High Yield Housing: 2026 Midyear Outlook: Where Rates and Affordability Constraints Meet M&A - Underweight on Valuation

Research evidence excerpt

High Yield Housing: 2026 Midyear Outlook: Where Rates and Affordability Constraints Meet M&A - Underweight on Valuation

ice in this consideration and look tight relative to entry-level oriented

homebuilders like ASHWOO and CCS. Risks to the rating: entry level demand volatility,

mortgage rate movement and capital allocation priorities.

• We upgrade Shea Homes (SHEAHM) to Neutral (from Underweight): Shea bonds

are short duration with low coupon maturities in 2028 and 2029. While the ‘29s trade in

line with longer duration high-BB Homebuilder bonds, we believe this is appropriate as

Shea continues to positively differentiate itself with a product mix that skews more move-

up oriented and less rate sensitive. Similar to MHO, SHEAHM carries one of the best

balance sheets in HY Homebuilding and, despite legacy concerns around affordability in

California markets, the company’s California move-up footprint has performed very well

in a challenging market as SHEAHM margins have held up relatively well compared to

other builders. We believe that SHEAHM justifiably belongs in the class with MHO

behind KBH from a valuation perspective among remaining high quality HY

Homebuilders following the acquisitions of TMHC and TPH. Risks to the rating:

California housing demand, equity market volatility impacting move-up appetite and

capital allocation.

• We downgrade Masterbrand (MASBRA) to Underweight (from Neutral): We

believe that valuation at MASBRA looks full following the successfully completed

American Woodmark acquisition. We like the M&A long-term, but note that leverage is

north of 3x out of the gate and that little to no execution risk around integration is priced

in to current spreads. We believe macro headwinds are likely to continue to put pressure