S&P Revises NVR Inc. Outlook to Positive; Afrms Rtgs

Business Wire, March 5, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--March 5, 2002

Standard & Poor's today revised its ratings outlook for NVR Inc. to positive from stable.

At the same time, the company's double-'B' corporate credit rating and senior unsecured rating were affirmed. The outlook revision and affirmation acknowledge NVR's strong financial measures and solid financial flexibility as it continues to improve its market share within its existing markets. NVR has a solid market position, an attractively structured and prudently managed inventory position, and very strong cash flow protection measures. These strengths are offset by the company's more modest tangible book equity coupled with a continued appetite for share repurchases.

McLean, Va.-based NVR is a holding company that, through its subsidiaries, operates two business segments: home building through Ryan Homes, NVHomes, and Fox Ridge Homes, and financial services through NVR Mortgage Finance Inc. NVR ranks sixth among national homebuilders in terms of 2001 home-building revenues ($2.56 billion) and is the leading builder in the Washington, D.C. and Baltimore, Md. markets. While the majority of NVR's business is still derived from Washington, D.C. (32% of 2001 new orders) and Baltimore (15%), this geographic concentration is improved from recent levels (54% combined in 1999). As the company pursues increased penetration of its newer markets, geographic concentration is expected to modestly decline. NVR's prudent inventory management helps to offset this concentration risk and should also provide the company with some stability during a housing slowdown.

Unlike the majority of its rated homebuilding peers, the company holds minimal unsold land inventory and controls all of its land lots through seller options, which materially reduces the company's capital needs. This provides for excellent efficiencies, as NVR's inventory turns averaged greater than 5.0 times (x) over the previous three- and five-year periods, which is the strongest in the home building sector. However, the cost of this strategy is in the form of investments in contract land deposits, which have increased during 2001 and now total $156 million (or about 45% of net tangible book equity), and NVR controls a two- to three-year supply of lots.

Coverage measures are excellent, with EBIT to interest incurred at greater than 32x overall currently and a very strong 25x and 18x average over the prior three and five years. However, NVR's strong corporate-level profitability measures are highly dependent on the company's ability to continue to procure land through option contracts, which supports high inventory turns.

Tangible book equity (net of $55 million excess reorganization value and goodwill) reached $294 million in the quarter ended Dec. 31, 2001. Book leverage of 26% is modest for the rating, and leverage levels rise to a still modest 29%, if adjusted to tangible book equity. This adjusted leverage level has improved from 55% at year-end 1999. However, recent gains in tangible book equity may moderate due to the company's aggressive pursuit of share repurchases ($224 million in 2001, and a recently authorized but as yet unused $300 million share buyback program). NVR has recently solicited consents from the holders of its 8% senior notes due 2005 to amend the indenture governing these notes. The purpose of the consent solicitation is to permit NVR to amend the indenture governing the notes in order to provide NVR with greater flexibility to continue to repurchase shares of its outstanding common stock. Standard & Poor's expects the company to pursue share repurchases in a balance sheet neutral manner, as it has historically done.

Internal cash ($85 million at the homebuilding division) and external liquidity sources ($100 million unsecured revolving credit facility, expiring May 2004, and is currently unused) provide ample financial flexibility. The addition of a $400 million shelf, which has a $255 million remaining balance, contributes to external liquidity.

OUTLOOK: POSITIVE

Management has adhered to a moderately conservative financing plan, while increasing share in its existing markets and modestly reducing geographic exposure over the prior several years. Future ratings improvements will be a function of NVR's demonstrated continued success in managing increased penetration of its existing markets while maintaining a conservative stance regarding share repurchases, inventory management, and leverage levels.

A complete list of ratings is available on RatingsDirect, Standard & Poor's on-line credit research service, or by calling the Standard & Poor's Ratings Desk at (1) 212-438-2400.

Copyright 2002, Standard & Poor's Ratings Services