KEY RATING DRIVERS
The ratings and Outlook for KBH are based on the company's geographic diversity, customer and product focus, conservative building practices and effective utilization of return on invested capital criteria as a key element of its operating model. The company did a good job in reducing its inventory exposure and generating positive operating cash flow during the last severe industry downturn. Since its peak in the third quarter of 2006, homebuilding debt has been reduced from
The ratings also reflect the following events:
--The housing recovery has continued into 2014 and should persist through the balance of this year and at least 2015;
--KBH is successfully mining the trade up market and more affluent first time buyers and de-emphasizing low end entry level customers (note the 11.2% increase in average sales price so far in 2014);
--The South Edge legal issues and liabilities have been dealt with; operating and financial comparisons so far in 2014 are much improved (especially average sales price, unit dollar backlog, gross profit margin, EBITDA and homebuilding and corporate pretax profitability);
--The deferred tax asset valuation allowance is likely to be reversed in the fiscal 2014 fourth quarter;
--Perhaps most importantly, the company has been successful in refinancing a substantial portion of the
The ratings reflect KBH's business model and marketing prowess. Additionally, the ratings also take into account its leadership role in constructing energy-efficient homes, its reemphasis of the value-engineered Open Series of home designs, its conservative building practices, its capital structure and the cyclicality of the U.S. housing market.
Industry housing metrics should increase in 2014 due to faster economic growth (prompted by improved household net worth, industrial production and consumer spending), and consequently some acceleration in job growth (as unemployment rates decrease to 6.4% for 2014 from an average of 7.4% in 2013), despite somewhat 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
New home price inflation should moderate in 2014, at least partially because of higher interest rates. Average and median new home prices should rise about 3.5% in 2014.
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (5.8% in 2015). Credit standards should steadily, moderately ease throughout next year.
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. Single-family starts are forecast to rise 21% to 819,000 as multifamily volume expands about 6.5% to 366,000. Total starts would be approaching 1.2 million. New home sales are projected to increase 20.4% to 560,000. Existing home volume is expected to approximate 5.075 million, up 5%.
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 2.5-3%.
Challenges remain including the potential for higher interest rates and restrictive credit qualification standards.
IMPROVING FINANCIAL RESULTS AND CREDIT METRICS
KBH's corporate revenues expanded 9.2% to
The homebuilding gross profit grew 33.9% to
SG&A expenses rose 2.8% ytd in 2014. SG&A expense as a percentage of homebuilding sales declined from 13.97% to 13.14%.
The six months pretax income (before charges) was
Net unit orders and the value of orders expanded 5.2% and 18.9%, respectively, for the first six months of 2014. As of
KBH's most recent credit metrics, while improving, remain stressed. Debt-to-LTM EBITDA at the end of the
LIQUIDITY AND CAPITAL ISSUES
The company ended the second quarter of 2014 with
KBH has a
The company maintains LOC facilities with various financial institutions to obtain LOCs in the ordinary course of operating its business. As of
The company regularly accesses the capital markets and in the second quarter 2014 did a public issuance of
KBH is primarily a single family homebuilder. It ranked as the fifth largest homebuilder in the U.S. in 2008 through 2013, based on home closings. KBH operates in four regions comprised of 10 states serving 40 major markets. The company delivered its first homes in
KBH typically has primarily focused on entry level home buyers and, to a lesser extent, on first step move-up buyers in the U.S. So far in 2014 trade up buyers and more affluent first time buyers dominated the sales mix. The first half 2014 average price was
At the end of the second quarter of 2014, KBH controlled 57,377 lots, an 8.8% increase from the end of the second quarter of 2013 but a 70.9% decrease from a peak of 197,000 lots at the end of 1Q'6 (
The company reported negative
Fitch is comfortable with this strategy given the company's liquidity position. Fitch expects KBH to end fiscal 2014 with homebuilding unrestricted cash of
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.
KBH's ratings are constrained in the intermediate term because of relatively high leverage metrics. However, a positive rating action may be considered if the recovery in housing is meaningfully better than Fitch's current outlook, KBH shows continuous improvement in credit metrics, and maintains a healthy liquidity position (combination of cash and equivalents and availability on the credit facility). In particular, debt-to-EBITDA would need to approach 4x, debt-to-capitalization should approximate 55% and interest coverage would need to exceed 4x in order to take a positive rating action.
Negative rating actions could be triggered if the industry recovery dissipates or if there is a shortfall in KBH's financials (revenues, profitability) and KBH maintains an overly aggressive land and development spending program that meaningfully diminishes its liquidity position (below
The Recovery Rating (RR) of 'RR4' on KBH's senior unsecured notes indicates average recovery prospects for holders of these debt issues. KBH'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 this RR.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
--'Liquidity Considerations for Corporate Issuers' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Liquidity Considerations for Corporate Issuers
Source: Fitch Ratings
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