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 ratings follows this release.
Toll's ratings and Outlook reflect the company's well-entrenched position as the preeminent builder of luxury homes, the successful execution of its operating model and relatively stable debt-protection measures despite the severe cyclical housing downturn and continued housing weakness. Additionally, the company's strong liquidity position provides a buffer and supports the current ratings. 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.
Recent macroeconomic housing statistics (new and existing home sales, single-family housing starts) are weak and disappointing, especially during the month of February. Although March statistics showed some improvement, April data eased again for starts and existing home sales. However, there is a seasonal pick-up in the spring orders compared to the winter. The public builders have reported clear improvement in traffic. In certain markets selling incentives appear to be rising, to the disadvantage of near-term margins, although new home prices are relatively stable. The public homebuilders were generally unprofitable in the calendar first quarter (excluding non-cash real estate charges) and revenues trailed a year ago levels. Builder comparisons are also challenging during the second quarter of 2011 and then ease in the third and fourth quarters. If the economy continues its advance and a moderate number of jobs are added, macroeconomic housing metrics should, for the most part, rise at a low single-digit pace this year and at a low double-digit pace in 2012.
Toll successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. At April 30, 2011, Toll had cash of $949.9 million and marketable U.S. Treasury securities totaling $297.8 million. During the past two years Toll added to its land position, supported by its strong liquidity. During the second quarter (ended April 30, 2011), the company's lot count increased sequentially by 224 and expanded by 2,291 lots year-over-year. At the end of the April 2011 quarter, Toll controlled 35,935 lots, 85.0% of which are owned with the remaining 15.0% controlled through options. This represents a 13.5-year supply of total lots controlled and an 11.5-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 44-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 for the first half of fiscal 2011 ($97.6 million, including a second quarter tax refund of $154.3 million), as the company continued its land acquisition activities. For the latest 12 months ended April 30, 2011, cash flow from operations totaled a positive $175.3 million (including the 2011 tax refund and a tax refund of $152.8 million in the calendar 2010 third quarter). Negative cash flow is typical in the early stages of a housing recovery for most of the large public builders. For all of fiscal 2011, Fitch expects the company to be cash flow negative, including the tax refunds, reflecting substantial land and development spending during the year. Nevertheless, spending may likely end up modestly short of 2010's approximately $420 million level of expenditures for land and development.
In addition to its strong cash position, Toll has access to an $885 million revolving credit facility that matures in October 2014. At April 30, 2011, the company had no borrowings under the revolver, but had $101.2 million of letters of credit outstanding under the facility. Toll had borrowing availability under the revolver of approximately $784 million. At the end of the second quarter, the company had sufficient room under the facility's financial covenants. Toll's debt maturities are well-laddered, with no major debt due until November 2012, when about $195 million of 6.875% senior notes mature. The next major debt maturity is in September 2013, when $142 million of 5.95% senior notes become due.
Leverage has typically remained under 45% over the past five years. At the end of its fiscal 2011 second quarter, leverage as measured by homebuilding debt to total capitalization was 39.2%. Taking into account its unrestricted cash position and marketable securities, net debt to capitalization was 13.6%. 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 8.3 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.
Fitch has affirmed the following ratings for Toll with a Stable Outlook.
--Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured debt at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'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=546646
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
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