Fitch Ratings assigns BBB- rating to Toll Brothers' proposed offering of US$350M of 4% senior unsecured notes due Dec. 31, 2018, and US$250M of 5.625% senior unsecured notes due Jan. 15, 2024
November 13, 2013
– Fitch Ratings has assigned a 'BBB-' rating to Toll Brothers, Inc.'s (NYSE: TOL) proposed offering of $350 million of 4% senior unsecured notes due Dec. 31, 2018 and $250 million of 5.625% senior unsecured notes due Jan. 15, 2024. These issuances are equal in right of payment with all other senior unsecured debt. Toll intends to use the net proceeds to fund a portion of the purchase price of its proposed $1.6 billion acquisition of Shapell Industries.
The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
Shapell currently has a portfolio of about 5,200 home sites, assembled over several decades, in coastal California's most affluent, high-growth, high barrier-to-entry markets: the San Francisco Bay area, the Los Angeles area, Orange County and the Carlsbad market. Shapell expects to deliver approximately 580 homes at an average price of $800,000 from about 20 selling communities in calendar 2013. The Shapell family will retain ownership of its retail, commercial and multi-family businesses and other non-homebuilding components of Shapell Industries through other entities.
Toll has been operating in California since 1994 and knows the coastal markets of the state very well. Toll's current average sales price in these markets during fiscal year 2013 was $997,000 and both companies serve affluent trade-up customers. Entitled real estate is highly desired and in short supply in these coastal markets and this acquisition will serve to meaningfully expand Toll's real estate holdings in California and add scale to existing Toll operations within these markets. The addition of Shapell's residential management team will add depth to Toll's local homebuilding and land development team in coastal California.
Toll intends to finance the transaction with draws from its existing credit facility with a combination of debt and equity issuances along with cash on hand. The company recently priced a public offering of 6,250,000 shares of its common stock at $32 per share. Toll also granted the underwriters a 30-day option to purchase up to an additional 937,500 shares from the company.
Toll has also received a commitment for a $500 million 364-day senior unsecured revolving credit facility. Post-closing, Toll intends to selectively sell certain assets to reduce land concentration and outstanding borrowings.
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 an 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 the past cycle. The acquisition of Shapell's land position is likely to be very rewarding over the next few years and will noticeably bolster Toll's market share within California. The company's liquidity position provides a buffer and supports the current ratings.
The ratings take into account the temporary scale up of debt and leverage. With considerable immediate cash return at the close and following Toll's successful conversion of Shapell's backlog into cash within the first six months, the sale of a substantial portion of the company's California land on a timely basis (most of it within the next 12 months), and incremental profitability from the Shapell operations, Fitch expects that debt would be much reduced from peak closing levels by year- end 2014 and leverage should approach 5x. Further leverage improvement is expected in 2015.
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.
The ratings could be downgraded if:
--Toll does not realize the anticipated cash generation in 2014 from Shapell asset and backlog sales
with resulting debt reduction and/or the recovery in housing dissipates;
--Toll's 2014/2015 revenues drop sharply while pretax profits approach break-even levels;
--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).
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 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). Of course, the debt associated with the Shapell acquisition would need to be largely repaid.
Fitch has the following ratings for Toll:
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Liquidity Considerations for Corporate Issuers http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
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