Fitch Affirms Toll Brothers' IDR at 'BBB-'; Outlook Stable
CHICAGO -- September 10, 2012
Fitch Ratings has affirmed its ratings for Toll Brothers, Inc. (NYSE: TOL),
including the company's Issuer Default Rating (IDR) at 'BBB-'. The Rating
Outlook is Stable. A complete list of rating actions follows this release.
Toll's ratings and Outlook reflect the company's well-entrenched market
position as the pre-eminent public builder of luxury homes, the successful
execution of its operating model that has produced one of the better margins
within the industry over a cycle, and relatively stable debt-protection
measures despite significant erosion in profitability during the extended
downside of this cycle. The company's liquidity position provides a buffer and
supports the current ratings. Significant insider ownership of approximately
14% aligns management's interests with the long-term financial health of Toll.
Risk factors include the cyclical nature of the homebuilding industry; the
volatility in the value of Toll's extensive land holdings (some of which will
be developed over an extended period of time); and the company's primary focus
on the luxury housing segment of the market which, although diversified
geographically and by product type across many niches within the urban and
suburban luxury market, is not as broad as the first-time and first-step
Builder and investor enthusiasm have for the most part surged so far in 2012.
However, national housing metrics have not entirely kept pace. Year-over-year
comparisons have been solidly positive on a consistent basis. Yet, month to
month the national statistics (single-family starts, new home, and existing
home sales) have been erratic and, at times, below expectations. In any case,
year to date these housing metrics are well above 2011 levels. As Fitch has
noted in the past, recovery will likely occur in fits and starts. (Toll
reported contract growth of 43% for the nine months ended July 31, 2012, far
exceeding national data and implying market share gains.)
Fitch's housing forecasts for 2012 have been raised since early spring but
still assume only a moderate rise off a very low bottom. In a slowly growing
economy with relatively similar distressed home sales competition, less
competitive rental cost alternatives, and new home inventories at historically
low levels, single-family housing starts should improve about 12%, while new
home sales increase approximately 10.5% and existing home sales grow 5.6%.
Further moderate improvement is forecast for 2013.
Toll successfully managed its balance sheet during the severe housing
downturn, allowing the company to accumulate cash as it pared down inventory.
At July 31, 2012, Toll had cash and equivalents of $601.4 million and
marketable securities totaling $275.9 million. During the past three years
Toll added to its land position, supported by its strong liquidity. During the
third quarter (ended July 31, 2012), the company's lot count increased by
3,023 lots year over year. At the end of the July 2012 quarter, Toll
controlled 39,208 lots, 80.4% of which are owned with the remaining 19.6%
controlled through options. This represents a 13.3-year supply of total lots
controlled and a 10.7-year supply of owned land based on trailing 12-month
Despite its long land position, the company continues to look for
opportunities to tie-up land at attractive prices. Fitch is comfortable with
this strategy given the company's 45-year track record, cash and liquidity
position, debt maturity schedule, proven access to the capital markets, and
management's demonstrated discipline in pulling back on its land and
development activities and improving liquidity as the economy and housing
Toll reported positive cash flow from operations in fiscal 2011 ($52.8
million, including a second quarter tax refund of $154.3 million), as the
company continued its land acquisition activities. For the first nine months
of 2012 cash flow was negative $234.1 million.
Negative cash flow is typical, especially in the early stages of a housing
recovery, for most of the large public builders. For fiscal 2012, Fitch
expects the company to be cash flow negative (in excess of $250 million),
reflecting substantial land and development spending during the year. Core
land and development spending was approximately $525 million in 2011. Fitch
estimates $725 million-$775 million of land and development expenditures in
In addition to its strong cash position, Toll has access to an $885 million
revolving credit facility that matures in October 2014. At July 31, 2012, the
company had no borrowings under the revolver, but had $65.8 million in letters
of credit outstanding under the facility. Toll had borrowing availability
under the revolver of $819.2 million. At the end of the third quarter, the
company had sufficient room under the facility's financial covenants.
Toll's debt maturities are well-laddered; $59.1 million of 6.875% senior notes
mature in November 2012. The next major debt maturity is in September 2013,
when $104.7 million of 5.95% senior notes become due.
Leverage has typically been 46% or lower as of fiscal year end over the past
eight years. At the end of its fiscal 2012 third quarter, leverage as measured
by homebuilding debt to total capitalization was 41.3%. Taking into account
its unrestricted cash position and marketable securities, net debt to
capitalization was 27.4%. These leverage ratios are appropriate for the rating
category, taking into account Toll's cash flow generation and operating risk
The company's inventory to net debt ratio, at present 3.7x, has consistently
remained in excess of 2.0x, providing a healthy buffer during this housing
Future ratings and Outlooks will be influenced by broad housing market trends
as well as company-specific activity, such as trends in land and development
spending, general inventory levels, speculative inventory activity (including
the impact of high cancellation rates on such activity), gross and net new
order activity, debt levels, free cash flow trends and uses, and the company's
Toll's ratings are constrained in the intermediate term because of relatively
high leverage metrics. However, positive rating action may be considered if
the recovery in housing is significantly stronger than Fitch's current
outlook, company credit metrics are much better than Fitch's current
projections for 2012 and 2013, and liquidity is largely maintained. A negative
rating action could be triggered if the industry recovery dissipates; Toll's
operating and financial performance for this year is well below Fitch's
current forecast for revenues ($1.7 billion), deliveries (3,200) and a modest
pretax profit; and 2013 revenues drop high single-digits while the company
slips back into a moderate pretax loss; and its cash and securities position
falls below $500 million and the credit line is largely exhausted.
Fitch has affirmed the following ratings for Toll with a Stable Outlook.
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Liquidity Considerations for Corporate Issuers
Corporate Rating Methodology
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