Fitch Ratings has published France-based housebuilder Kaufman & Broad S.A.'s (K&B) 'BBB-' Long-Term Issuer Default Rating (IDR).

The Outlook is Stable.

The rating reflects K&B's solid business profile and its strong operating cash flow. The company's targeted pre-sales and limited working capital requirements favour the projects' cash-flow cycle. The recent surge in building costs have been offset by an increase in homes' selling prices. Sales visibility at end-May 2022 (1H22) was strong, with the orderbook amounting to EUR3.4 billion (EUR2.3 billion housing and EUR1.1 billion commercial properties). K&B's commercial developments and the relatively new managed-housing business provide some diversification to the income stream of the company's housebuilding core business.

Key Rating Drivers

Robust Business Profile: K&B specialises in delivering predominantly one to three bed apartments in France's largest conurbations. The company typically targets 60% pre-sales before purchasing the land and starting construction works. In order to secure land before starting the marketing phase, K&B enters into option agreements with sellers, limiting the initial capital commitments. During the construction phase, staged payments received from customers contribute to smooth working capital requirements. Commercial developments are partly de-risked, with projects 100% pre-sold.

Entering the Managed Housing Business: In the past two years, K&B has been expanding its build-to-rent (BTR) segment, with the aim of creating its own portfolio of assets dedicated to students and seniors accommodations. In 2021, K&B acquired 60% of Neoresid, the French provider of student accommodation, while a few years before, K&B entered into a JV agreement with Serenis, an operator of retirement homes and healthcare facilities. With these transactions, K&B accessed knowledge of the managed housing business, becoming a fully integrated developer-investor-operator. At July 2022, six student residences were under construction or in planning, for a total 1,300 beds, while senior housing projects are temporarily halted given the inflationary pressure on costs and services.

Limited Funding Needs for BTR: Fitch believes that investments in BTR can be accommodated within the company's current capital structure, considering the limited number, size and timing of the projects and their funding characteristics. K&B is targeting a capital structure for these BTR projects split between equity and debt (50/50), with debt raised at the project level and non-recourse to the rest of the group. In some cases, K&B may also consider involving third-party equity investors, further limiting its capital commitment. The total 2022-27 investment for the student residences amounts to EUR115 million, only half of which is expected to be injected by K&B as equity.

Buoyant Market Conditions: Demand for new homes in France is strong, underpinned by a slow but positive population growth. In the past 10 years, the number of building permits issued by the local authorities dropped to between 330,000 and 480,000 (from 500,000 in 2011), although in recent months this trend has slightly reversed. Initiatives to support the housing market in France are among the strongest in Europe, offering various degrees of tax incentives and interest-free loans to first-time buyers.

Building Costs Increase Offset: In the six months ending May 2022, land and construction costs in France increased about 10% compared with the previous year. K&B offset these by increasing the selling price of its dwellings by around 13%. There have been some delays in the supply of raw materials in recent months, with some deliveries expected to take place later than initially planned. Fitch considers these delays as temporary rather than having a permanent impact on volumes and ultimately K&B's profits.

Low Leverage Supports Rating: Funds from operations (FFO) gross leverage at end-November 2021 (FY21) was stable at 2.2x and we forecast it will remain at around 2.0x in the next two years. K&B enjoys a positive net cash position, which Fitch expects it to retain over the coming years, given positive cash flow generation. In addition, investments in the BTR segment will be modest and any non-recourse debt excluded from Fitch's leverage ratios calculation.

Derivation Summary

K&B ranks among the top five French housebuilders. With revenues exceeding EUR1.2 billion, the company is bigger than its Spanish peers AEDAS Homes S.A (BB-/Stable), Via Celere Desarrollos Inmobiliarios, S.A.U. (BB-/Stable) and Neinor Homes S.A. (BB-/Stable) all generating sales below EUR1 billion. In terms of sales, K&B is nearly half the size of the London-focused housebuilder The Berkeley Group Holdings plc (BBB-/Stable), which is partly explained by Berkeley's high average selling price (ASP; averaging more than GBP650,000 over the past four years compared with K&B's ASP of EUR334,285 for single family homes and less than EUR300,000 for apartments). This reflects Berkeley's commitment to the wealthiest areas of the UK with high-end, regeneration projects that also attract foreign buyers.

The Spanish and the French housebuilding markets are highly fragmented. However, the French one compares favourably due to its supportive regulation, various schemes that help the end-customer, as well as the use of optioned land. The pre-sale rate hurdle of K&B at around 60% is nearly double than that of its Spain-based peers, which also typically acquire the land well ahead of the construction. These features contribute to K&B's investment-grade business profile. The regional focused UK housebuilder Castle UK Finco PLC (B+/Stable, trading as Miller Homes) makes use of optioned land as K&B does. However, K&B enjoys favourable payment terms from its customers with staged instalments received throughout the construction phase. Spain and UK-based housebuilders' funding relies instead on small purchaser deposits (5%-10% for the UK and up to 20% for Spain) to fund land and development costs up to completion.

K&B's low leverage is commensurate with its investment-grade rating. The only other Fitch-rated entity with low FFO gross leverage and low total debt/EBITDA is Berkeley (around 1.5x and 1.0x, respectively).

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

FY22 revenues to exceed EUR1.3 billion, with reservations for the year of around 7,000 units (FY21 6,609). Low single-digit increase in ASP compared to FY21

Gross margin in the high teens during FY22-FY25

No additional debt incurred and repayment of the existing EUR50 million bond in 2024

Dividends progressively increased based on the expectation of gradually increased activity and profits

Managed housing business funded through a mix of equity and non-recourse debt (50/50) raised at project level

Gare d'Austerlitz redevelopment not included in our forecast

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

FFO gross leverage below 1.0x (gross debt/EBITDA below 0.5x) on a sustained basis

Maintaining prudent development with pre-sale rates of at least 60%

Change in the working capital/turnover ratio below 7% on a sustained basis

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Evidence of weakening risk management policies with pre-sale rates materially decreasing below 60%

Change in the working capital/turnover ratio to above 7% on a sustained basis, impacting liquidity

FFO gross leverage above 2.0x (gross debt/EBITDA above 1.5x) on a sustained basis

FFO net leverage above 1.5x (net debt/EBITDA above 1.0x) on a sustained basis

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Ample Liquidity: At 1H22 K&B's liquidity was abundant, comprising EUR98 million of cash and a EUR250 million undrawn revolving credit facility maturing in 2025. There are no large incoming debt maturities in the next three years. The two outstanding unsecured bonds, totalling EUR150 million, will mature in May 2024 (EUR50 million) and May 2025 (EUR100 million). The total cost of debt, including issuance expenses and hedging arrangements is 4.19%.

Issuer Profile

K&B is one of the top five French housebuilders by volumes of units delivered. The company specialises in delivering predominantly one to three bed apartments in France's largest conurbations.

Date of Relevant Committee

06 September 2022

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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