Fitch Rates Toll's Proposed $350MM Sr. Notes Offering 'BBB-': Outlook Stable
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
Toll's 'BBB-' ratings and Stable 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, which 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 2014 acquisition of Shapell's substantial, unique 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.
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 up-scale market, is not as broad as the first-time and first-step trade-up segments.
Industry challenges (although somewhat muted) remain, including restrictive credit qualification standards and limited availability of 'A' location lots in certain markets.
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 and especially free cash flow trends and uses, and the company's cash position.
THE INDUSTRY
Housing metrics increased in 2014 due to more robust economic growth during the last three quarters of the year (prompted by improved household net worth, industrial production and consumer spending), and consequently acceleration in job growth (as unemployment rates decreased to 6.2% for 2014 from an average of 7.4% in 2013), despite modestly higher interest rates, as well as more measured home price inflation. A combination of tax increases and spending cuts in 2013 shaved about 1.5pp off annual economic growth, according to the Congressional Budget Office. Many forecasters estimate the fiscal drag in 2014 was only about 0.25%.
Single-family starts in 2014 improved 4.8% to 648,000 as multifamily volume grew 15.6% to 355,000. Thus, total starts in 2014 were 1.003 million. New home sales were up a modest 1.6% to 436,000, while existing home volume was off 2.9% to 4.940 million largely due to fewer distressed homes for sale and limited inventory.
New home price inflation moderated in 2014, at least partially because of higher interest rates and buyer resistance. Average new home prices rose 6.4% in 2014, while median home prices advanced approximately 5.4%.
Housing activity has ratcheted up more sharply in 2015 with the support of a steadily growing, relatively robust economy throughout the year. Considerably lower oil prices should restrain inflation and leave American consumers with more money to spend. The unemployment rate should continue to move lower (5.0% in 2015). Credit standards should steadily, moderately ease throughout 2015. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25-35-year-olds should provide some incremental elevation to the rental and starter home markets. Single-family starts are now forecast to rise about 11.4% to 722,000 as multifamily volume expands about 11% to 394,000. Total starts would be just in excess of 1.1 million. New home sales are projected to increase 20% to 523,000. Existing home volume is expected to approximate 5.280 million, up 6.9%.
New home price inflation should further taper off with higher interest rates and the mix of sales shifting more to first time homebuyer product. Average and median home prices should increase 3.0%-3.5%.
Sparked by a slightly faster growing economy the housing recovery is expected to continue in 2016. Although interest rates are likely to be higher, a more robust economy, healthy job creation and further moderation in lending standards should stimulate housing activity. Housing starts should approximate 1.24 million with single-family volume of 0.82 million and multifamily starts of 0.42 million. New home sales should reach 617,000, up 18.0%. Existing home volume growth should again be mid-single digit (+4.0%).
Average and median home prices should rise 2.0%-2.5%.
As Fitch noted in the past, the housing recovery will likely continue in fits and starts.
THE SHAPELL ACQUISITION
On Feb. 4, 2014, Toll completed its acquisition of Shapell Industries, Inc. Pursuant to the purchase agreement, Toll acquired, for cash, all of the equity interests in Shapell from Shapell Investment Properties, Inc. for an aggregate purchase price of $1.60 billion. Toll acquired the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California, some of which Toll has sold and may continue to sell to other builders. This acquisition provided Toll with a premier California land portfolio including 11 active selling communities, as of the acquisition date, in affluent, high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County, and the Carlsbad market.
Toll did not acquire apartment and commercial rental properties owned and operated by Shapell or Shapell's mortgage lending activities relating to their home building operations.
Toll financed the acquisition with a combination of $370 million of borrowings under its $1.035 billion revolving credit facility, $485 million from a term loan facility, as well as with $815.7 million in net proceeds from debt and equity financings completed in November 2013.
Toll has been successfully operating in California since 1994 and knows the state's housing markets. California has historically represented approximately 9% of Toll's consolidated annual closings with the company's California average delivered prices 50% above Toll's corporate average price. The acquisition of Shapell is basically a land buy. The addition of Shapell added scale in top locations in both northern and southern California. And the industry-wide supply of quality California lots is scarce. Toll's inventory balance in California had been steadily declining until a few quarters before the Shapell acquisition.
LAND STRATEGY
During the past six years, Toll added to its land position, supported by its strong liquidity. However, during the third quarter (ended July 31, 2015), the company's lot count decreased by 3,662 lots year-over-year. At the end of the third quarter, Toll controlled 45,375 lots, 78.7% of which are owned with the remaining 21.3% controlled through options. This represents an 8.2-year supply of total lots controlled and a 6.5-year supply of owned land based on trailing 12-month deliveries. The company's lot position is lower than the eight to nine year land supply that the company had during the 1996-2008 period. During that period the owned lot supply ranged from four to six years.
The company spent $560 million on land and development in fiscal 2010, $472 million in 2011 and $500 million on land and $245 million on development in 2012. Toll also expended about $1 billion for land and $350 million on development activities in 2013. Toll spent $600 million on land and $500 million on development activities in 2014 (not including the $1.6 billion spent on the Shapell acquisition). Fitch projects about $1.1 billion for land and development spending in 2015.
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 47-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. The company exhibited that discipline during the last housing downturn and during the severe housing contractions in the late 1980s and early 1990s.
LIQUIDITY AND CREDIT METRICS
Toll successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. At July 31, 2015, Toll had unrestricted cash and equivalents of $394.8 million and marketable securities totaling $10 million.
Negative cash flow is typical in the early stages of a housing recovery for most of the large public builders. Toll reported negative cash flow from operations in fiscal 2013 ($568.9 million), as the company continued its land acquisition activities. For the first nine months of fiscal 2015, cash flow was negative $111.2 million. The company was cash flow positive $313.2 million in fiscal 2014.
For fiscal 2015, Fitch expects the company to be cash flow negative (perhaps $50 million). However, cash flow is projected to be positive in excess of $100 million in fiscal 2016.
In addition to its strong cash position, Toll has access to a $1.035 billion revolving credit facility that matures in August 2018. Up to 75% of the aggregate credit commitment is available for letters of credit. The credit facility has an accordion feature which could increase the credit facility up to a maximum aggregate amount of $2 billion. At July 31, 2015, Toll had $220 million of outstanding borrowings under the credit facility and had outstanding letters of credit of about $103.8 million. As part of the Shapell acquisition, Toll borrowed $370 million under the credit facility on Feb. 3, 2014, all of which was repaid as of July 31, 2014. At the end of the third quarter, the company had sufficient room under the facility's financial covenants.
Toll had $3.22 billion of debt as of July 31, 2015. Toll's debt maturities are well laddered, with the most current notes maturities $400 million due in October 2017 and $350 million maturing in December 2018.
Leverage has typically been 46% or lower as of fiscal year end over the past 10 years. At the end of the third quarter, leverage as measured by homebuilding debt-to-total capitalization was 43.9%. Taking into account its unrestricted cash position and marketable securities, net debt-to-capitalization was 40.6%. 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 2.5x, has consistently remained in excess of 2x, providing a healthy buffer following the recent housing downturn.
OTHER INCOME STREAMS
Outside of its traditional homebuilding activities, Toll has cultivated other real estate activities, particularly during the past seven years. The proceeds of these activities generated $67.1 million of other and joint venture (JV) income through the first nine months of fiscal 2015 and have averaged more than $50 million for the last seven years. The JV activities consist of land sales and development, a portion of City Living (condos for sale) and Apartment Living (rental). Other income includes land sales and development, Apartment Living, and ancillary businesses such as Gibraltar Capital, TBI Mortgage, Golf Course Development Management, Toll Landscaping, Security and Title.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Toll include:
--Industry single-family housing starts improve almost 11.5%, while new and existing home sales grow 20% and 6.9%, respectively, in calendar 2015;
--Toll's revenues grow 5.5% to about $4.1 billion with home deliveries of 5,500 and EBITDA margins up slightly (30-35 bps);
--The company's leverage (debt-to-LTM EBITDA) approximates 4x in 2015 and migrates lower in 2016;
--Toll spends approximately $1.1 billion on land and development activities this year;
--The company maintains a healthy liquidity position (above $1 billion with a combination of cash and revolver availability).
RATING SENSITIVITIES
The ratings could be downgraded if:
--The industry recovery dissipates and Toll's 2016 revenues drop sharply while pretax profits approach break-even levels;
--Toll's leverage (debt-to-LTM EBITDA) does not continue to shift to lower levels, ultimately approaching 3x;
--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).
FULL LIST OF RATINGS
Fitch currently rates Toll as follows:
--Long-term Issuer Default Rating 'BBB-';
--Senior unsecured notes 'BBB-';
--Unsecured revolving credit facility 'BBB-';
--Term loan facility 'BBB-'.
The Rating Outlook is Stable.
Комментарии