Fitch Ratings has affirmed
The Rating Outlook has been revised to Positive from Stable.
The Outlook revision to Positive reflects the company's more conservative posture during this cycle by meaningfully reducing debt, pivoting to a more land-light strategy, and demonstrating the ability to generate meaningful and more consistent cash flow from operations (CFO) through the cycle. Fitch expects the company will maintain low leverage levels, including net debt to capitalization below 10% and EBITDA leverage below 1.0x. Fitch expects Lennar will achieve these solid credit metrics despite the assumption that single-family starts fall 15%-20% in 2023 and grow slightly in 2024.
Fitch may consider upgrading Lennar's IDR to 'BBB+' if the company's operating performance meets or exceeds Fitch's rating case forecast (see Key Assumptions) and the company continues to strengthen its balance sheet.
Key Rating Drivers
Solid Results Despite Industry Slowdown: Fitch expects Lennar will outperform the industry and gain market share, resulting in a mid-single digit increase in home deliveries in fiscal 2023 and slightly higher closings next year. Fitch expects the company will continue to focus on pace, which may lead to lower average home sales price in the next 12-18 months. Fitch expects EBITDA margins will fall 550-650 bps this year and 100-150 bps in 2024 as price adjustments and incentives remain elevated to drive demand.
Conservative Balance Sheet: Fitch expects Lennar's credit metrics will remain strong for the 'BBB' IDR, including net debt to capitalization below 10% (excluding
Lennar has meaningfully delevered its balance sheet since acquiring
Land-Light Strategy: Lennar has lowered its owned-lot position and increased lots controlled through options. Fitch views this strategy positively, as it reduces carrying costs and should lessen impairments during severe housing contractions. At
The company has a 2.3 year owned-lot supply and 6.2 years of total lots controlled. Its owned-lot position is among the lowest in Fitch's coverage. Fitch expects Lennar will continue controlling the majority of its lots through options in a stable-to-growing housing market and will be willing to walk away from these options in a cyclical downturn if the returns are not justified.
Higher Speculative Activity: Lennar has increased its spec activity due to higher demand for quick move-in homes, stemming from volatile mortgage rates and longer cycle times. While still inherently riskier than a pre-sold strategy, Fitch views the current level of spec activity as appropriate in the current environment given low existing inventory and still-elongated, although improving, cycle times. At
Consistent Cash Flow Generation: Lennar's shift to a more land-light strategy has resulted in the company generating one of the strongest and most consistent CFO among its investment-grade peers. The company generated CFO margin of almost 10% annually in fiscal 2021 and 2022. Fitch expects Lennar will generate CFO of
Disciplined Capital Allocation: The company has been disciplined with its capital allocation strategy, prioritizing debt reduction while making modest share repurchases. Lennar repurchased
Large Diversified Builder: Lennar is the second largest homebuilder in the
The company has heavy exposure to the Western region, with 40% of homebuilding assets and 36% of homebuilding revenues generated from this region. Lennar serves first-time, move-up, active-adult and luxury homebuyers. Lennar has a top 10 position in 42 of the 50 largest new home metro markets in the country, including a top position in 21 markets.
Non-Homebuilding Activities: Lennar has diversified its real estate activities to include nonresidential activities, multi-family construction, large-scale master-planned communities, and construction of single-family rental units. The company also has strategic investments in technology companies. Lennar intends to spin-off its multifamily and single-family home for rent asset management businesses, together with some investment assets, by transferring them to a newly formed subsidiary,
Lennar expects its asset base to be reduced by about
Derivation Summary
Lennar's closest peers are
Lennar and DHI are more aggressive with their speculative building compared with
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer:
Homebuilding revenues fall low-single digits in fiscal 2023 and remains relatively flat in fiscal 2024;
EBITDA margins of 15%-16% in fiscal 2023 and 14%-15% in fiscal 2024;
CFO of
Net debt to capitalization below 10% and EBITDA leverage below 1x during the forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Lennar continues to control a majority of its land through options, including maintaining an owned-lot position (including homes in production) of less than three years;
Fitch's expectation that net debt to capitalization will sustain below 30%;
Fitch's expectation that EBITDA leverage will consistently be below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation that net debt to capitalization will consistently be above 35% because of sustained erosion of profits due to meaningful and continued loss of market share, ongoing land, materials and labor cost pressures, and/or significant inventory or goodwill impairment charges;
Fitch's expectation that EBITDA leverage will sustain above 2.5x;
Lennar maintains an overly aggressive land and development spending program that leads to consistently negative CFO. In particular, Fitch will focus on the company's ability to repay debt maturities with available liquidity and internally generated cash flow;
The company meaningfully changes its financial and growth strategy, including large, debt-funded acquisitions and/or aggressive land and development spending and shareholder friendly activities that could result in significantly weaker credit metrics.
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 Position: As of
Lennar has meaningful debt maturities in the next 18 months, including
Issuer Profile
Summary of Financial Adjustments
Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation, interest expense included in cost of sales and impairment charges and land option abandonment costs.
Fitch also excludes the EBITDA and debt of Lennar's financial services (FS) operations as this subsidiary's only debt, a mortgage repurchase facility, is non-recourse to Lennar 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 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 Lennar's FS operations. The debt to equity ratio of Lennar'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 these 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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