S&P: Century Communities Inc. Upgraded To 'B+' On Improved Credit Metrics And Expanded Operational Platform, Outlook Stable

S&P Global Ratings today raised its corporate credit rating on Denver-based Century Communities Inc. to 'B+' from 'B' The outlook is stable.

At the same time, we raised our issue-level rating on the company's senior unsecured notes to 'B+' from 'B'. The '3' recovery rating remains unchanged, indicating our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery in the event of a default.

The upgrade reflects Century Communities' completed integration of west coast homebuilder UCP Inc. and its expanded size and geographic diversity following the acquisition. In addition, we believe that the company's entry into the California and Pacific Northwest markets has enhanced the attractiveness of its overall market mix and provided it with positions in some otherwise land-constrained areas. The company has also maintained profitability on par with that of its similarly-sized peers while executing its acquisitive growth strategy. Furthermore, we forecast that Century will operate with debt-to-EBITDA of 4x-5x on a run-rate basis and interest coverage of at least 2x.

The stable outlook on Century reflects our expectation that favorable housing demand and the company's expanded community platform will allow it to increase home closings at a faster rate than the broader U. S. market over the next 12 months. In addition, we anticipate that it will maintain EBITDA margins of 9%-10% over this period. We forecast that the company's increased EBITDA and cash flow generation will cause its credit measures to improve gradually, leading its debt-to-EBITDA to decline toward 4x as of year-end 2018.

Although we view a downgrade as unlikely in the next 12 months given our expectation for a continued recovery in the U. S. housing market, we could lower our corporate credit rating on Century to 'B' if the company sustained leverage of more than 5x or interest coverage of less than 2x. This could occur if the company took on debt to fund $100 million of additional land spending beyond the assumptions in our forecast or if it undertakes a major acquisition without reducing its debt-to-EBITDA below 5x in the following 12 months.

We could consider upgrading Century in the next 12 months if the company sustains debt-to-EBITDA of less than 4x, which it would likely achieve by increasing its number of closings and raising its prices at a faster rate than in our forecast. Under this scenario, we anticipate that the company's homebuilding revenue would increase to $2.1 billion. However, these positive factors may be tempered by Century's acquisitive growth strategy, as the company may choose to use more debt financing for future transactions.

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