Fitch Rates D.R. Horton's Proposed Sr. Notes Offering 'BB+'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BB+' rating to D.R. Horton, Inc.'s DHI proposed offering of senior unsecured notes due 2020. This issue will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offerings will be used for general corporate purposes.

The Rating Outlook is Stable.

A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings for DHI reflect the company's successful execution of its business model, steady capital structure, and geographic and product line diversity. The company was an active consolidator in the homebuilding industry in the past, but has been much less acquisitive over the past 10 years and it appears that the company will continue to be focused principally on harvesting the opportunities within its current and adjacent markets.

The ratings also reflect the company's relatively heavy speculative building activity (at times averaging 50%-60% of total inventory and 58% at Dec. 31, 2014). Historically, the company built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand). DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is somewhat more comfortable with the more moderate spec targets of 2004 and 2005, when spec inventory accounted for roughly 35%-40% of homes under construction.

The Stable Outlook takes into account further moderate improvement in the housing market in 2015 and the potential for share gains by DHI and hence volume outperformance relative to industry trends. The Outlook also considers the company's above-average performance from credit and operating perspectives during much of the past housing downturn and so far in the recovery. DHI was one of the few public builders profitable in 2010 and 2011. The company reported solid profits in 2012, 2013 and 2014, and should report stronger pretax and net income this fiscal year. DHI was the second builder to reverse its substantial federal deferred tax asset allowance (during FY 2012).

THE COMPANY

D.R. Horton was established in 1978 and completed its initial public offering in 1992. DHI has grown quite rapidly since its beginnings. From 1978 to 1987 its activities were exclusively in the Dallas/Ft. Worth area. The company has entered 77 markets since then through a combination of 'greenfield' entries and acquisitions. Since 1978, DHI has made 20 acquisitions, almost all of these during the 1994-2002 period.

DHI acquired the homebuilding operations of Breland Homes in August 2012 for $105.9 million in cash. Breland Homes operated in Huntsville and Mobile in Alabama and along the gulf coast of Mississippi. In October 2013, the company acquired the homebuilding operations of Regent Homes, Inc. for $34.5 million cash. Regent operated in Charlotte, Greensboro and Winston-Salem, N.C. DHI acquired Crown Communities, the largest builder in Atlanta, on May 9, 2014.

In calendar 2014, DHI was ranked the largest homebuilder in the U.S. based on closings and revenues, holding the #1 position based on home closings since 2002. The company has made only three acquisitions since 2003 and it appears that DHI may remain less acquisitive in the future as it focuses on harvesting the opportunities within its current and adjacent markets. The company operates in 27 states and 79 markets in the U.S. and has 38 homebuilding operating divisions.

IMPROVING HOUSING MARKET

Housing metrics grew 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 slowed (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 4.9% to 648,000 as multifamily volume grew 16.4% to 357,800. Thus, total starts in 2014 were 1.006 million. New home sales increased 1.2% to 435,000, while existing home volume was off 3.1% to 4.93 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 (5.8% in 2015). Credit standards should steadily ease moderately 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 to 35 year-olds should provide some incremental elevation to the rental and starter home markets.

This year single-family starts are forecast to rise about 17.5% to 762,000 as multifamily volume expands about 7% to 383,000. Total starts would be in excess of 1.1 million. New-home sales are projected to increase 18% to 513,000. Existing home volume is expected to approximate 5.14 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. Average and median home prices should increase 2.2%-2.7%.

FINANCIALS

DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt during the downturn and early in the recovery. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.58 billion as of Dec. 31, 2011, a 71% reduction.

More recently, DHI has been responding to the stronger housing market, expanding inventories and increasing leverage. Homebuilding debt at the end of the fiscal 2015 first quarter was $3.40 billion.

As of Dec. 31, 2014, debt/capitalization was 39.3%. Net debt/capitalization was 35.4% at the end of fiscal 2015 first quarter. Debt-to-EBITDA has improved from 5.7x at Sept. 30, 2012 to 4.0x at Sept. 30, 2013 and 3.3x at Sept. 30, 2014 and Dec. 31, 2014. Funds from operations (FFO) adjusted leverage was 6.6x at the end of fiscal 2012 and is currently 4.6x. Interest coverage rose from 3.35x at the end of fiscal 2012 to 4.75x in 2013 and 5.9x at the end of the fiscal 2015 first quarter. Fitch projects that debt-to-EBITDA should be just below 3x by the conclusion of 2015. Fitch also projects that at the end of 2015 interest coverage should come close to 6.5x.

DHI's earlier debt reduction was accomplished through debt repurchases, maturities and early redemptions. Approximately $158 million in debt will mature on Feb. 15, 2015.

DHI has solid liquidity with unrestricted homebuilding cash and equivalents of $517.7 million as of Dec. 31, 2014.

On Sept. 7, 2012, DHI entered into a new $125 million five-year unsecured revolving credit facility. In early November 2012, the company announced that it had received additional lending commitments, increasing the capacity of the facility to $600 million. Currently, the facility size is $975 million with an uncommitted accordion feature that could increase the size of the facility to $1.25 billion, subject to certain conditions and availability of additional bank commitments.

The facility also provides for the issuance of letters of credit (LOCs). LOCs issued under the facility reduce available borrowing capacity. The maturity date of the facility is Sept. 7, 2019. At Dec. 31, 2014, there were $375 million of borrowings outstanding and $94 million of LOCs issued under the revolving credit facility.

In early December 2012, DHI declared a cash dividend of $0.15 per share. This dividend was in lieu of and accelerated the payment of all quarterly dividends that the company would have otherwise paid in calendar 2013. DHI resumed its normal quarterly cash dividends in calendar 2014.

REAL ESTATE

DHI spent $2.3 billion on real estate in 2014: $1.4 billion on land and $0.9 billion on development. The company expended $2 billion on land/lots in 2013 and spent about $640 million on development activities. DHI purchased $1.1 billion of land and lots in 2012 and spent approximately $300 million on land development. The company spent $790 million on land and development activities in 2011, and about $830 million during 2010, compared with $380 million paid in 2009. During the peak of the housing cycle, DHI spent $5.2 billion annually.

During the first quarter of fiscal 2015, the company committed roughly $550 million on real estate activities (55% on land and 45% on development). Fitch expects that land and development spending will approximate $2.2 to 2.4 billion for full-year fiscal 2015 with almost 60% for land and lots and roughly 40% for development activities.

DHI maintains a 6.1-year supply of lots (based on LTM deliveries), 67.4% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past six years as the company has written off substantial numbers of options and land owners are less inclined to use options. Fitch expects DHI to continue adding to its land position and increasing its community count. The primary focus will be optioning (or in some cases, purchasing for cash) or developing finished lots in relatively small phases, wherein DHI can get a faster return of its capital.

DHI's cash flow from operations during fiscal 2014 (ending Sept. 30, 2014) was a negative $661.4 million. In fiscal 2015, Fitch expects DHI to be cash flow neutral despite the company continuing to spend substantial amounts on land and development activities.

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;

--DHI's cash position.

Fitch would consider taking further positive rating actions if the recovery in housing persists or accelerates and DHI shows steady improvement in credit metrics (such as debt-to-EBITDA leverage approaching 2x and sustaining at that level), 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 DHI 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, and meaningfully diminished liquidity position (below $500 million).

Fitch currently rates DHI as follows:

--Long-term IDR '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:

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=979155

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