Though the housing market has been recovering for six years, some homebuilders are still struggling from high leverage and a heavy debt burden. Though operating conditions are more favorable, some have yet to bounce back.
According to a new report from Fitch Ratings, Havnanian Enterprises (HOV) and Beazer Homes USA (BZH) carried heavy debt into the downturn. Cash flow has been held back by high interest rates, and leverage is still at an elevated level. BZH has a chance to catch up to its peers if the housing market remains healthy, but HOV’s capital structure is untenable, the ratings agency said. HOV can avoid default if housing stays robust for several more years and if it can refinance near-term debt. It recently refinanced debt due in 2018 and 2019, though substantial debt will still mature in the next few years. BZH reduced its total debt by nearly $200 million since fiscal 2015 and plans to pay down another $100 million through fiscal 2018.
The operating models and growth strategies of homebuilders are focused on land purchases and development spending, Fitch said. Both HOV and BZH have recently curtailed land and development spending to concentrate on debt reduction, but lower land spending has led to a reduction in community count, lower net orders and a reduction in home deliveries.
Fitch expects the housing market recovery to continue through at least 2018, though rising costs for land, labor and materials will weigh on profits. Favorable demographics and continuing economic growth should offset inflation and a possible rise in interest rates. First-time buyers are expected to continue to represent a higher portion of housing purchases. Some lessening in affordability has occurred, however, as the upcycle in housing has matured, Fitch said.
– Adam Fusco, associate editor