June 20, 2013 / 8:44 PM / 4 years ago

Fitch Affirms Lennar's IDR at 'BB+'; Outlook Stable

(The following statement was released by the rating agency) MUMBAI/HONG KONG/SINGAPORE, June 20 (Fitch) Fitch Ratings has affirmed its ratings for Lennar Corporation (NYSE: LEN), including the company's Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is Stable. A complete list of rating actions follows this release. KEY RATING DRIVERS The ratings and Outlook for Lennar reflect the company's strong liquidity position and improved prospects for the housing sector this year and in 2014. 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. There are still some challenges facing the housing market that are likely to moderate the early stages of this recovery. Nevertheless, Lennar has the financial flexibility to navigate through the sometimes challenging market conditions and continue to invest in land opportunities. THE INDUSTRY Housing metrics all showed improvement so far in 2013. For the first five months of the year, single-family housing starts improved 23.6% and existing home sales expanded 11%. New home sales increased 26.8% during the first four months of the year. The most recent Freddie Mac 30-year interest rate was 3.93%, 62 bps above the all-time low of 3.31% set the week of Nov. 21, 2012. The NAHB's latest existing home affordability index was 183.1, short of the all-time high of 207.3. Fitch's housing estimates for 2013 follow: 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. Challenges (although somewhat muted) remain, including continued relatively high levels of delinquencies, potential for short-term acceleration in foreclosures, and consequent meaningful distressed sales, and restrictive credit qualification standards. FINANCIALS Lennar has solid liquidity with unrestricted homebuilding cash of $1.11 billion as of Feb. 28, 2013. On June 12, 2013 LEN announced that it increased the amount of financing available under its unsecured revolving credit facility to $950 million from $525 million and extended the credit facility's maturity to June 2017. The $950 million includes an approximately $33 million accordion feature, subject to additional commitments. The credit agreement also provides that up to $500 million in commitments may be used for letters of credit. The credit agreement contains financial covenants, including a minimum consolidated tangible net worth, a maximum leverage ratio and liquidity requirements. There was no debt outstanding for the facility as of Feb. 28, 2013. The company's debt maturities are well-laddered, with about 18% of its senior notes (as of Feb. 28, 2013) maturing through 2015. HOMEBUILDING The company was the third largest homebuilder in 2012 and primarily focuses on entry-level and first-time move-up homebuyers. The company builds in 19 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 had above-average exposure to joint ventures (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 been substantially reducing its number of JVs over the last few years (from 270 at the peak in 2006 to 38 as of Feb. 28, 2013). As a consequence, the company has very sharply lowered its JV recourse debt exposure from $1.76 billion to $55.8 million ($42.3 million net of joint and several reimbursement agreements with its partners) as of Feb. 28, 2013. 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 $999 million of new land and spent roughly $302 million on development expenditures. Fitch anticipates land and development spending for 2013 will be sharply higher than in 2012, approaching $2.5 billion. In any case, Fitch now expects Lennar to be less cash flow negative this year than was the case in 2012. 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. RIALTO During 2010 the company ramped up its investments in Rialto Investments. More recently it has been harvesting the by-products of its efforts. This segment provides advisory services, due-diligence, workout strategies, ongoing asset management services, and acquires and monetizes distressed loans and securities portfolios. (Management has considerable expertise in this highly specialized business.) In February 2010, the company indirectly acquired 40% managing member equity interests in two limited liability companies in partnership with the FDIC, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). Lennar had also invested $69 million in a fund formed under the Federal government's Public-Private Investment Program (PPIP), which was focused on acquiring securities backed by real estate loans. During the three months ended Aug. 31, 2012, the AB PPIP fund started unwinding its operations. During the fourth quarter, Lennar finalized its last sales of the underlying securities in the fund and made its final distributions to the partners, including Lennar. On average the company had $61 million of its equity invested in the fund and it has brought back all of that investment as well as profits and fees totaling $112 million. On Sept. 30, 2010, Rialto completed the acquisitions of approximately $740 million of distressed real estate assets, in separate transactions, from three financial institutions. The company paid $310 million for these assets, of which $124 million was funded by a five-year senior unsecured note provided by one of the selling financial institutions. As of Feb. 28, 2013, Rialto Investments had $270.4 million of debt, of which $90.9 million is recourse to Lennar. In December 2012, Lennar completed the first closing of its second real estate fund with initial equity commitments of approximately $260 million (including $100 million committed by Lennar). Rialto provides Lennar with ancillary income as well as a source of land purchases (either directly or leveraging Rialto's relationship with owners of distressed assets). Fitch views this operation as strategically material to the company's operation, particularly as housing activity remains at relatively low levels. RENTAL ACTIVITIES AND LARGE MPCs In addition to the homebuilding, financial services and Rialto operating platforms, Lennar has been incubating a multi-family rental business strategy (beginning in early 2011) as well as FivePoint Communities which manages large, complex master planned communities (MPCs) in the Western U.S. (including the former Newhall Land and Farming Company). The multi-family JV activities have a pipeline that exceeds $1 billion, and over 6,500 apartments. At Feb. 28, 2013, Lennar had approximately $62 million invested in this business and expects that investment to rise to $100 million by the end of fiscal 2013. The company's long-term goal is to build a portfolio of income producing apartment properties across the country. 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. Positive rating actions may be considered if the recovery in housing is maintained and is more robust than Fitch's current outlook, Lennar shows continuous improvement in credit metrics (with leverage less than 3x and interest coverage in excess of 5x), and maintains a healthy liquidity position. 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 consistent and significant negative quarterly cash flow from operations and meaningfully diminished liquidity position (below $500 million). Fitch has affirmed Lennar's ratings as follows: --Issuer Default Rating at 'BB+'; --Senior unsecured debt at 'BB+'. The Rating Outlook is Stable. Contact: Primary Analyst Robert Curran Managing Director +1-212-908-0515 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Robert Rulla, CPA Director +1-312-606-2311 Committee Chairperson Monica Aggarwal Senior Director +1-212-908-0282 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Liquidity Considerations for Corporate Issuers' (June 12, 2007. 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