S&P Raises NVR Inc. Ratings;Outlook Revised to Stable

Business Wire, April 14, 2003

Business Editors

NEW YORK--(BUSINESS WIRE)--April 14, 2003

Standard & Poor's Ratings Services today raised its corporate credit rating on NVR Inc. to 'BB+' from 'BB'.

At the same time, ratings are raised on $115 million senior debt. The outlook is revised to stable from positive (see list).

The raised ratings are driven by NVR's very strong debt protection and profitability measures and a solid market position in key mid-Atlantic markets. These strengths are offset by NVR's demonstrated appetite for share repurchases and a unique business model that essentially pushes land investment and model homes off balance sheet, requiring analytical adjustments to derive comparatively meaningful financial ratios.

McLean, Va.-based NVR operates two business segments: homebuilding through Ryan Homes, NVHomes, and Fox Ridge Homes, and financial services through NVR Mortgage Finance Inc. NVR ranked as the eighth largest national homebuilder in terms of homebuilding revenues ($3.06 billion) for 2002 with 11,368 settlements. During the prior year, the company's top-line growth was driven by increases in both deliveries (9.6%) and average selling price (9.2%), with the average selling price increase benefiting from a change in mix away from generally lower priced attached product and toward higher priced detached product. NVR is the leading builder in its existing Washington, D.C. and Baltimore, Md. markets, which accounted for 31% and 14% of 2002 home settlements, respectively, a reduced concentration from recent levels (35% and 17% in 2000). This improved diversification has been driven primarily by growth within the company's North market segment (Delaware, New Jersey, New York, Ohio, and Pennsylvania), which experienced a 25% increase in settlements during 2002. Geographic concentration is expected to continue to decline modestly, driven by higher rates of growth in the company's existing North and South (North Carolina, South Carolina, Tennessee, and Richmond, Va.) markets. NVR's prudent inventory management helps to offset this concentration risk and should also provide the company with some stability during a housing slowdown.

NVR controls all of its land needs through contract land deposits, enters into sale-leaseback arrangements on most of its model homes, and holds minimal unsold inventory. This strategy materially reduces the company's on-balance sheet assets and provides for excellent efficiencies, as inventory turns averaged greater than 5.0x over the previous three- and five-year periods. The cost of this strategy is in the form of investments in contract land deposits, which increased by 49% during 2002 and now total $231 million, or a relatively high 57% of tangible book equity. However, this level of land deposits appears to be well supported by the company's strong backlog, as it remains a roughly two- to three-year supply based on the company's sales objectives. In almost all cases, NVR's total liquidating damages for non-performance are limited to the deposit, and NVR does not finance its contract land deposits with financial intermediaries.

Coverage measures are industry leading, with earnings before interest and taxes (EBIT) to interest incurred at greater than 38x overall currently and a very strong 31x and 23x average over the prior three and five years. The company experienced above-average gross margins of 23.7% and operating margins of 17.5% for 2002, margins that are particularly strong considering they do not include any land development profit.

Tangible book equity (net of $55 million excess reorganization value and goodwill) reached $348 million in the quarter ended Dec. 31, 2002. Recent gains in tangible book equity have been moderated by the company's aggressive pursuit of share repurchases for treasury ($362 million in 2002 and $224 million in 2001). NVR has $138 million remaining on a $150 million share repurchase authorization, and Standard & Poor's expects the company to pursue any future share repurchases in a balance sheet neutral manner, as it has historically done.

NVR's unique business model essentially limits on balance sheet land and model home investments, requiring analytical adjustments by Standard & Poor's to derive comparatively meaningful financial ratios. Standard & Poor's analytically consolidates estimated model home costs and an estimated $200 million quarterly contract land deposit takedown on balance sheet to derive key financial ratios - inventory turns, coverage, and leverage - for NVR. Based on these analytical adjustments, NVR's inventory turns decline from over 5x to a still very strong 4x. NVR's model homes are sold to and leased from various entities, and the company has no obligation at the end of the lease to repurchase or assist in the sale of the model home. NVR accounts for the sale-leaseback of its model homes as operating lease transactions, not financings. However, when Standard & Poor's analytically considers NVR's lease payments on model homes as an interest expense, EBIT coverage declines from 39x to 22x for 2002. Additionally, when an imputed conservative 10% to 15% carrying cost is applied to Standard & Poor's estimated $200 million quarterly contract land deposit takedown, and also included as an interest expense, coverages decline further but still remain strong at roughly 10x to 12x. Book leverage of 23% is very modest for the rating, and leverage levels rise to a still modest 31% if adjusted to consider future model home lease payments as a long-term financial obligation. Additionally, leverage rises to roughly 48% when Standard & Poor's assumes adjusted asset additions to the balance sheet are 100% debt financed. (However, Standard & Poor's acknowledges that NVR has maintained a relatively low debt-to-capital ratio, and management would be unlikely to finance additional assets solely with debt.) Even with Standard & Poor's fairly conservative analytical adjustments, NVR's financial measures appear strong.