S&P: NVR Inc. Ratings Affirmed On Continued Low Operating Leverage, Outlook Remains Stable

S&P Global Ratings today affirmed all of its ratings on NVR Inc. The outlook remains stable.

Our ratings on NVR reflect the large scale of the company's operations as it ranks as the fourth-largest builder in the U. S. based on the number of home closings and the fifth largest based on total revenue. Within its homebuilding business, the company has some degree of product-type diversity because it sells single-family houses, townhouses, and condominiums. In addition, NVR's selling price points cover a wide range of customer segments. The company also has benefits from some measure of geographic diversity as it operates in 31 markets spread across 14 states in the eastern half of the U. S. However, NVR does have some geographic concentration as approximately 41% of its 2017 homebuilding sales were in the Washington D. C. and Baltimore metropolitan areas--where the company maintains the No. 1 market share--and approximately 58% of its 2017 homebuilding revenue came from the Mid-Atlantic region.

The stable outlook on NVR reflects our belief that the company will maintain its industry-best credit measures while continuing to increase its market share organically over the next two years. We also expect the company to maintain strong liquidity aided by the improving--albeit uneven--housing recovery, which should support increased EBITDA over the next one to two years.

While a downgrade is highly unlikely, we could lower our ratings on NVR if, contrary to our current expectations, its debt-to-EBITDA increased above 2x or its debt-to-capital (adjusted for surplus cash) rose above 35%. This could occur if management adopts much more aggressive policies related to shareholder returns than it has previously demonstrated. Our downside scenario would become more likely if the uneven housing recovery stalls or reverses, leading to a 70% decline in the company's forecast EBITDA.

We currently see little upside for the rating in the next 24 months given that we do not expect NVR to engage in any transformational transactions that could materially affect our assessment of its business risk. In order to revise our assessment of the company, NVR would need to expand to markets beyond its current footprint, which would likely necessitate an increase in the company's size.

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