In November, Toll Brothers, through Toll Brothers Finance Corp. issued $250 million of 5.625% coupon senior unsecured notes. Despite trading a bit over par, the notes still offer an attractive yield for the given level of credit risk. Here are the highlights of the 2024 notes:
- January 15, 2024 maturing, 5.625% coupon, senior unsecured notes (CUSIP 88947EAQ3), rated Ba1/BB+ by Moody’s/S&P, paying interest semiannually, and recently asking 100.65 cents-on-the-dollar (5.537% yield-to-worst).
- Interest accrues from November 21, 2013. But the first semiannual interest payment is not until July 15, 2014.
- The notes are guaranteed by Toll Brothers, Inc. and certain subsidiaries.
- The notes have a make whole call prior to October 15, 2023. On or after October 15, 2023, the notes are callable at par. There is also a “Special Mandatory Redemption” at par, in the event the purchase of Shapell Industries’ single-family residential property business is not completed prior to May 31, 2014. Additionally, the notes will also be subject to the Special Mandatory Redemption should Toll Brothers announce, prior to May 31, 2014, that it will no longer pursue the acquisition, or should the Purchase Agreement be terminated on any date prior to May 31, 2014.
- There is a “Change of Control Repurchase Event” at 101 cents-on-the-dollar.
- Read more details in the Prospectus Supplement.
For readers less familiar with Toll Brothers, here is a bit of background on the company:
- Toll Brothers operates in 19 U.S. states, designing, building, and financing homes in luxury residential communities.
- According to the Prospectus Supplement for the 2024 maturing notes (linkedabove), Toll Brothers operates its own “land development, architectural, engineering, mortgage, title, landscaping, security monitoring, lumber distribution, house component assembly, and manufacturing operations.” The company also develops, owns, and operates golf courses and country clubs, which are generally associated with its master planned communities.
- On December 10, Toll Brothers reported fiscal year 2013 Q4 results. Revenues were up 65% compared to Q4 2012. Homebuilding deliveries were up 36% year-over-year. The average price of homes delivered increased to $703,000 from Q4 FY 2012’s $582,000 (up 20.79%). The fiscal year-end backlog rose 57% in dollar terms and 43% in unit terms compared to fiscal year-end 2012.
- According to its most recent earnings release, at the end of fiscal year 2013, Toll Brothers had $825.5 million of cash and marketable securities. The company also had $958.4 million available under its $1.035 billion, 15-bank credit facility. The credit facility matures in August 2018.
Investors willing to purchase individual bonds with non-investment grade ratings should consider the newly issued Toll Brothers Finance Corp. notes, CUSIP 88947EAQ3. With that said, it is important to recognize the risk associated with the “Special Mandatory Redemption.” Should the purchase of Shapell Industries’ single-family residential property business not be completed prior to May 31, 2014, the notes will be called at par. If you purchase the notes at a price too much above par, it is possible to lose money on the investment. This is true even when factoring in accrued and unpaid interest that would be paid when the notes are called.
Finally, the notes are currently trading at a yield that seems too high relative to the rest of Toll Brothers’ outstanding senior unsecured notes. I attribute this to the risk of the “Special Mandatory Redemption” actually occurring. If the deal with Shapell Industries closes as planned, I suspect the current premium (from a yield perspective) to other Toll Brothers’ notes outstanding will narrow. Investors therefore currently have the opportunity to capture more yield than would otherwise be the case if the 2024 notes didn’t have a “Special Mandatory Redemption.”
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