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One of the leading luxury homebuilders in the U.S, Toll Brothers Inc. (TOL - Analyst Report) announced that its wholly-owned subsidiary Toll Brothers Finance Corp. intends to issue exchangeable senior notes worth $250 million due on September 15, 2032 to initial purchasers. The senior notes would be eventually put up on offer for institutional buyers. The senior notes offering, which carries an interest rate of 0.50%, is expected to close on September 11, 2012.

Toll Brothers intends to use the net proceeds from the sale of the senior notes for corporate expenditures.

Most of the company’s short-term financing, such as expenses for land acquisition and development activities and other general operating needs, is met with cash generated from operations and proceeds from debt issuances. Toll Brothers strategically focuses on acquiring higher-margin well-positioned land or communities, in order to increase margins and sales orders.

Toll Brothers had strong liquidity at the end of the third quarter of fiscal 2012. The company had $877.4 million of cash and marketable securities, which is 16.1% of the total asset at the end of the third quarter of fiscal 2012 and $819.2 million available under its $885 million 12-bank credit facility, which matures in October 2014.

With the gradual economic recovery and relatively low interest rates, customers who had been delaying purchases are coming back stronger than expected. Thus, home prices may be expected to increase. Along with its strong brand name, attractive land position, strong repute for reliability and quality and robust liquidity position, Toll Brothers needs to maintain a strong inventory level in order to maximize the opportunities expected to come with market recovery.

Toll Brothers expects to deliver 800 to 1,000 homes in the fourth quarter of fiscal 2012. The average price of homes is expected to be in the range of $570,000 to $590,000, which is higher than the previous guidance of $560,000 to $580,000.

The company expects to generate home sale revenue of between $1.71 billion and $1.84 billion in fiscal 2012.

Our Recommendation

We currently have an Outperform recommendation on Toll Brothers. The stock carries a Zacks #2 Rank (short-term ‘Buy’ rating).

We appreciate the company’s order growth, stable margins and improved pricing. We believe that the company has benefited from its focus on the premium segment, which is witnessing growing demand and limited competition.

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