Fitch Affirms PulteGroup's IDR at 'BB+'; Outlook to Positive

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'BB+' Issuer Default Rating (IDR) of PulteGroup, Inc. PHM, and revised the Rating Outlook to Positive from Stable. Fitch has also assigned a 'BB+/RR4' rating to PHM's $500 million unsecured revolving credit facility that matures in July 2017. A complete list of rating actions follows this release.

KEY RATING DRIVERS

The revision to Positive reflects PHM's operating performance in 2014 and current financial ratios (especially leverage and coverage) which compare well vs. its peers, its solid liquidity position and favorable prospects for the housing sector in 2015 and 2016. Fitch believes that the housing recovery is firmly in place (although the rate of recovery remains well below historical levels and will likely continue to occur in fits and starts). The Outlook also takes into account the enhanced senior management team and the board's more shareholder-friendly strategy.

The rating for PHM reflects the company's broad geographic and product diversity, a long track record of adhering to a disciplined financial strategy and, somewhat more recently, an at times, aggressive growth strategy (via mergers and acquisitions). The merger with Centex in August 2009 further enhanced the company's broad geographic and product line diversity. Centex's significant presence in the first move-up and especially the entry-level categories complemented PHM's strength in both the move-up and active adult segment. PHM's Del Webb (active adult) segment is perhaps the best recognized brand name in the homebuilding business. The company also did a good job in reducing its inventory and generating positive operating cash flow during the severe housing downturn from 2007 through 2011 and since then.

PHM's future ratings and Outlook will be influenced by broad housing market trends as well as company-specific activity such as 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 and free cash flow trends and uses.

DEBT AND LIQUIDITY

The affirmation also takes into account the company's successful execution of its debt repayment strategy following the merger with Centex in August 2009 and more recently. Subsequent to the merger the company repurchased $1.5 billion of senior notes through a tender offer. PHM also retired $898.5 million in debt in 2010, $323.9 million in 2011, $592.4 million in 2012, $462 million in 2013 and $245.7 million in 2014. Remaining debt maturities are well laddered with $236.4 million scheduled to mature in 2015 and $462 million due in 2016. PHM ended 2014 with $1.29 billion of unrestricted cash and equivalents and $1.82 billion of senior notes.

The reduced debt and growing profitability have enabled the company to improve its debt/EBITDA ratio from 14.3x at the end of 2010 to 2.05x at the end of 2014. During that same period, interest coverage improved to 6.7x from 0.9x.

As a cost saving measure and to provide increased operational flexibility, PHM voluntarily terminated its $250 million unsecured revolving credit facility effective March 30, 2011. Then on July 23, 2014, PHM entered into a senior unsecured RCF that matures on July 21, 2017. The facility provides for maximum borrowings of $500 million and contains an uncommitted accordion feature that could increase the size of the facility to $1 billion.

As is the case with other public homebuilders, PHM is using the liquidity accumulated over the past few years to expand its land position and trying to acquire land at attractive prices.

In late July 2013, the board of directors reinstituted a quarterly dividend ($0.05 per share). The board had eliminated the $0.04 per share quarterly dividend in November 2008 to conserve cash. In October 2014, Pulte's board declared a 60% increase in its quarterly dividend to $0.08 per share.

Pulte also announced in October that its board approved a share repurchase authorization of $750 million. As of third quarter end $85 million was available under its earlier repurchase authorization. Management has indicated that its first priority in allocating capital is to invest in its business, and then to return excess funds to shareholders in the form of dividends and share repurchases on a routine and systematic basis. PHM repurchased 12.9 million shares (cost $245.8 million) in 2014 and 7.2 million shares (cost $118.1 million) in 2013.

Even with substantial land and development spending in 2015 as well as some moderate share repurchase activity and the higher dividend, Fitch expects PHM will end the year with a cash and equivalents position between $950 million and $1 billion.

MARGIN ENHANCEMENT AND COST-REDUCTION EFFORT

PHM has realized considerable improvement in gross profit margins, before real estate charges, from 8.7% in 2009 to 23.4% in 2014 and ongoing operational initiatives which are expected to support margins and largely counter increased competitive and cost pressures and customer mix shifts. Those initiatives include a rising share of closings from the implementation of common plans to help drive construction efficiency, pushing design, engineering and purchasing activities out to field operations to drive local costs lower, and working to ensure proper balance of pre-sold vs. lower margin speculative sales (currently 74.3% of production pre-sold, 25.7% spec).

REAL ESTATE

As of Dec. 31, 2014, PHM controlled 130,793 lots, of which 73.6% are owned and the remaining 26.4% controlled through options. Total lots controlled represent a 7.6-year supply of total lots based on LTM closings, while the company owns 5.6-years of lots. The company's land position has historically been longer compared to other public homebuilders due to its Del Webb operations. PHM's active adult and certain master-planned communities can take from five to seven years or longer during their build-out.

During the first few years off the market bottom, the company was relatively subdued in committing to incremental land purchases because of its already sizeable land position. Of course, the acquisition of Centex in 2009 allowed the company to sharply increase its land position.

PHM spent $750 million on land and development in 2009, while Centex spent roughly $200 million. PHM spent $980 million on land and development in 2010 and $1.04 billion in 2011. The company paid out $924 million for land and development in 2012 - roughly 1/3 for land and 2/3 for development activities. PHM spent approximately $1.3 billion on real estate in 2013 with roughly 40% for land and 60% for development. For full year 2014 the company spent $1.8 billion on real estate: about 50% for land and 50% on development. This was approximately $200 million below the board's authorization level. The board has authorized $2.4 billion in real estate expenditures for 2015 with more than 50% targeted for development activities. (For perspective, PHM alone spent $4.6 billion on land and development in 2006.)

PHM continues to have meaningful development expenditures, partially due to its Del Webb active adult (retiree) operations, but largely related to its Pulte brand. Currently, fewer developed lots are available to buy; thus, more raw land, which will require development spending, is being acquired for its Pulte and Centex brands. This is also the case for other homebuilders.

Fitch is comfortable with PHM's land strategy given the company's cash 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. Additionally, Fitch expects management to be disciplined with the uses of its cash, refraining from significant share repurchases or one-time dividends to its stockholders that would meaningfully deplete its liquidity position.

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 1.5pp 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 4.9% to 647,400 and multifamily volume grew 16% to 355,600. 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 3% 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 5.8% 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 about 17.5% to 760,000 as multifamily volume expands 7% 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.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Industry single-family housing starts improve 17.5%, while new and existing home sales grow 18% and 4.3%, respectively, in 2015;

--PHM's revenues increase mid-single digit and homebuilding EBITDA margins slightly erode this year;

--The company's debt/EBITDA approximates 2x and interest coverage exceeds 7x by year-end 2015;

--PHM spends in excess of $2 billion on land acquisitions and development activities this year;

--The company maintains a healthy liquidity position (above $1 billion with a combination of unrestricted cash and revolver availability).

RATING SENSITIVITIES

Additional positive rating actions leading to a low investment grade rating may be considered if the recovery in housing appears likely for the next few years and meets or exceeds Fitch's current outlook, PHM at least maintains current credit metrics (particularly debt-to-EBITDA of 2x and interest coverage at or above 7x) and the company preserves a substantial liquidity position.

A negative rating action could be triggered if the industry recovery dissipates; PHM's 2015 revenues drop in the high-teens while the EBITDA margins decline below 12%; and PHM's liquidity position falls sharply, perhaps below $500 million, as the company pursues overly aggressive shareholder-friendly actions (e.g. dividends, share repurchase).

Fitch affirms the following ratings for PHM:

PulteGroup, Inc.:

--Long-term IDR at 'BB+';

--Senior unsecured notes at 'BB+/RR4'.

Centex Corp.:

--Long-term IDR at 'BB+';

--Senior unsecured debt at 'BB+/RR4'.

Fitch has also assigned a 'BB+/RR4' rating to the company's $500 million unsecured revolving credit facility.

The Rating Outlook is Positive.

In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The 'RR4' for PHM's senior unsecured debt supports a rating of 'BB+', the same as PHM's IDR, and reflects average recovery prospects in a distressed scenario.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980998

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