Fitch Ratings has affirmed the ratings of M.D.C. Holding, Inc. (MDC), including the company's Long-Term Issuer Default Rating (IDR) and unsecured debt ratings at 'BBB-' following the closing of its acquisition by Sekisui House, Ltd.

The Rating Outlook is Stable.

The rating affirmation and Stable Outlook reflect Fitch's determination that the acquisition of the company by SH Residential Holdings, LLC (a subsidiary of Sekisui House, Ltd.; unrated) does not meaningfully change the company's credit profile. This determination includes Fitch's expectation that there will be no meaningful changes to the operating or financial strategy of the company, MDC or Sekisui (or any of its subsidiaries) will not guarantee each other's debt and there will be no cross-default/cross acceleration provisions between the consolidated entities and MDC's bonds will remain outstanding.

Key Rating Drivers

Acquisition by Sekisui House: Fitch expects the transaction to be beneficial to MDC's business profile given the increased size and scale from combining with Sekisui House and its other homebuilding brands. On a pro forma basis, Sekisui House will be the 5th largest homebuilder in the U.S. While Fitch expects MDC will be operated independently of Sekisui's other homebuilding operations in the U.S., MDC may benefit longer term from purchasing synergies owing to the combined U.S. operations' increased size. The company has not yet articulated what its operating and financial strategy will be going forward, but Fitch does not expect any meaningfully changes.

Fitch does not expect cross guarantees or cross default provisions between MDC and Sekisui (or any of its subsidiaries). However, any cross-guarantees or implied support or cross default provisions could result in a change to Fitch's assessment of the company's credit profile. Additionally, the ratings could be pressured if there is a change in financial policy, such as sizeable distributions to its parent, which would weaken the company's liquidity position.

Significant Decline in Revenue and EBITDA: MDC's revenue declined 19.1% in 2023 and Fitch expects 2024 revenue to be flat to slightly lower as affordability issues, a softer economy and low consumer confidence continue to weigh on demand. U.S. homebuyer sentiment is likely to remain subdued as consumer expectations of higher home prices persist and mortgage rates stabilize at relatively elevated levels. EBITDA margins contracted about 630bps in 2023 and Fitch projects another 150bps to 175bps of compression in 2024 as input costs as well as incentives remain elevated. Higher speculative building activity is likely to weigh on margins as home prices have declined from peaks in many markets and MDC prioritizes pace over price.

Strong Balance Sheet Provides Cushion: MDC has meaningful rating headroom relative to Fitch's net debt to capitalization negative rating sensitivity for the 'BBB-' IDR, supported by meaningful cash on hand. This ratio was 3.1% after considering $75 million of cash as not readily available for working capital as of Dec. 31, 2023. Fitch expects MDC will remain disciplined with capital allocation as demand remains volatile, resulting in net debt to capitalization remaining below 30%. However, given the significant drop in revenue and contraction in margins, EBITDA leverage increased meaningfully from its low of 1.5x at YE 2022 to 2.9x at YE 2023. Fitch expects EBITDA leverage to approach 3.5x by YE 2024 before declining in 2025.

The ratings could be pressured if Fitch expects EBITDA leverage to sustain above 3.0x, which would imply an inability to return to $500 million in EBITDA at current debt levels. The absence of a clear path back to $500 million in EBITDA may imply impairment of the business profile, which would be inconsistent with an investment-grade rating. Fitch will evaluate MDC's EBITDA leverage in conjunction with its cash flow and liquidity, which remain very strong.

Robust Financial Flexibility: MDC has a very strong liquidity position, with $1.48 billion of homebuilding cash and $1.1 billion available under its revolving credit facility as of Dec. 31, 2023. This liquidity, combined with a long-dated maturity schedule, affords MDC flexibility to continue to invest in the business and fund other capital allocation priorities. Fitch expects MDC to generate weaker, but still-positive cash flow from operations (CFO) in 2024 and 2025 (1.0%-2.0% of homebuilding revenue) as it increases land acquisition to support community count growth. MDC significantly reduced land and development spending in 2022 and 2023, resulting in CFO of $906 million and $562 million, respectively.

Increased Spec Building: MDC's strategy has historically been to focus on the presale of homes, but it pivoted to a more speculative building strategy, given higher demand for quick move-in homes and increased cancelations. Spec homes increased to 3,048 at Dec. 31, 2023 from 1,459 in 2022. Although elevated in the near term, spec building is expected to represent a relatively modest portion of homes delivered. The shift in strategy adds risk to the credit profile, although Fitch views the modest speculative activity as appropriate in the present environment, given the demand for quick move-in homes, low existing inventory and still elongated, although improving, cycle times.

Fitch views the build-to-order strategy as a more conservative approach as builders could be burdened with excess inventory in a housing downturn under a speculative building strategy, pressuring gross margins. The company was more aggressive at times with its speculative building activity, such as in 2014 and 2015.

Historically Conservative Land Policies: MDC has generally employed more conservative land and development strategies than homebuilding peers covered by Fitch. As of Dec 31, 2023, MDC controlled 2.7 years of land and owned 2.2 years of land, based on LTM closings. The company's relatively lower amount of owned land on the balance sheet compared with some Fitch-rated peers should help to reduce impairment charges as a percentage of total assets during a more pronounced housing correction.

Geographic Diversification: MDC benefits from geographic diversification, with operations across 16 states in the West Coast, East Coast and Rocky Mountain regions. MDC has some concentrations within its portfolio, as Arizona, California and Colorado represented 23%, 20% and 20%, respectively, of 2023 home deliveries. MDC.'s homebuilding footprint is less geographically diverse than larger higher-rated homebuilders.

Significant Exposure to Entry Level: MDC addressed ongoing home affordability issues by expanding its product offerings designed for first-time or move-down buyers. Fitch estimates that more than half of the company's 2023 deliveries were from what the company considers affordably priced homes. Fitch expects demographic trends to support long-term housing demand for entry-level homes. However, Fitch believes demand at the lower price points can be more cyclical and volatile, as first-time buyers are more sensitive to higher mortgage rates and home prices and deteriorating economic conditions.

Housing Market Remains Challenged: Fitch expects the housing market to improve in 2024 but remain anemic, as low housing affordability and a weak economic backdrop will keep housing demand constrained. Mortgage rates staying higher for longer, combined with elevated home prices, will keep affordability challenging. However, homebuilders' ability to adjust product offerings and offer mortgage rate buydowns will make new homes an attractive alternative for potential homebuyers.

MDC's offering of homes at affordable price points allows the company to meet homebuyers' needs. Fitch expects MDC's revenues will be relatively flat, driven by higher home deliveries but offset by lower selling prices while EBITDA margins compress 150bps to 175bps from higher input costs and elevated incentive levels.

Derivation Summary

M.D.C. Holdings, Inc.'s 'BBB-' IDR reflects its steady capital structure through the housing cycle, relatively conservative land policy, build-to-order strategy and strong position in core markets. Risks include the company's less consistent cash flow generation and lower geographic diversification than higher-rated homebuilding peers.

The rating affirmation and the Stable Outlook reflect MDC's substantial cushion relative to Fitch Ratings' net debt to capitalization negative rating sensitivity. Fitch's rating case assumptions include single-family housing starts improving slightly in 2024.

MDC is smaller, less geographically diversified, and generates more volatile CFO, than higher-rated peers, including NVR, Inc. (BBB+/Stable), D. R. Horton, Inc. (BBB+/Stable), Lennar Corporation (BBB/Positive) and PulteGroup, Inc. (BBB/Positive). Some of these peers also procure land predominantly through option contracts, which should result in more consistent cash flows and stable credit metrics through housing cycles. MDC.'s short owned-land position relative to similarly rated peers such as Toll Brothers (BBB/Stable) mitigates some of the risk associated with land ownership in a contracting housing market. The company also has maintained a very conservative posture through housing cycles and has financial flexibility comparable with higher-rated peers.

Fitch applies its 'Parent and Subsidiary Linkage Rating Criteria' to derive the IDR for MDC. Fitch considers Sekisui House, Ltd.'s standalone credit profile (SCP) to be slightly stronger than MDC given its larger size, geographic diversification, and modest leverage levels.

Following the 'Stronger Parent Path', Fitch determines that legal incentives are low, due to the lack of guarantees or other legal ties such as cross-default provisions. Fitch views strategic incentive to be medium as MDC represents about 20% of Sekisui's combined pro forma revenues, and MDC provides a material competitive advantage and growth platform for Sekisui's U.S. operations. Lastly, Fitch views operational incentive to be low as there are no common management and Fitch's expectation of low operational synergies, at least in the short to medium term. Given the Fitch's assessment of a narrow differential of SCPs between MDC and Sekisui, Fitch did not apply a rating uplift to MDC's rating.

Key Assumptions

Single-family housing starts to grow 3%-4% in 2024;

Homebuilding revenues are flat to slightly lower in 2024 as delivery growth is offset by ASP declines;

EBITDA margins of 9.5%-10.5% in 2024 and 10%-11% in 2025;

CFO around 1%-2% of homebuilding revenue in 2024 and 2025 as the company resumes meaningful investment in inventory;

Net debt to capitalization ratio below 30% in 2024 and 2025;

EBITDA leverage approaching 3.5x in 2024 and declining to around or below 3.0x in 2025.


Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Fitch's expectation that net debt-to-capitalization will sustain below 30%;

The company increases its size and further enhances its geographic diversification and local market leadership;

EBITDA margins sustain in the mid-teens.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Fitch's expectation that net debt-to-capitalization will sustain above 40%;

Fitch's expectation that EBITDA leverage will sustain above 3.0x;

The company makes a meaningful change to its financial policies and capital allocation priorities, including sizeable shareholder distributions that pressure its liquidity position;

The company maintains an aggressive land and development spending program that leads to consistently negative CFO, higher debt levels and diminished liquidity.

Liquidity and Debt Structure

Strong Liquidity: MDC's homebuilding operation has strong liquidity, with $1.1 billion available under committed revolving credit facilities, with $10.0 million outstanding and $40.8 million of LCs, and $1.48 billion of homebuilding cash as of Dec. 31, 2023. The company's $1.125 billion revolving credit facility matures in December 2025.

Long-Dated Maturity Schedule: The company has no near-term note maturities, as its next maturity is not until January 2030, when its $300 million senior unsecured notes come due.

Issuer Profile

M.D.C. Holdings, Inc. has been building new homes under the name Richmond American Homes for over 40 years. The company is the 11th largest homebuilder in the United States based on 2022 closings and has a top 10 position in 13 of the 50 largest housing markets in the country and is the largest builder in the Denver metro area.

Summary of Financial Adjustments

Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and interest expense included in cost of sales and also excludes impairment charges and land option abandonment costs.

Fitch also excludes the EBITDA and debt of MDC's financial services (FS) operations as this subsidiary's only debt, a mortgage repurchase facility, is non-recourse to MDC and the FS subsidiary generally sells the mortgage it originates and the related servicing rights to third-party purchases within 30 days-45 days. However, as part of its captive finance adjustment, Fitch assumes a capital structure for the FS operations that is sufficiently robust for that entity to support its debt without reliance on the corporate entity.

Fitch applies a hypothetical capital injection from the corporate entity to achieve a target capital structure (2.0x debt/equity) that is indicative of a self-sustaining credit profile for MDC's FS operations. The debt to equity ratio of MDC's FS operation was below this target level, so Fitch did not make any adjustments related to the FS operations. Shareholders' equity is assumed to be unaffected. Fitch reviews historical CFO on a consolidated basis and also estimates CFO excluding the FS operations.


The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit

(C) 2024 Electronic News Publishing, source ENP Newswire