Fitch Ratings has assigned a 'BB+' rating to Lennar Corporation's (NYSE:
LEN and LEN.B) proposed offering of $400 million of senior notes due
2025. This issue will be ranked on a pari passu basis with all other
senior unsecured debt. Net proceeds from the notes offering will be used
for working capital and general corporate purposes.
The Rating Outlook is Stable. A full list of ratings is provided at the
end of this release.
KEY RATING DRIVERS
The ratings and Outlook for Lennar reflect the company's strong
liquidity position and continuing recovery of the housing sector in 2015
and 2016. The ratings also reflect Lennar's successful execution of its
business model over many cycles, geographic and product line diversity,
and much lessened joint venture exposure than was the case just a few
years ago.
The company did a good job in reducing its inventory exposure
(especially early in the correction) and in generating positive
operating cash flow during the past severe industry downturn. In
addition, Lennar steadily, substantially reduced its number of joint
ventures (JVs) over the last few years and, as a consequence, has very
sharply lowered its JV recourse debt exposure (from $1.76 billion to
$24.5 million as of Nov. 30, 2014).
In contrast to almost all the other public homebuilders Lennar was
profitable in fiscal 2010 and 2011 and was solidly profitable in fiscal
2012, 2013 and 2014. The company's gross margins are typically above its
peers, and contributions from its Rialto Investment segment have added
to corporate profits from 2010 through 2014.
There are still some challenges facing the housing market that are
likely to moderate the intermediate stages of this recovery.
Nevertheless, Fitch believes Lennar has the financial flexibility to
navigate through the sometimes challenging market conditions and
continue to broaden its franchise and invest in land and other
opportunities.
THE INDUSTRY
Housing metrics increased in 2014 due to more robust economic growth
during the last three quarters of the year (prompted by improved
household net worth, industrial production, and consumer spending), and
consequently, acceleration in job growth (as unemployment rates
decreased to 6.2% for 2014 from an average of 7.4% in 2013), despite
modestly higher interest rates, as well as more measured home price
inflation. A combination of tax increases and spending cuts in 2013
shaved about 1.5 percentage points (pp) off annual economic growth,
according to the Congressional Budget Office. Many forecasters estimate
the fiscal drag in 2014 was only about 0.25%.
Single-family starts in 2014 improved 4.8% to 647,900 and multifamily
volume grew 15.6% to 355,400. Thus, total starts in 2014 were 1.003
million. New-home sales were up 1.9% to 437,000, while existing home
volume was off 2.9% to 4,940 million largely due to fewer distressed
homes for sale and limited inventory.
New-home price inflation moderated in 2014, at least partially because
of higher interest rates and buyer resistance. Average new-home prices
rose 5.7% in 2014, while median home prices advanced approximately 5.5%.
Housing activity is likely to ratchet up more sharply in 2015 with the
support of a steadily growing, relatively robust economy throughout the
year. Considerably lower oil prices should restrain inflation and leave
American consumers with more money to spend. The unemployment rate
should continue to move lower (averaging 5.3% in 2015). Credit standards
should steadily, moderately ease throughout 2015. 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 17.3% to 760,000 as
multifamily volume expands 7.3% to 381,000. Total starts would be in
excess of 1.1 million. New-home sales are projected to increase about
18% to 515,000. Existing home volume is expected to approximate 5.152
million, up 4.3%.
New-home price inflation should further taper off with higher interest
rates and the mix of sales shifting more to first-time homebuyer product.
Challenges remain, including the potential for higher interest rates,
and restrictive credit qualification standards.
LIQUIDITY/DEBT
The company's homebuilding operations ended the first quarter of 2015
with $583.75 million in unrestricted cash and equivalents. Debt totaled
$5.13 billion as of Feb. 28, 2015, up from $4.69 billion at fiscal
year-end 2014.
At Nov. 30, 2014, Lennar had a $1.5 billion unsecured revolving credit
facility (RCF) with certain financial institutions which includes a $248
million accordion feature that matures in June 2018, $125 million of
letter of credit (LOC) facilities with a financial institution and a
$140 million LOC facility with a different financial institution. The
proceeds available under the credit facility, which are subject to
specified conditions for borrowing, may be used for working capital and
general corporate purposes. The credit facility agreement also provides
that up to $500 million in commitments may be used for LOCs. As of Nov.
30, 2014, there were no borrowings under the credit facility.
On April 17, 2015, Lennar amended the RCF, to, among other things,
increase the maximum borrowing from $1.5 billion to $1.6 billion, which
includes a $263 million accordion feature. The amendment also extended
the maturity of $1.18 billion of the credit facility from June 2018 to
June 2019.
Lennar's debt maturities are well-laddered, with about 33.6% of its
senior notes (as of Feb. 28, 2015) maturing through 2017.
Lennar's performance LOCs outstanding were $234.1 million as of Nov. 30,
2014. The company's financial LOCs outstanding were $190.4 million at
the end of the fourth quarter. Performance LOCs are generally posted
with regulatory bodies to guarantee its performance of certain
development and construction activities. Financial LOCs are generally
posted in lieu of cash deposits on option contracts, for insurance
risks, credit enhancements and as other collateral.
Debt leverage (debt/EBITDA) decreased to 4.0x as of Nov. 30, 2014, down
from 4.9x at the end of 2013. EBITDA-to-interest expense rose from 3.2x
at Nov. 30 2013 to 4.3x at the conclusion of 2014.
HOMEBUILDING
The company was the second largest homebuilder in 2013 and primarily
focuses on entry-level and first-time move-up homebuyers. In 2013 and
2014, approximately one third of sales were to the first-time buyer,
half to first-time move-up customers and the balance is a mix of
second-time move-up, luxury and active adult. The company builds in 17
states with particular focus on markets in Florida, Texas and
California. Lennar's significant ranking (within the top five or top 10)
in many of its markets, its largely presale operating strategy, and a
return on capital focus provide the framework to soften the impact on
margins from declining market conditions. Fitch notes that in the past,
acquisitions (in particular, strategic acquisitions) have played a
significant role in Lennar's operating strategy.
Compared to its peers, Lennar has had above-average exposure to JVs
during this past housing cycle. Longer-dated land positions are
controlled off balance sheet. The company's equity interests in its
partnerships generally ranged from 10% to 50%. These JVs have a
substantial business purpose and are governed by Lennar's conservative
operating principles. They allow Lennar to strategically acquire land
while mitigating land risks and reduce the supply of land owned by the
company. They help Lennar to match financing to asset life. JVs
facilitate just-in-time inventory management.
Nonetheless, Lennar has substantially reduced its number of JVs over the
last eight years (from 270 at the peak in 2006 to 35 as of Nov. 30,
2014). As a consequence, the company has very sharply lowered its JV
recourse debt exposure from $1.76 billion to $24.5 million as of Nov.
30, 2014. In the future, management will still be involved with
partnerships and JVs, but there will be fewer of them and they will be
larger, on average, than in the past.
The company did a good job in reducing its inventory exposure
(especially early in the correction) and generating positive operating
cash flow. In 2010, the company started to rebuild its lot position and
increased land and development spending. Lennar spent about $600 million
on new land purchases during 2011 and expended about $225 million on
land development during the year. This compares to roughly $475 million
of combined land and development spending during 2009 and about $704
million in 2010. During 2012, Lennar purchased approximately $1 billion
of new land and spent roughly $302 million on development expenditures.
Land spend totaled almost $1.9 billion in 2013, and development
expenditures reached about $600 million, double the level of 2012.
Approximately, $1.5 billion was expended on land and $1.1 billion on
development in 2014. Fitch expects that total real estate spending in
2015 could be up moderately (perhaps $200 million-$300 million) with
more expended on land than development activities.
The company was slightly less cash flow negative in 2014 ($788.49
million) than in 2013 ($807.71 million). Lennar is likely to be much
less cash flow negative in 2015, perhaps less than half as much as in
2014. The company could be cash flow positive in 2016.
Fitch is comfortable with this real estate strategy given the company's
cash position, debt maturity schedule, proven access to the capital
markets and willingness to quickly put the brake on spending as
conditions warrant.
FINANCIAL SERVICES
Lennar's financial services segment provides mortgage financing, title
insurance and closing services for both buyers of its homes and others.
Substantially all of the loans that the segment originates are sold
within a short period in the secondary mortgage market on a servicing
released, non-recourse basis. After the loans are sold, Lennar retains
potential liability for possible claims by purchasers that the company
breached certain limited industry standard representations and
warranties in the loan sale agreements. The company participates in
mortgage refinance activity, which periodically is consequential
business.
During 2014, Lennar's financial services subsidiary provided loans to
approximately 78% of its homebuyers who obtained mortgage financing in
areas where Lennar offered services. During that same period, the
company originated approximately 23,300 mortgage loans totaling $6
billion. (By loan count refinanced loans accounted for 9% of
originations in 2014.)
RIALTO
Lennar's Rialto segment was formed to focus on acquisitions of
distressed debt and other real estate assets utilizing Rialto's
abilities to source, underwrite, price, turnaround and ultimately
monetize such assets in markets across the U.S. Lennar had a similar
operation in the 1980s, LNR Property Corporation, which was the vehicle
used by the company to invest in and work out large portfolios of
distressed real estate assets purchased from the government's Resolution
Trust Corporation (RTC). This operation was subsequently spun-off as a
separate publicly traded company and was later acquired by Cerberus
Capital Management.
Lennar's Rialto reportable segment is a commercial real estate
investment, investment management, and finance company focused on
raising, investing and managing third party capital, originating and
securitizing commercial mortgage loans, as well as investing its own
capital in real estate related mortgage loans, properties and related
securities. Rialto utilizes its vertically-integrated investment and
operating platform to underwrite, do the due diligence, acquire, manage,
workout and add value to diverse portfolios of real estate loans,
properties and securities, as well as providing strategic real estate
capital. Rialto's primary focus is to manage third party capital and to
originate and sell into securitizations commercial mortgage loans.
Rialto has commenced the workout and/or oversight of billions of dollars
of real estate assets across the U.S., including commercial and
residential real estate loans and properties, as well as mortgage backed
securities. To date, many of the investment and management opportunities
have arisen from the dislocation in the U.S. real estate markets and the
restructuring and recapitalization of those markets. In July 2013, RMF
was formed to originate and sell into securitization five-, seven- and
10-year commercial first mortgage loans, generally with principal
amounts between $2 million and $75 million, which are secured by income
producing properties. This business is expected to be a significant
contributor to Rialto revenues, at least in the near future.
Rialto is the sponsor of and an investor in private equity vehicles that
invest in and manage real estate related assets. This includes:
--Rialto Real Estate Fund, LP, formed in 2010 to which investors have
committed and contributed a total of $700 million of equity (including
$75 million by Lennar);
--Rialto Real Estate Fund II, LP, formed in 2012 with the objective to
invest in distressed real estate assets and other related investments
and that as of Nov. 30, 2014 had equity commitments of $1.3 billion
(including $100 million by Lennar) and was closed to additional
commitments;
--Rialto Mezzanine Partners Fund, formed in 2013 with a target of
raising $300 million in capital (including $27 million committed by
Lennar) to invest in performing mezzanine commercial loans that have
expected durations of one to two years and are secured by equity
interests in the borrowing entity owning the real estate assets.
Rialto also earns fees for its role as a manager of these vehicles and
for providing asset management and other services to those vehicles and
other third parties.
LENNAR MULTIFAMILY
Since 2012, Lennar has become actively involved, primarily through
unconsolidated entities, in the development of multifamily rental
properties. This business segment focuses on developing a geographically
diversified portfolio of institutional quality multifamily rental
properties in select U.S. markets.
As of Nov. 30, 2014, Lennar's balance sheet had $268 million of assets
related to the Lennar Multifamily segment, which includes investments in
unconsolidated entities of $105.7 million. Lennar's net investment in
the Lennar Multifamily segment, as of Nov. 30, 2014, was about $200
million. As of Nov. 30, 2014, the Lennar Multifamily segment had 24
communities under construction with development costs of approximately
$1.6 billion. The Lennar Multifamily segment has a pipeline of future
projects totaling $5.5 billion in assets (including the $1.6 billion in
development) across a number of states that will be developed primarily
by unconsolidated entities.
FIVEPOINT COMMUNITIES
FivePoint manages large, complex master planned communities in the
Western U.S., typically in a JV structure. These include the former
military installation El Toro, the former Newhall Land and Farming
Company (just north of Los Angeles) and San Francisco's Hunters Point.
These entities will not be generating meaningful home deliveries for
another few years.
KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for the issuer include:
--Industry single-family housing starts improve almost 17.5%, while new
and existing home sales grow 18% and 4.3%, respectively, in 2015;
--Lennar's deliveries increase 12% and homebuilding gross margins
decline more than a single pp to 24% this year;
--The company's debt/EBITDA approximates 3.4x-3.5x and interest coverage
exceeds 4.5x by year-end 2015;
--Lennar spends at least $2.6 billion on land acquisitions and
development activities this year;
--The company maintains a healthy liquidity position (well above $1
billion with a combination of unrestricted cash and revolver
availability).
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.
Fitch would consider taking positive rating action if the recovery in
housing accelerates and Lennar shows steady improvement in credit
metrics (such as debt-to-EBITDA leverage consistently less than 3x),
while maintaining a healthy liquidity position (in excess of $1 billion
in a combination of cash and revolver availability).
Conversely, negative rating actions could occur if the recovery in
housing dissipates and Lennar maintains an overly aggressive land and
development spending program. This could lead to sharp declines in
profitability, consistent and significant negative quarterly cash flow
from operations, higher leverage and meaningfully diminished liquidity
position (below $500 million).
Fitch currently rates Lennar as follows:
--Issuer Default Rating 'BB+';
--Senior unsecured debt 'BB+'.
The Rating Outlook is Stable.
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:
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983305
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.
Copyright Business Wire 2015