Toll Brothers’ bonds no longer “junk”

Despite the market for home sales being plagued by elevated mortgage rates and lingering recession fears, Toll Brothers’ credit rating has received a boost.

Standard & Poor’s raised the homebuilder’s credit rating to BBB- from BB+, shifting Toll Brothers’ out of “junk” status and into the realm of investment grade. The stronger rating will allow Toll to pay less interest on bonds it issues, reducing its cost of capital.

The ratings agency cited several reasons for the upgrade. It noted that mortgage rates have stabilized and buyers are getting used to higher rates. S&P also said Toll customers’ cancellation rate has normalized, and that the homebuilder faces less competition from the resale market, thanks to a paucity of listings.

Those factors, paired with healthy housing demand expected for the rest of 2023, bode well for Toll, S&P said. The ratings firm also noted that Toll had raised its prices by about $25,000 per home in the quarter ending in April, boosting its profit margin.

The company also cleaned up its balance sheet by redeeming $400 million of senior notes in April, reducing company debt to around $2.28 billion. It had been $2.35 billion in October.

S&P previously upgraded the credit ratings of several other homebuilders. DR Horton and PulteGroup were lifted to BBB+ and BBB, respectively, and Lennar was also moved up to BBB.

While S&P noted that profit margins may be hard for Toll Brothers to sustain, given high labor costs and inflation, it forecast that its earnings would stay relatively healthy even if the market dips.