Investing.com -- Moody’s Ratings has upgraded Toll Brothers (NYSE: TOL ), Inc.’s Issuer Rating to Baa2 from Baa3, and the senior unsecured notes ratings for its subsidiary Toll Brothers Finance Corp. to Baa2 from Baa3. The outlook for both Toll and Toll Brothers Finance Corp. has been adjusted to stable from positive.
The upgrade is a reflection of Toll’s growth and deleveraging in recent years and its strong position in the luxury home market. Most of Toll’s customers are already homeowners, which contributes to the resilience of its operations. These customers are less likely to be affected by affordability pressures and have been less impacted during past industry downturns.
Toll’s strong liquidity profile and financial flexibility, as well as its robust gross margin performance, were also factors in the rating upgrade. Moody’s expects Toll to maintain strong credit metrics and a conservative approach to its operations and financial profile, even during industry downturns.
Natalia Gluschuk, Moody’s Ratings Vice President and Senior Credit Officer, stated that Toll’s strong product positioning, brand awareness, and the higher resilience of its customers will support the company’s future performance, even during a market weakening.
The Baa2 senior unsecured rating is backed by Toll’s strong market position as a national homebuilder focusing on the upper-end homebuilding segment, its recognized brand name, and its ability to adapt to changing market conditions. The company’s operations span 24 states in over 60 markets, and it has a build-to-order operating strategy with the lowest cancellation rate in the industry. About 70% of Toll’s buyers are already homeowners, which enhances the company’s resiliency. The company’s conservative financial policies and strong liquidity profile also support the rating.
However, the rating is limited by Toll’s track record of shareholder-friendly actions, including share repurchases and dividends. Its owned land supply, which is exposed to impairments during a housing downturn, and the exposure to repayment and carry cost guarantees of joint venture debt obligations also constrain the rating. Affordability constraints in the sector and the cyclicality of the homebuilding sector are other limiting factors.
The stable outlook is based on the expectation that Toll will maintain strong credit statistics, operate conservatively, and maintain robust financial flexibility over the next 12 to 18 months.
Toll’s strong liquidity profile is supported by its strong cash flow generation, significant capacity under its recently upsized $2.35 billion unsecured revolving credit facility, substantial covenant compliance headroom, and ample land supply. As of January 31, 2025, the company had $2.35 billion in total liquidity, consisting of $575 million in cash and $1.8 billion in revolver availability.
Factors that could lead to an upgrade include a commitment to operating with debt to book capitalization below 20% during any industry cycle. A downgrade could occur if the homebuilding sector experiences a prolonged downturn, leading the company to generate net losses and incur meaningful impairments.
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