Fitch Expects To Rate Lennar's $300MM Convertible Senior Notes 'BB+'

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NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to assign a 'BB+' rating to Lennar Corporation's (NYSE: LEN) proposed offering of $300 million principal amount of convertible senior notes due 2021. This issue will be ranked on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offering will be used for general corporate purposes, which may include the repayment or repurchase of its existing senior notes or other indebtedness, acquisitions of land suitable for residential development, and purchases of or investments in, portfolios of distressed mortgages or other debt instruments and foreclosed real estate.

Fitch's current Issuer Default Rating (IDR) for Lennar is 'BB+'. The Rating Outlook is Stable.

The ratings and Outlook for Lennar reflect the company's strong liquidity position and stable to slightly stronger prospects for the housing sector in 2012. The ratings also reflect Lennar's successful execution of its business model, geographic and product line diversity, lessened joint venture exposure, and the still challenging U.S. housing environment.

The economy is restraining the housing recovery as consumer confidence has collapsed, employment growth is modest, and there is little that policymakers can do to boost the economy. At the same time, housing is not fulfilling its role as a key impetus to the early stages of an economic recovery. The fall in mortgage rates and the continued rise in nominal incomes results in superior affordability and valuations. Mortgage rates are at their lowest levels since the 1940s and housing appears more undervalued versus incomes than at any time in the past 35 years. But home prices may continue to be soft over at least the next few quarters, as employment continues to stagnate, real incomes decrease, and financial markets remain unsettled. Demand will continue to be affected by widespread negative equity, more challenging mortgage qualification standards and excess supply due to foreclosures.

Fitch is forecasting a moderately weaker year for housing in 2011. Total housing starts should edge down 2.7%, single-family starts should fall roughly 13%, new home sales should decline 7.5%, and existing home sales are expected to be off 2%. Fitch's housing forecasts for 2012 assume a modest rise off a very low bottom. In a slowly growing economy with slightly lesser distressed home sales competition, less competitive rental cost alternatives, and, perhaps, even lower mortgage rates, single-family housing starts should improve about 6%, while new home sales increase 7% and existing home sales grow 2%. Average single-family new home prices (as measured by the Census Bureau) are projected to decrease 1.5%-2.5% in 2011 and rise 1%-2% in 2012.

Lennar has solid liquidity with unrestricted homebuilding cash of $800.3 million as of Aug. 31, 2011. The company's homebuilding debt maturities are well-laddered, with $267.7 million maturing in March 2013 and $250 million due in September 2014. Although the company has sufficient cash on hand to meet upcoming debt maturities, Fitch expects Lennar to access the capital markets to refinance these maturities. Lennar has demonstrated that it can access the capital markets, even during periods of distress.

The company was the third largest homebuilder in 2010 and primarily focuses on entry-level and first-time move-up homebuyers. The company builds in 14 states with particular focus on markets in Florida, Texas and California. Lennar's significant ranking (within the top five or top 10) in many of its markets, its largely presale operating strategy, and a return on capital focus provide the framework to soften the impact on margins from declining market conditions. Fitch notes that in the past, acquisitions (in particular, strategic acquisitions) have played a significant role in Lennar's operating strategy.

Compared to its peers Lennar had above-average exposure to joint ventures (JVs) during this past housing cycle. Longer-dated land positions are controlled off balance sheet. The company's equity interests in its partnerships ranged from 10% to 50%. These JVs have a substantial business purpose and are governed by Lennar's conservative operating principles. They allow Lennar to strategically acquire land while mitigating land risks and reduce the supply of land owned by Lennar. They help Lennar to match financing to asset life. JVs facilitate just-in-time inventory management. Notwithstanding, Lennar has been substantially reducing its number of JVs over the last few years (from 270 at the peak in 2006 to 36 as of Aug. 31, 2011) and, as a consequence, has very sharply lowered its JV recourse debt exposure (from $1.76 billion to $156.4 million as of Aug. 31, 2011). In the future, management will still be involved with partnerships and JVs, but there will be fewer of them and they will be larger, on average, than in the past.

Lennar spent roughly $523 million on new land purchases during 2010 and had $181 million of land development spending during the year. This compares to approximately $350 million of combined land and development spending during 2009. Fitch expects land and development spending for 2011 to slightly exceed 2010 levels. As a result, Fitch expects Lennar to be cash flow negative this year. Fitch is comfortable with this strategy given the company's cash position, debt maturity schedule and proven access to the capital markets.

The company has ramped up its investments in its newest segment, Rialto Investments. This segment provides advisory services, due-diligence, workout strategies, ongoing asset management services, and acquires and monetizes distressed loans and securities portfolios. (Management has considerable expertise in this highly specialized business.) In February 2010, the company acquired indirectly 40% managing member equity interests in two limited liability companies in partnership with the FDIC, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). Lennar has also invested $67.5 million in a fund formed under the Federal government's Public-Private Investment Program (PPIP), which is focused on acquiring securities backed by real estate loans. On Sept. 30, 2010, Rialto completed the acquisitions of approximately $740 million of distressed real estate assets, in separate transactions, from three financial institutions. The company paid $310 million for these assets, of which $124 million was funded by a five-year senior unsecured note provided by one of the selling financial institutions. In November 2010, Rialto completed its first closing of a real estate investment fund with initial equity commitments of approximately $300 million (including $75 million committed by Rialto). During the nine months ended Aug. 31, 2011, Rialto contributed $60.6 million to the fund out of total investor contributions of $301 million. As of Aug. 31, 2011, Rialto Investments had $765.9 million of debt. Rialto provides Lennar with ancillary income as well as a source of land purchases (either directly or leveraging Rialto's relationship with owners of distressed assets). Fitch views this operation as strategically material to the company's operation, particularly as housing activity remains at absolute low levels.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as trends in land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels, free cash flow trends and uses, and the company's cash position.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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Fitch RatingsPrimary AnalystBob Curran, +1-212-908-0515Managing DirectorFitch, Inc.One State Street PlazaNew York, NY 10004orSecondary AnalystRobert Rulla, CPA, +1-312-606-2311DirectororCommittee ChairpersonJason Pompeii, +1-312-368-3210Senior DirectororMedia RelationsSandro Scenga, +1-212-908-0278[email protected]

Source: Fitch Ratings

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