Fitch Ratings has revised
Fitch also affirmed the 'BBB-'/'RR1' rating of the company's senior secured debt.
The Outook revision to Stable reflects Fitch's expectation that HHC's leverage will decrease to around the low-8x level in 2022, driven by operating asset NOI stabilization, increased condo sales and execution of dispositions. Nothwithstanding unevenness in the condo and MPC land sales segments, Fitch expects leverage to return to levels consistent with the 'BB' rating.
The rating reflects HHC's strong portfolio asset quality within its core markets in and around strategic master planned communities (MPC), in select Sunbelt markets and other mid-
Key Rating Drivers
Key Assets in Attractive Markets: HHC owns strategic asset positions in select Sunbelt and mid-
The company's MPCs total approximately 118,000 gross acres of land with 25,000 residential acres of land remaining to be developed and 13,000 acres designated for commercial development or non-compete users. Despite a rising mortgage rate and inflationary environment, HHC's markets continue to experience elevated housing demand, leading to homebuilders' ongoing purchase of additional lots in the company's MPCs at appreciating prices.
Land and Condo Development Volatility: Fitch views HHC's rental income risk profile as below average relative to its equity REIT peers, generally consistent with high speculative grade category. The company generated approximately 31% of 2021 revenues contractual rents from its operating portfolio properties, which include predominantly office, multifamily, retail properties located in and adjacent to its master planned communities. This figure was down from 53% of revenues in 2020 as the company's other segments, notably MPCs and Strategic Developments performed relatively stronger in 2021.
The company's development-for-sale segments provide incremental cash flow but possess increased volatility. Fitch anticipates an increase in earnings for these segments in 2022, with a drop in 2023 and subsequent rebound later into the forecast period. This volatility is due to the timing of the future
High Income-Based Leverage: HHC's net debt to recurring operating EBITDA leverage is high relative to low-investment-grade-rated equity REIT peers, partly due to the company's development focus and related non-income producing assets. Moreover, the company generates a high percentage of income from non-recurring asset sales within its MPC and strategic developments segments, which Fitch views as more volatile than contractual rental income.
The Operating Asset segment NOI recovered in 2021 and surpassed pre-pandemic levels. Fitch foresees a modest decline in this segment in 2022, partially due to the sale of the company's hotel assets in 2021 in addition to higher expected deliveries of condo projects. As revenues stabilize and development assets are completed, Fitch anticipates leverage declining to the low to mid 7x level over the forecast period.
Fitch also considers HHC's net debt/capital, a supplemental metric commonly used to analyze homebuilders, which was 55.5% for the quarter ended
Prefunded Development Mitigates Risk: HHC prefunds all development with non-recourse secured debt. The company does not begin construction until all necessary cash is on the balance sheet. Fitch views this strategy as mitigating unfunded development pipeline risk. As of
As of
In
Speculative Grade Capital Access: HHC has demonstrated capital access to the unsecured bond market as the company issued
Strategic Management Shift Completed: Upon management's 2019 shift, HHC implemented a transformation plan, which aimed to substantially reduce G&A expenses, dispose of
Derivation Summary
Although HHC has not elected REIT status, Fitch views select
HHC's portfolio is more diversified by property type than higher-rated, Sunbelt-focused multifamily REIT peers
Fitch considers debt to capitalization as a secondary leverage measure given HHC's high level of non-income-producing land and homebuilding industry exposure. Fitch expects the company will operate with a debt capitalization ratio of approximately 55% over the forecast period, which is considerably above the 35% to 40% range for homebuilding peer
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
--Operating Asset segment decline of 2% in 2022, followed by SSNOI growth of low-single through the remainder of forecast period;
Strategic Development Revenues of
Development deliveries of approximately
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
REIT leverage (net debt to recurring operating EBITDA) sustaining below 7x, assuming a similar or modestly greater percentage of NOI from contractual rents;
REIT fixed-charge coverage sustaining above 2.5x;
Growth in HHC's operating assets resulting in NOI from recurring contractual rental income comprising 70% of net operating income;
Growth in unencumbered assets and/or UA/UD coverage improving to 1.75x, or greater.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch expectations of net leverage (net debt to recurring operating EBITDA) sustaining above 9x and/or a net debt to capital ratio sustaining above 55%;
Expectations of REIT fixed charge coverage sustaining below 1.5x;
Expectations of deteriorating access to capital markets.
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
Adequate Liquidity: Fitch estimates HHC's base case liquidity coverage at 1.1x through YE 2023 and improves to 1.4x, assuming 80% secured refinancing. The company's sources include approximately
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources include unrestricted cash, availability under unsecured revolving credit facilities and retained cash flows from operating activities after dividends. Uses include pro rata debt maturities, expected recurring capex and forecast (re)development costs.
Issuer Profile
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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