NEW YORK, May 08, 2013 (BUSINESS WIRE) -- 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 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.
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 and starts.
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 markets.
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 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 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 contract.
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 2013.
RATING SENSITIVITIES
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.
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 availability).
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790703
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
http://cts.businesswire.com/ct/CT?id=bwnews&sty=20130508006182r1&sid=cmtx4&distro=nx
SOURCE: Fitch Ratings
Fitch Ratings Primary Analyst Robert Curran, +1 212-908-0515 Managing Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Robert Rulla, CPA, +1 312-606-2311 Director or Committee Chairperson Craig Fraser, +1 212-908-0310 Managing Director or Media Relations: Sandro Scenga, +1 212-908-0278 sandro.scenga@fitchratings.com
Copyright Business Wire 2013
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