Fitch raises IDR for Standard Pacific to B+, up from B; rating outlook stable
December 13, 2013
– Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Standard Pacific Corp. (NYSE: SPF) to 'B+' from 'B'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade reflects SPF's operating performance year-to-date (YTD), improving credit metrics, the above average performance relative to its peers in certain financial, credit and operational categories and strong liquidity position.
The rating for SPF is also influenced by the company's execution of its business model, land policies, and geographic, price point and product line diversity. Risk factors include the cyclical nature of the homebuilding industry and the company's somewhat aggressive land strategy.
The Stable Outlook takes into account Fitch's expectation of a continued moderate recovery for the housing sector for the remainder of 2013 and in 2014.
IMPROVING FINANCIAL RESULTS AND CREDIT METRICS
SPF's homebuilding revenues for the first nine months of 2013 increased 60% to $1.31 billion as home deliveries grew 40.6% to 3,259 homes and the average selling price advanced 14% to $399,000. More importantly, the company reported homebuilding pre-tax income of $147.7 million (11.3% of homebuilding revenues) during the Sept. 30, 2013 YTD period compared with $38.6 million (4.7% of revenues) during the same period last year. Fitch expects SPF's 4Q'13 home deliveries and average sales price will grow at a somewhat similar pace as the YTD period and homebuilding pre-tax income will be roughly 11%-12% of homebuilding revenues for all of 2013.
Fitch-calculated leverage at the end of the 3Q'13 was 5.8x compared with 8.2x at the end of 2012. EBITDA to interest coverage was 2.3x for the LTM period ending September 30, 2013 compared with 1.4x in 2012. Fitch expects further improvement in credit metrics, with leverage falling below 5x and interest coverage approaching 3x by the end of 2014.
Housing metrics have all showed improvement so far in 2013. For the first eight months of the year, single-family housing starts increased 19.3%. Existing home sales gained 11.2% for the first ten months of 2013 while new home sales grew 15.8%.
Fitch's housing estimates for 2013 are as follows: Single-family starts are forecast to grow 15% to 615,000, while multifamily starts expand about 20% to 295,000; single-family new-home sales should increase approximately 15.3% to 423,000 and existing home sales advance 8.5% to 5.05 million.
Housing metrics should increase in 2014 due to faster economic growth, and some acceleration of job growth (as unemployment rates decrease to 6.9% for 2014 from an average of 7.5% in 2013), despite somewhat higher interest rates, as well as more measured home price inflation. Single-family starts are projected to improve 20.0% to 738,000 as multifamily volume grows about 9% to 322,000. Thus, total starts next year should top 1 million. New home sales are forecast to advance about 20% to 508,000, while existing home volume increases 2.0% to 5.16 million. Average and median new home prices should rise about 3.5% in 2014.
As Fitch noted in the past, the housing recovery will likely occur in fits and starts.
HIGHER INTEREST RATES
The most recent Freddie Mac average mortgage rate was 4.42%, down 4 bps sequentially from the previous week and about 97 bps higher than the average rate during the month of April 2013, a recent low point for mortgage rates. While the current rates are still well below historical averages, the sharp increase in rates and rising home prices are moderating affordability. In the case of SPF, whose average home price is roughly $420,000, assuming a 20% down payment, a 100 bps rise in mortgage rates will increase principal and interest payment by about $205 each month or a 12.1% impact.
There has been some short-term volatility in certain housing metrics following the increase in interest rates (and higher home prices) during the past seven months. Existing home sales (on a seasonally adjusted basis) fell 3.2% on a month-over-month basis in October following a 1.8% decline in September. New home sales in October grew 25.4% on a seasonally-adjusted basis to 444,000, compared with 354,000 during the previous month. This follows a 6.6% month-over-month decline in September, a 1.6% improvement in August and a 17.1% decrease in the month of July.
In the case of SPF, new home orders improved 32.6% during the nine-month period but only advanced 12.2% year-over-year (yoy) during the 3Q'13. Management also indicated that net order activity during the month of October fell 15% compared to last year. Cancellation rates also increased to 20% during the 3Q'13 from 14% during the 3Q'12. However, the higher rate during the quarter is still relatively in line with the historical average cancellation rates for the company and the industry.
While there has been some short-term weakness in order trends due to the sharp increase in interest rates, higher home prices and, perhaps, the government shutdown and debt limit concerns, Fitch currently does not expect this trend will persist into the 2014 spring selling season. However, a continued sharp increase in rates could further slow the housing recovery.
The company ended the September 2013 quarter with $346 million of unrestricted cash on the balance sheet and $350 million of availability under its $350 million unsecured revolving credit facility. In October 2013, the company increased the revolver commitment from $350 million to $470 million. Fitch expects SPF in the intermediate term will maintain liquidity of at least $350 million - $400 million from a combination of cash and revolver availability. The company's debt maturities are well-laddered, with no major debt maturities until 2016, when $268 million of senior notes become due.
SPF is focused on growing its operations by investing in new communities, particularly in land-constrained markets. Following the significant reduction of its land supply during the 2006 -2009 periods, SPF began to increase its land holdings during the past four years. Total lots controlled increased 18.2% yoy and 1.4% compared with the previous quarter. As of Sept. 30, 2013, the company controlled 35,643 lots, of which 76% were owned and the remaining lots controlled through options and JV partnerships. Based on LTM closings, SPF controlled 8.4 years of land and owned roughly 6.4 years of land.
The company spent $560 million on land and development ($377 million for land and $183 million for development) during the first nine months of 2013 compared with $443 million expended during the same period in 2012. SPF expects total land and development spending will be between $700 million - $850 million during 2013 (including $225-275 million for development). This compares with $711 million spent during 2012 ($543 million for land and $168 million for development), $437 million during 2011, $336 million in 2010 and $158 million during 2009.
Fitch is comfortable with this strategy given the company's strong liquidity position, well-laddered debt maturity schedule and management's demonstrated ability to manage its spending. Fitch expects management will pull back on spending if the recovery in housing stalls or dissipates.
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 and especially free cash flow trends and uses, and the company's liquidity position.
Positive rating actions may be considered if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, SPF shows continuous and sustained improvement in credit metrics (particularly debt-to-EBITDA approaching 4x and interest coverage exceeding 4x), and preserves a healthy liquidity position.
A negative rating action could be triggered if the industry recovery dissipates; SPF's 2014 revenues drop high-teens while the EBITDA margins decline below 15%; leverage exceeds 8x and SPF's liquidity position falls sharply, perhaps below $200 million.
Fitch has upgraded the following ratings for SPF:
--Long-term IDR to 'B+' from 'B';
--Senior unsecured notes to 'B+/RR4' from 'B/RR4';
--Unsecured revolving credit facility to 'B+/RR4' from 'B/RR4'.
The Rating Outlook is Stable.
The 'RR4' Recovery Rating (RR) on the company's unsecured debt indicates average recovery prospects for holders of these debt issues. Standard Pacific'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 debt holders. Fitch applied a going concern valuation analysis for these RRs.