Taylor Morrison Home Corp outlook revised to positive by S&P Global Ratings

Investing.com -- S&P Global Ratings has revised its outlook for Taylor Morrison Home Corp. (NYSE:TMHC) from stable to positive, based on the company’s solid credit metrics. Despite challenging macroeconomic conditions, the homebuilder is expected to maintain its scale and keep its debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio at or below 1.5x.

The revised outlook reflects S&P Global Ratings’ belief that Taylor Morrison can maintain its debt to EBITDA ratio within the mentioned limits, providing a buffer against the inherent cyclicality of the homebuilding industry, for the next 12 to 24 months. The company’s credit rating, including the ’BB+’ issuer credit rating, has been affirmed.

Taylor Morrison’s credit metrics have provided a cushion against slower housing demand. Since 2020, it has reduced its S&P Global Ratings-adjusted net debt and increased its EBITDA by $700 million and $683 million respectively, as of March 31, 2025. The company’s debt to EBITDA has been at or below 1.5x since the end of 2022, providing a 60% cushion on the forecasted EBITDA for 2026 relative to the 3x downside threshold at the current rating.

The firm’s leverage increased to 1.6x in the second quarter of 2024, from 1.0x in the previous year, due to increased funded debt levels and declining cash reserves. This decline in cash reserves is attributed to substantial working capital outflows, resulting from land acquisitions and inventory buildup of speculative homes.

S&P Global Ratings anticipates a leverage of about 1.5x or below over the next two years, which provides a significant cushion at the current rating level. However, leverage could increase if the company decides to pursue a more aggressive land acquisition strategy amid declining profitability margins, or more aggressive shareholder repurchases. The base-case scenario includes share repurchases of $350 million in 2025 and $400 million in 2026.

With the ongoing macroeconomic uncertainty, the company’s margins are expected to contract to 15%-15.5% in 2025, from 17.4% in 2024, due to elevated incentives, dampened price realizations, and the sale of less profitable spec homes. For fiscal 2026, the company’s margins are expected to further moderate to 14.5%-15% due to ongoing input cost inflation and elevated incentive levels.

S&P Global forecasts the average 30-year fixed mortgage rate to be 6.6% and 5.6% for 2025 and 2026, respectively. Real GDP growth is expected to cool to 1.5% in 2025 and grow by 1.7% in 2026, down from 2.9% in 2023 and 2.8% in 2024. The unemployment rate is expected to peak at 4.7% by mid-2026.

Taylor Morrison could be upgraded to investment grade if it maintains its debt-to-EBITDA ratio below 1.5x over the next 12 to 24 months, despite the current macroeconomic uncertainty. The company is expected to generate EBITDA of roughly $1.2 billion-$1.3 billion in fiscal years 2025 and 2026.

The positive outlook reflects the view that Taylor Morrison could generate an S&P Global Ratings-adjusted debt to EBITDA of less than 1.5x in 2025 and 2026. The company’s low leverage at this point in the U.S. housing cycle provides it with a good buffer to maintain debt to EBITDA of less than 2x even if market conditions unexpectedly deteriorate further.

S&P Global Ratings could revise its outlook on Taylor Morrison to stable over the next 12 months if the conditions in the housing market decline such that its operating results are weaker than expected, with debt to EBITDA exceeding 1.5x.

Assuming Taylor Morrison’s cash flow metrics and other credit measures remain near current levels over the next 12 to 24 months, S&P Global Ratings would consider raising its ratings if the company improves its business risk or materially reduces its cash flow volatility. This would be demonstrated by the company enhancing the scale of its homebuilding operations while maintaining margin improvement that compares favorably to peers’, and maintaining EBITDA near their current levels including debt to EBITDA of below 1.5x.

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