NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Toll Brothers, Inc.'s (NYSE: TOL) $300 million senior unsecured notes due February 2022. The Rating Outlook is Stable.
The notes will be issued by Toll Brothers Finance Corp., a wholly-owned subsidiary, and will be guaranteed on a senior basis by Toll Brothers, Inc. and certain of its subsidiaries that guarantee its current bank credit facilities and its senior notes. The issue will be ranked on a pari passu basis with other senior unsecured debt, including the company's $885 million unsecured revolving credit facility. 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. Fitch expects leverage to remain within or below Toll's stated debt to capitalization target range of 45 - 55%. The net debt to capitalization ratio should be meaningfully lower than its target range.
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 trade-up segments.
As expected, the housing recovery has been irregular so far and to date quite anemic. Various housing and related statistics appear to have bottomed in early to mid-2009. Since then the on, then off, then on again federal housing credit at times spurred or at least pulled forward housing demand. With the U.S. economy moving from recession to expansion in the third quarter of 2009, plus very attractive housing affordability and government incentives, housing was jump-started. However, faltering consumer confidence, among other issues, has restrained the recovery so far. New home sales and single-family starts retested the bottom during the summer of 2010 and in February 2011.
Certain recent economic/construction related statistics, such as job growth, consumer confidence, mortgage rates, household formations, multifamily starts, existing home sales, pending home sales, housing inventories, and foreclosures were improving and/or above consensus. A few key statistics such as single-family housing starts, new home sales, home prices (CoreLogic, Case Shiller) were declining/short of expectations. Overall, the current setting is much like at the beginning of 2011.
Fitch's housing forecasts for 2012 assume a modest rise off a very low bottom. New home inventories are at historically low levels and affordability is at near record highs. In a slowly growing economy with distressed home sales competition similar to 2011, less competitive rental cost alternatives, and, probably, even lower mortgage rates, single-family housing starts should improve about 5% to 445,000, while new home sales increase approximately 5.5% to 322,000 and existing home sales grow 3% to 4.405 million.
Toll successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. At Oct. 31, 2011, Toll had cash and equivalents of $906.3 million and marketable securities totaling $233.6 million. During the past two years Toll added to its land position, supported by its strong liquidity. During the fourth quarter (ended Oct. 31, 2011), the company's lot count increased sequentially by 1,312 and expanded by 2,645 lots year-over-year. At the end of the October 2011 quarter, Toll controlled 37,497 lots, 80.5% of which are owned with the remaining 19.5% controlled through options. This represents a 14.4-year supply of total lots controlled and an 11.6-year supply of owned land based on trailing 12-month deliveries.
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 contract.
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.
Negative cash flow is typical in the early stages of a housing recovery for most of the large public builders. For fiscal 2012, Fitch expects the company to be moderately cash flow negative, reflecting substantial land and development spending during the year. Core land and development spending was approximately $500 million in 2011 and a similar level of expenditures is probable in 2012, excluding the recently concluded CamWest Development LLC acquisition.
In addition to its strong cash position, Toll has access to an $885 million revolving credit facility that matures in October 2014. At Oct. 31, 2011, the company had no borrowings under the revolver, but had $100.3 million of letters of credit outstanding under the facility. Toll had borrowing availability under the revolver of $784.7 million. At the end of the fourth quarter, the company had sufficient room under the facility's financial covenants.
Toll's debt maturities are well-laddered. $139.8 million of 6.875% senior notes mature in November 2012. The next major debt maturity is in September 2013, when $141.6 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 2011 fourth quarter, leverage as measured by homebuilding debt to total capitalization was 38.1%. Taking into account its unrestricted cash position and marketable securities, net debt to capitalization was 15.0%. 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 4.9 times (x), has consistently remained in excess of 2.0x, providing a healthy buffer during this housing downturn.
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 cash position.
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. 12, 2011);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers