBITDA growth as Fitch does not expect any meaningful debt
repayment in the short to intermediate term.
LIQUIDITY
BZH currently has an adequate liquidity position, which allows the
company to meet interest payments and land and development spending
requirements. BZH ended the June 2014 quarter with $206.5 million of
unrestricted cash and no borrowings under its $150 million revolving
credit facility. Fitch expects BZH will maintain cash and revolver
availability of at least $250 - $300 million in the near to intermediate
term. Furthermore, the company has no major debt maturities until 2016,
when $172.9 million of sr. notes become due.
LAND STRATEGY
BZH maintains a 6-year supply of lots (based on last 12 months
deliveries), 79.4% of which are owned, and the balance controlled
through options. As is the case with other public homebuilders, the
company is rebuilding its land position and trying to opportunistically
acquire land at attractive prices. Total lots controlled increased 10.4%
yoy and grew 1.5% compared with the previous quarter.
The company has been aggressive in its land and development spending
following the successful execution of its capital markets transactions
in 2012. BZH spent roughly $475.2 million on land purchases and
development activities during fiscal 2013 compared with $185.6 million
expended during fiscal 2012. Through the first nine months of fiscal
2014 (ended June 30, 2014), BZH spent $381.5 million for land and
development activities. For all of 2014, management expects land and
development spending will total $520 - $560 million.
As a result, Fitch expects BZH will be cash flow negative by about $225
million - $250 million this fiscal year.
Fitch is comfortable with BZH's land strategy given the company's
liquidity position, debt maturity schedule, proven access to the capital
markets, and management's demonstrated discipline in pulling back on its
land and development activities during periods of distress.
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 the company's cash position.
BZH's ratings are constrained in the intermediate term due to weak
credit metrics and high leverage. However, positive rating actions may
be considered if the recovery in housing is maintained and is
meaningfully better than Fitch's current outlook, BZH shows continuous
improvement in credit metrics (particularly debt-to-EBITDA consistently
below 8x and interest coverage above 2x), and the company preserves a
healthy liquidity position.
Negative rating actions could occur if the recovery in housing
dissipates, resulting in BZH's revenues and operating losses approaching
2011 levels, and the company maintains an overly aggressive land and
development spending program. This could lead to consistent and
significant negative quarterly cash flow from operations and diminished
liquidity position. In particular, Fitch will review BZH's ratings if
the company's liquidity position (unrestricted cash plus revolver
availability) falls below $200 million. Negative rating actions could
also occur if the company's credit metrics do not improve much from
current levels in a sustained housing recovery, including debt to EBITDA
consistently remaining above 10x and interest coverage below 1x.
Fitch affirms the following ratings for BZH:
--Long-term IDR at 'B-';
--Secured revolver at 'BB-/RR1';
--Second lien secured notes at 'BB-/RR1';
--Senior unsecured notes at 'CCC+/RR5';
--Junior subordinated debt at 'CCC/RR6'.
The Rating Outlook is Stable.
The Recovery Rating (RR) of 'RR1' on BZH's secured credit revolving
credit facility and second-lien secured notes indicates outstanding
recovery prospects for holders of these debt issues. The 'RR5' on BZH's
senior unsecured notes indicates below-average recovery prospects for
holders of these debt issues. BZH'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. The 'RR6' on the company's junior subordinated notes
indicates poor recovery prospects for holders of these debt issues in a
default scenario. Fitch applied a liquidation value analysis for these
recovery ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
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=865174
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