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Rating Action: Moody's changes the outlook for Toll Brothers to positiveGlobal Credit Research - 01 Mar 2021Approximately $2.67 billion of debt securities affectedNew York, March 01, 2021 -- Moody's Investors Service ("Moody's") changed the outlook for Toll Brothers, Inc. ("Toll") to positive from stable. At the same time, Moody's affirmed Toll's Ba1 Corporate Family Rating and Ba1-PD Probability of Default Rating, and the Ba1 rating on the senior unsecured notes of Toll Brothers Finance Corp. The company's Speculative Grade Liquidity Rating was maintained at SGL-1.The positive outlook reflects Moody's expectation of Toll Brothers' strong performance in 2021, including significant revenue expansion and growth in gross margin, accompanied by improvements in debt leverage and interest coverage credit statistics through debt repayment and earnings retention. In the next 12 months Moody's expects Toll Brothers' total debt to capitalization to decline to approximately 37%, interest coverage to trend toward 7.0x and gross margin to exceed 21%, strengthening the company's credit profile. The company's recent voluntary repayment of $150 million of its senior unsecured term loan due 2025, and the anticipated early redemption of its 5.625% $250 million senior unsecured notes due 2024 in March 2021 demonstrate Toll's strategic goal to reduce leverage. Over the next 12 to 18 months Moody's expects Toll to continue to operate conservatively, make strides to reduce debt, and maintain a disciplined approach to shareholder friendly actions. Moody's also expects Toll's focus on land purchasing efficiencies to contribute to its strong cash flow during this growth stage, supporting the company's excellent liquidity."Moody's projects Toll's revenue to exceed $8 billion in FY 2021, setting another all-time high company record, driven by strong demand across its product categories and geographies" says Natalia Gluschuk, Moody's Vice President -- Senior Analyst.The following rating actions were taken:Affirmations:..Issuer: Toll Brothers, Inc..... Corporate Family Rating, Affirmed Ba1.... Probability of Default Rating, Affirmed Ba1-PD..Issuer: Toll Brothers Finance Corp.....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)Outlook Actions:..Issuer: Toll Brothers Finance Corp.....Outlook, Changed To Positive From Stable..Issuer: Toll Brothers, Inc.....Outlook, Changed To Positive From StableRATINGS RATIONALEToll Brothers, Inc.'s Ba1 Corporate Family Rating is supported by: 1) the company's position as the sole national homebuilder with a meaningful focus on the upper-end homebuilding segment and a widely recognized brand name; 2) management's ability to stay ahead of evolving demographics and adapt to changing markets resulting in a diversity of offered product categories, including an expansion into the affordable luxury segment; 3) a broad geographic reach nationwide with operations in 24 states and 50 markets; 4) a largely build-to-order operating strategy, and the resulting revenue visibility, as well as the lowest cancellation rates in the industry; and 5) governance considerations, including a conservative financial profile and financial strategy that allows for significant financial flexibility and incorporates very good liquidity.However, the rating is also constrained by: 1) the company's track record of shareholder-friendly actions including share repurchases and dividends that have limited deleveraging; 2) cost pressures facing the industry with respect to land, labor and building materials; 3) an owned land supply of about four years based on the LTM deliveries, which could be subject to impairment risk during a market weakening; 4) capital requirements associated with its joint venture operations; and 5) exposure to protracted declines in revenues and weakening in credit metrics given the cyclicality inherent to the homebuilding sector.The SGL-1 Speculative Grade Liquidity Rating reflects Moody's expectation that Toll will maintain very good liquidity over the next 12 to 15 months given its strong cash flow, significant availability under its $1.9 billion revolving credit facility expiring in 2025, substantial covenant compliance headroom, and ample land supply. As of January 31, 2021, Toll had $2.7 billion in liquidity, consisting of $950 million of cash and $1.8 billion in revolver availability.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade include:» Achievement and maintenance of adjusted homebuilding debt to book capitalization below 40% together with homebuilding EBIT coverage of interest sustained in the high single digits» Maintenance of a very good liquidity position, including strong free cash flow» Demonstration of a commitment to attaining and maintaining an investment grade rating, both to Moody's and to the debt capital markets» An ability to withstand a serious financial shock without having its key credit metrics sinking to low speculative grade levelsFactors that could lead to a downgrade include:» Debt leverage approaching 50%» Cash flow from operations becoming increasingly negative and liquidity weakening» An economic downturn in which revenues and net income declineThe principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Toll Brothers, Inc. is a national builder of luxury homes. Toll serves move-up, empty-nester, active-adult, and second-home buyers and operates in 50 markets across 24 states. The company builds an array of luxury residential single-family detached, attached home, master planned resort-style golf, and urban low-, mid-, and high-rise communities, principally on land it develops and improves. Toll also operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, and landscape subsidiaries. The company also operates its own lumber distribution, house component assembly, and manufacturing operations. The company develops commercial and apartment properties through Toll Brothers Apartment Living, Toll Brothers Campus Living, and develops urban low-, mid-, and high-rise for-sale condominiums through Toll Brothers City Living. Revenue and net income in the LTM period ended January 31, 2021 were $7.3 billion and $486 million, respectively.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Natalia Gluschuk Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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