Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable.
MDC's 'BBB-' IDR reflects its steady capital structure through the housing cycle, relatively conservative land policy, build-to-order strategy, and strong market position in core markets. Risks include the company's less consistent cash flow generation and lower geographic diversification relative to higher-rated homebuilding peers.
The rating affirmation and Stable Outlook reflect MDC's substantial cushion relative to Fitch's net debt to capitalization negative rating sensitivity, enabling the company to withstand the meaningful slowdown in housing activity. Fitch's rating case assumptions include single-family housing starts falling 15%-20% in 2023 and improving slightly in 2024. The ratings could be pressured if Fitch expects the company to have difficulty returning to
Key Rating Drivers
Significant Decline in Revenue and EBITDA: Fitch projects MDC's revenues to decline 23%-24% in 2023 and flatten in 2024 as affordability issues, a softening economic environment and low consumer confidence continue to weigh on demand.
Fitch expects MDC's operating results to fare worse than other public builders in Fitch's coverage as the company saw outsized yoy net order declines during 2H22. Higher speculative building activity is likely to weigh on margins as home prices have declined from peaks in many markets and MDC prioritizes pace over price.
Strong Balance Sheet Provides Cushion: MDC has meaningful rating headroom relative to Fitch's net debt to capitalization negative rating sensitivity for the 'BBB-' IDR, supported by meaningful cash on hand. This ratio was -0.7% (after considering
The ratings could be pressured if Fitch expects EBITDA leverage to sustain above 3.0x, which would infer an inability to return to
Robust Financial Flexibility: MDC has a very strong liquidity position with
MDC significantly reduced land and development spending in 2022 (46% below 2021), resulting in the generation of
Fitch views the build-to-order strategy as a more conservative approach to homebuilding as builders could be burdened with excess inventory in a housing downturn under a speculative building strategy, pressuring gross margins. There have been instances in the past when the company was more aggressive with its speculative building activity, such as in 2014 and 2015.
Historically Conservative Land Policies: MDC has generally employed more conservative land and development strategies than homebuilding peers covered by Fitch. As of
Geographic Diversification: MDC benefits from geographic diversification, with operations across 16 states located in the
Significant Exposure to Entry-Level: MDC addressed ongoing home affordability concerns by expanding its product offerings designed for first-time or move-down buyers. About 63% of 2022 deliveries were from what the company considers affordably priced homes. Fitch expects demographic trends to continue to support long-term housing demand for entry-level homes. However, Fitch believes demand at the lower price points can be more cyclical and volatile as first-time buyers are more sensitive to higher mortgage rates and home prices and deteriorating economic conditions.
Derivation Summary
Fitch views MDC's 'to-be-built' strategy as more conservative than peers such as
The company is smaller, less geographically diversified, and generates more volatile CFO than higher-rated peers, including
Key Assumptions
Single-family housing starts to decline 15%-20% in 2023 and improve slightly in 2024;
Homebuilding revenues drop 23%-24% in 2023 and are relatively flat in 2024;
EBITDA margins of 10%-11% in 2023 and 8.5%-9.5% in 2024;
CFO of
Net debt to capitalization ratio below 10% in 2023 and 2024;
EBITDA leverage of around 3.0x-3.5x in 2023 and 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation that net debt-to-capitalization will sustain below 30%;
The company increases its size and further enhances its geographic diversification and local market leadership positions;
EBITDA margins sustain in the mid-teens.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation that net debt-to-capitalization will sustain above 40%;
Fitch's expectation that EBITDA leverage will sustain above 3.0x;
The company maintains an aggressive land and development spending program that leads to consistently negative CFO, higher debt levels and a diminished liquidity position.
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
Strong Liquidity: MDC's homebuilding operation has strong liquidity with
Long-Dated Maturity Schedule: The company has no near-term note maturities as its next maturity is not until
Issuer Profile
Summary of Financial Adjustments
Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and interest expense included in cost of sales and also excludes impairment charges and land option abandonment costs.
Fitch also excludes the EBITDA and debt of MDC's financial services (FS) operations as this subsidiary's only debt, a mortgage repurchase facility, is non-recourse to MDC and the FS subsidiary generally sells the mortgage it originates and the related servicing rights to third-party purchases within 30-45 days. However, as part of its captive finance adjustment, Fitch assumes a capital structure for the FS operations 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 (2.0x debt/equity) that is indicative of a self-sustaining credit profile for MDC's FS operations. The debt to equity ratio of MDC's FS operation was below this target level, so Fitch did not make any adjustments related to the FS operations. Shareholders' equity is assumed to be unaffected. Fitch reviews historical CFO on a consolidated basis and also estimates CFO excluding the FS operations.
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.
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