Meritage planning to pay down debt using proceeds from spec home, lot reductions

By Jennifer Lanning Drey

Portland, Ore., Oct. 4 - Meritage Homes Corp. plans to pay down debt using proceeds generated through a plan focused on reducing its supply of spec homes and developed lots, Steven J. Hilton, Meritage's chief executive officer, said during a Thursday presentation at the Deutsche Bank Leveraged Finance Conference.

Meritage estimates that it could generate "tens of millions of dollars" through the spec reductions over the next several quarters, Hilton said.

"Our plans are designed to maintain adequate capital, reduce our debt and maintain adequate liquidity reserves," he said.

Meritage is also liquidating land and joint venture interests and reducing overhead in order to generate cash.

Regardless, the company projects its interest coverage ratio could fall below 2.0 times as soon as early 2008 if conditions do not improve and the company continues to perform at its second-quarter EBITDA and adjusted interest levels, Larry W. Seay, Meritage's chief financial officer, said Thursday.

Meritage last week completed an amendment to its revolving credit facility that reduced the minimum interest ratio to 1.0 from 2.0 for a period of up to nine consecutive quarters.

"While we are planning for the worst, we are hoping for the better but are not holding our breath," Seay said.

The company projects free cash flow will turn positive in 2008, although a near-term recovery in the homebuilding industry is not expected.

"We anticipate the remainder of 2007 and most, if not all, of 2008, will continue to be difficult, and we're looking beyond that for a slow and steady recovery in the U.S. homebuilding market," Seay said.

Meritage is a Scottsdale, Ariz.-based designer and builder of single-family attached and detached homes.

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