Fitch Rates Toll's Proposed $100 million Add-on 10-Year Senior Notes 'BBB-'
NEW YORK -- May 8, 2013
Fitch Ratings has assigned a 'BBB-' rating to Toll Brothers, Inc.'s (NYSE:
TOL; Toll) proposed add-on offering of its senior notes due 2023. The proposed
$100 million add-on issuance will increase the notes outstanding to $400
million. This issuance is equal in right of payment with all other senior
unsecured debt. Proceeds from the new debt issue will be used for general
corporate purposes which may include the repayment or repurchase of certain of
Toll's outstanding indebtedness. The Rating Outlook is Stable. Fitch expects
leverage to remain within or below Toll's historic debt to capitalization
range of 45% - 55%. The net debt to capitalization ratio should be
meaningfully lower than its historic range. A complete list of ratings follows
at the end of this release.
KEY RATING DRIVERS
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
11.7% aligns management's interests with the long-term financial health of
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
IMPROVING HOUSING MARKET
Fitch's housing forecasts for 2013 assume a continued moderate rise off the
very low bottom in 2011. In a slowly growing economy with somewhat diminished
distressed home sales competition, less competitive rental cost alternatives,
scarcity of high profile lots and new and existing home inventories at
historically low levels, 2013 total single-family housing starts should
improve about 18% to 633,000, while new home sales increase approximately 22%
and existing home sales grow 7.5%.
However, as Fitch has noted in the past, recovery will likely occur in fits
Challenges (although somewhat muted) remain, including continued relatively
high levels of delinquencies, potential of short-term acceleration in
foreclosures, and consequent meaningful distressed sales, restrictive credit
qualification standards and limited availability of developed lots in certain
LIQUIDITY AND LAND STRATEGY
Toll successfully managed its balance sheet during the severe housing
downturn, allowing the company to accumulate cash as it pared down its
inventory. At Jan. 31, 2013, Toll had cash and equivalents of $368.8 million
and marketable securities totaling $424.8 million. During the past three
years, Toll added to its land position, supported by its strong liquidity.
During the first quarter (ended Jan. 31, 2013), the company's lot count
increased by 4,041 lots year-over-year. At the end of the January 2013
quarter, Toll controlled 43,695 lots, 76.7% of which are owned with the
remaining 23.3% controlled through options. This represents a 12.6-year supply
of total lots controlled and a 9.7-year supply of owned land based on trailing
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 46-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 negative cash flow from operations in fiscal 2012 ($169
million), as the company continued its land acquisition activities. For the
first three months of fiscal 2013 cash flow was negative $305.8 million.
Negative cash flow is typical in the early stages of a housing recovery for
most of the large public builders. For fiscal 2013, Fitch expects the company
to be cash flow negative (in excess of $300 million), reflecting substantial
land and development spending during the year. Core land and development
spending was approximately $525 million in 2011 and $800 million in 2012.
Fitch estimates $800 million-$900 million of land and development expenditures
by Toll in 2013.
In addition to its strong cash position, Toll has access to an $885 million
revolving credit facility that matures in October 2014. At Jan. 31, 2013, the
company had no borrowings under the revolver, but had $66 million of letters
of credit outstanding under the facility. Toll had borrowing availability
under the revolver of $819 million. At the end of the first quarter, the
company had sufficient room under the facility's financial covenants.
Toll's debt maturities are well-laddered: $104.7 million of 5.950% senior
notes mature in September 2013. The next major debt maturity is in March 2014,
when $268 million of 4.950% senior notes become due.
Leverage has typically been 46% or lower as of fiscal year end over the past
nine years. At the end of its fiscal 2013 first quarter, leverage as measured
by homebuilding debt to total capitalization was 40.3% (and slightly beneath
45% on a pro forma basis). Taking into account its unrestricted cash position
and marketable securities, net debt to capitalization was 29.7%. These
leverage ratios are appropriate for the rating category, taking into account
Toll's cash flow generation and operating risk profile.
The company's inventory to net debt ratio, at present 3.1 times (x), has
consistently remained in excess of 2.0x, providing a healthy buffer following
the recent housing downturn.
OTHER INCOME STREAMS
Recently Toll indicated that it has assembled a collection of sites that it
controls for new rental apartment projects totaling 4,000 units. The company
also controls (through ownerships and options) two high-quality student
housing projects totaling about 890 units. These projects are located in the
metro Boston to Washington, DC corridor. Toll plans to develop these projects
in partnership structures over the next several years and these activities
should start generating income beginning in fiscal 2015. The company
previously developed 1,500 apartment units which it currently operates and
owns in partnership structures. Fitch expects that Toll may invest a couple of
hundred million dollars in these activities over the intermediate term.
RECENT OPERATING RESULTS
Revenues in the first quarter of fiscal 2013 (ended Jan. 31, 2013) totaled
$424.6 million, up 31.9%. Toll reported a 32.3% increase in home closings and
0.3% decline in average sales price to $569,170. In this seasonally small
quarter, the company reported pretax profits of $8.3 million which compares to
a loss of $6.4 million in the year earlier quarter. The gross profit margin
expanded as the expense/sales ratio contracted, primarily due to greater
volume. Net orders improved 49.2%. Unit backlog at quarter end was 2,796, up
56.7%. The value of backlog increased 66.4%.
Toll's first quarter fiscal 2013 credit metrics improved relative to year end
fiscal 2012 and 2011. Homebuilding debt to LTM EBITDA decreased from 13.7x at
year-end 2011 and 10.2x at year-end 2012 to 9.0x (5.6x net debt to LTM EBITDA)
as of Jan. 31, 2013. Interest coverage increased to 1.8x at the end of the
first quarter 2013 from 1.7x at year-end 2012 and 1.0x at year-end 2011. Fitch
currently expects leverage to be 6.75x - 7.25x (net debt to LTM EBITDA 4.5x -
5.0x) and interest coverage to approximate 2.0x by the conclusion of fiscal
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, a Positive Outlook may be considered if the
recovery in housing is significantly better than Fitch's outlook and the
company shows meaningful improvement in credit metrics (such as homebuilding
net debt to LTM EBITDA levels approaching 2.0x) while maintaining a healthy
liquidity position (above $1 billion with a combination of cash and revolver
Conversely, negative rating actions could occur if the recovery in housing
dissipates; Toll's 2013 revenues drop by 15% or more while the pretax loss
approaches levels of 2010; and Toll maintains an overly aggressive land and
development spending program that leads to consistent and significant negative
quarterly cash flow from operations and meaningfully diminished liquidity
position (perhaps below $500 million).
Fitch currently rates Toll as follows with a Stable Outlook:
--Issuer Default Rating 'BBB-';
--Senior unsecured debt 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
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Fitch Ratings, Inc.
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