Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable.
The rating affirmation and Stable Outlook reflect Fitch's determination that the acquisition of the company by
Key Rating Drivers
Acquisition by
Fitch does not expect cross guarantees or cross default provisions between MDC and
Significant Decline in Revenue and EBITDA: MDC's revenue declined 19.1% in 2023 and Fitch expects 2024 revenue to be flat to slightly lower as affordability issues, a softer economy and low consumer confidence continue to weigh on demand.
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 3.1% after considering
The ratings could be pressured if Fitch expects EBITDA leverage to sustain above 3.0x, which would imply an inability to return to
Robust Financial Flexibility: MDC has a very strong liquidity position, with
Fitch views the build-to-order strategy as a more conservative approach as builders could be burdened with excess inventory in a housing downturn under a speculative building strategy, pressuring gross margins. The company was more aggressive at times 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 in the
Significant Exposure to Entry Level: MDC addressed ongoing home affordability issues by expanding its product offerings designed for first-time or move-down buyers. Fitch estimates that more than half of the company's 2023 deliveries were from what the company considers affordably priced homes. Fitch expects demographic trends 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.
Housing Market Remains Challenged: Fitch expects the housing market to improve in 2024 but remain anemic, as low housing affordability and a weak economic backdrop will keep housing demand constrained. Mortgage rates staying higher for longer, combined with elevated home prices, will keep affordability challenging. However, homebuilders' ability to adjust product offerings and offer mortgage rate buydowns will make new homes an attractive alternative for potential homebuyers.
MDC's offering of homes at affordable price points allows the company to meet homebuyers' needs. Fitch expects MDC's revenues will be relatively flat, driven by higher home deliveries but offset by lower selling prices while EBITDA margins compress 150bps to 175bps from higher input costs and elevated incentive levels.
Derivation Summary
The rating affirmation and the Stable Outlook reflect MDC's substantial cushion relative to Fitch Ratings' net debt to capitalization negative rating sensitivity. Fitch's rating case assumptions include single-family housing starts improving slightly in 2024.
MDC is smaller, less geographically diversified, and generates more volatile CFO, than higher-rated peers, including
Fitch applies its 'Parent and Subsidiary Linkage Rating Criteria' to derive the IDR for MDC. Fitch considers
Following the 'Stronger Parent Path', Fitch determines that legal incentives are low, due to the lack of guarantees or other legal ties such as cross-default provisions. Fitch views strategic incentive to be medium as MDC represents about 20% of
Key Assumptions
Single-family housing starts to grow 3%-4% in 2024;
Homebuilding revenues are flat to slightly lower in 2024 as delivery growth is offset by ASP declines;
EBITDA margins of 9.5%-10.5% in 2024 and 10%-11% in 2025;
CFO around 1%-2% of homebuilding revenue in 2024 and 2025 as the company resumes meaningful investment in inventory;
Net debt to capitalization ratio below 30% in 2024 and 2025;
EBITDA leverage approaching 3.5x in 2024 and declining to around or below 3.0x in 2025.
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;
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 makes a meaningful change to its financial policies and capital allocation priorities, including sizeable shareholder distributions that pressure its liquidity position;
The company maintains an aggressive land and development spending program that leads to consistently negative CFO, higher debt levels and diminished liquidity.
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 days-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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