Fitch Ratings affirmed Arizona-based homebuilder Meritage Homes Corp.'s long-term issuer default rating at BB and revised the outlook to positive from stable.
The rating reflects Meritage's moderate geographic and product diversity, relatively strong credit metrics, healthy liquidity position, and business model, combined with the company's risky approach to homebuilding in its aggressive shift toward a more speculative operating strategy.
Fitch forecasts high land and development spending leading to negative cumulative funds from operations in 2020; however, leverage levels are likely to remain low even in a moderate housing downturn. The company's strong performance in the current operating environment is expected to give Meritage enough margin to maintain net debt to capitalization below 40%.
Financially, the rating agency believes Meritage has enough liquidity for the company to easily manage upcoming debt maturities, continue to fund working capital and land and development activities and execute on its share repurchase program.
The ratings are based on the assumptions that Meritage has slightly stronger EBITDA margins in 2019 and roughly the same in 2020, net debt to capitalization remaining in the low- to mid-30% range in 2019 and 2020, and total debt to operating EBITDA lying in the 3.0x range during the forecast period.