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Rating Action:

Moody's Confirms Century Communities' Existing Ratings; Positive Outlook; Concludes Review

26 Jul 2017

Approximately $785 million of debt securities affected

New York, July 26, 2017 -- Moody's Investors Service took the ratings of Century Communities, Inc. ("Century") off review for upgrade, confirmed all of the company's existing ratings, and revised the outlook to positive from rating under review. This concludes the review that Moody's had initiated on April 11, 2017 following Century's announcement that it was acquiring UCP, Inc.

The review concluded with a positive outlook rather than with an upgrade to B2 from B3 because of the remaining uncertainties following the acquisition. Specifically, Century's acquisition of UCP is the former's largest to date, and puts the company into a number of new markets, including in California, where everything that is related to homebuilding is generally more complex and costly than elsewhere in the U.S. In addition to having to contend with possible integration issues and learning a variety of new markets, the company has stretched its balance sheet for this acquisition, reaching a pro forma 56% debt to capitalization as of the date of the initiation of the Moody's review. This level of debt leverage is elevated for the company and not a strong B2 type ratio.

On the positive side, Century will be placing UCP's CEO, Dustin Bogue, as head of its western US operations, which will be a great help in the integration process and in navigating the California market. In addition, two of the important benchmarks for moving from B3 to B2 will have been achieved, i.e., having revenues greater than $1 billion and tangible net worth greater than $500 million.

RATINGS RATIONALE

The B3 Corporate Family Rating reflects Moody's expectation that Century will be free cash flow negative in 2017 and 2018, owing to its land investments, and the company's expansion goals will likely keep free cash flow weak in later years as well. The company has an active acquisition strategy, having acquired four companies in 2013 and 2014 and announcing its combination with UCP in a transaction scheduled to close in August 2017. Moody's anticipates that this appetite for acquisitions will continue in the coming years after a reasonable "digestion" interval, because the company aggressively seeks growth and to expand its geographical footprint. This will put continued pressure on debt leverage.

At the same time, however, Century generates solid financial metrics, made it through the prior housing downturn intact, and is located in several healthy homebuilding markets in Colorado, Las Vegas and Atlanta. The proposed acquisition of UCP puts Century into additional attractive markets, including California and the Pacific Northwest.

The following ratings were affected:

Corporate Family Rating, confirmed at B3

Probability of Default Rating, confirmed at B3-PD

Ratings on two issues (with three Moody's debt numbers) of senior unsecured notes, confirmed at B3 (LGD4)

Outlook changed to positive from Rating Under Review

The positive outlook is based on Moody's expectation that Century will strengthen its credit metrics and eventually integrate UCP successfully.

Factors that could lead to an upgrade to B2 are a seamless integration of UCP, lowering of debt leverage below 50%, and maintenance of healthy liquidity.

Factors that could lead to a return to a stable outlook (from positive) include liquidity constraints, debt leverage rising above 60%, EBIT interest coverage falling below 1.5x, and gross margins falling below 18% on a sustained basis.

As the company has grown, it has frequently raised the size of its committed senior unsecured revolving credit facility. As of February 2017, soon after its $125 million add-on offering to its 6.875% senior unsecured notes due 2022, the company raised its revolver size to $400 million from $380 million. The revolver will mature on October 21, 2019. With its $400 million senior unsecured note offering in May 2017 and repayment of the $65 million revolver debt that was outstanding at the time, Century had $400 million of availability, a sizable line of credit given its size. Covenants include a 1.5x debt to tangible net worth leverage test, a 1.5x interest coverage test, and a minimum tangible net worth test. Century has satisfactory to ample headroom under these tests.

Founded in 2002 and headquartered in Greenwood Village, Colorado, Century Communities is a builder of single-family homes, townhomes, and flats in select major metropolitan markets in Colorado, Georgia, Nevada, Texas, and Utah. The company has had 14 consecutive years of profitability since its formation, and based on 2015 deliveries, as ranked by BUILDER Online, it is a top 25 US homebuilder. Revenues and net income in 2016 were approximately $979 million and $50 million, respectively.

Headquartered in San Jose, CA, UCP was established, through its predecessor, in 2004 principally as a land developer under the name Union Community Partners, LLC by its founder and current CEO, Dustin Bogue (who will remain with Century Communities). Revenues and net income in 2016 were approximately $349 million and $14 million, respectively.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in April 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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