DR HORTON
Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable.
The 'BBB+' IDR reflects the company's scale, geographic and product diversity, strong local market positions, track record of successful execution of its business model through the cycle, solid credit metrics and strong financial flexibility. The high cyclicality of the residential real estate market and the company's aggressive speculative building strategy are also factored into the rating.
The Stable Outlook reflects DHI's strong financial flexibility and meaningful cushion relative to Fitch's negative rating sensitivities to withstand the meaningful slowdown in housing activity. Fitch expects the company to generate positive cash flow from operations (CFO) during the forecast period despite lower margins through 2024.
Key Rating Drivers
Strong Credit Metrics Despite Margin Contraction: Fitch expects DHI will maintain solid credit metrics and meaningful rating headroom relative to the negative rating sensitivities for the 'BBB+' IDR. Net debt to capitalization (including rental operation cash and debt but excluding
Fitch expects DHI will outperform the industry and gain market share in 2023, resulting in flat home deliveries this year. However, Fitch expects EBITDA margins will contract 550-650 bps this year and 50-150 bps in 2024 as incentives and price adjustments remain elevated to drive demand.
Land Light Strategy: Fitch views DHI's land-light strategy as lower risk, as it reduces carrying costs and should lessen impairment charges during severe housing contractions. The company has a 2.2-year owned-lot supply and 7.2 years of total lots controlled. Its owned-lot position is among the lowest in Fitch's coverage, while its total lot position is modestly above the 5.6-year average. As of
Fitch expects DHI will continue controlling the majority of its land through options in a stable-to-growing housing market and will show willingness to walk away from these options in a cyclical downturn if the returns do not justify the investment.
Deconsolidating Forestar: DHI controls 30,500 lots, or 5.1% of its total controlled lots, through
Strong and Consistent CFO Supports Capital Allocation: DHI has consistently generated positive CFO since fiscal 2015 and Fitch expects the company will generate positive CFO in most periods during the housing cycle as it executes its land-light strategy. DHI generated
Fitch expects DHI will continue to direct FCF to share repurchases, as it has been more aggressive with share repurchases over the past two years. In
Other Real Estate Activities: DHI has cultivated other real estate activities, including multi-family rental and single-family rental properties. These activities typically require significant upfront capital before generating revenues and can take an extended period of time to construct, thus increasing the risk, in a housing downturn. Investments in these rental operations totaled
Large Diversified Builder: Fitch views DHI's broad product and geographic diversity positively as it provides some cushion from regional and buyer segment downturns. Additionally, its large national presence and local market leadership positions provide an advantage as scale in local metro markets becomes increasingly more important as homebuilders look for efficiencies in purchasing amid elevated costs. Scale in local metro markets also enhances a builder's access to the local labor pool and land. DHI was the largest homebuilder in 2022 and is the most geographically diverse builder with operations in 113 markets across 33 states.
DHI sells to first-time, move-up, luxury and active-adult buyers. According to
Speculative Activity: DHI typically maintains a high level of speculative building regardless of the state of the economy, typically accounting for about 70%-80% of homes closed. More recently, the company has been more aggressive with its speculative activity due to increased demand for quick move-in homes, stemming from volatile mortgage rates and longer construction cycle times. While still inherently riskier than a pre-sold strategy, Fitch views the current level of speculative activity as appropriate in the present environment, given low existing inventory and still-elongated, although improving, cycle times.
As of
Derivation Summary
DHI's closest peers are
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
Single-family housing starts fall 15%-20% in 2023 and improve slightly in 2024;
Homebuilding and rental revenues grow 4%-5% in fiscal 2023 and are relatively flat in fiscal 2024;
EBITDA margins of 16.5%-17.5% in fiscal 2023 and 15.5%-16.5% in fiscal 2024;
Consolidated CFO of
Net debt to capitalization ratio below 10% in fiscal 2023 and 2024;
EBITDA leverage of 0.5x-1.0x in fiscal 2023 and 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upward rating momentum is unlikely in the near term given the high cyclicality of the homebuilding sector.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation that net debt-to-capitalization will consistently be above 30%;
Fitch's expectation that EBITDA leverage will sustain above 2.0x;
DHI changes its operating strategy and controls a higher portion of its land through ownership rather than through option contracts or maintains an owned-land position in excess of three years for an extended period of time.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity: Liquidity is solid as DHI had homebuilding unrestricted cash of
DHI's rental subsidiary, DRH Rental, had
Short-Dated Maturity Schedule: The company's debt is relatively short-dated, with 100% of its senior notes maturing in the next five years. The company repaid with cash on hand
Issuer Profile
Summary of Financial Adjustments
The following items are added back to EBITDA:
Interest expense included in cost of goods sold;
Impairment and lot option charges.
Fitch excludes the debt and EBITDA of DHI's majority-owned Forestar subsidiary from the calculation of the company's credit metrics. Fitch deconsolidates Forestar and DHI's financial statements and rates DHI on a standalone basis. Fitch applies its parent-subsidiary linkage criteria to DHI and Forestar and believes DHI has a stronger standalone credit profile than Forestar. Fitch does not expect DHI to provide additional capital to Forestar going forward, as Forestar has accessed the capital markets in the past to support its growth, which is expected to continue.
Additionally, DHI does not guarantee Forestar's debt, and the two companies do not share management teams or treasury functions. These weak legal, operational and strategic ties between the entities support Fitch's approach of deconsolidating Forestar's earnings and debt from DHI's credit profile.
Fitch also excludes the EBITDA and debt of DHI's financial services (FS) operations as this subsidiary's only major debt, two mortgage repurchase facilities, are non-recourse to DHI and the FS subsidiary generally sells the mortgage it originates and the related servicing rights to third-party purchasers within 30-45 days. However, as part of its captive finance adjustment, Fitch assumes a capital structure for the FS operation that is sufficiently robust for that entity to support its debt without reliance on the corporate entity. Fitch applies a hypothetical capital injection from the corporate entity to achieve a target capital structure (1.0x debt/equity) that is indicative of a self-sustaining credit profile for DHI's FS operations. Fitch has reduced DHI's homebuilding and rental operation's unrestricted cash by
Fitch has also consolidated DHI's rental operations' debt and EBITDA in calculating the company's credit metrics. While DRH Rental's
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2023 Electronic News Publishing, source
