Toll Brothers Overpays For Shapell, But Reports Blowout Preliminary Earnings

| About: Toll Brothers (TOL)

The salubrious news of Toll Brothers' (NYSE:TOL) recent acquisition was highly-touted, but a look at the underlying figures reveals Toll paid on average $308,000 for each of the 5,200 lots it's getting from Shapell.

Toll's purchase price was 50% higher than KBH Home (NYSE:KBH) paid Brookfield Residential (NYSE:BRP) for 100 developed lots in the highly-sought-after Playa Vista development near Marina Del Rey, in West Los Angeles, in November, 2012 ($205,000/ea).

Toll's cost was also about 50% higher than what Tri-Pointe (NYSE:TPH) paid for its 16,000 developed CA lots in the Weyerhaeuser merger (NYSE:WY) on Monday.

Toll clearly wanted these lots and was willing to "pay up" for them.

If you factor in a home construction cost of $400,000 and 22%+ gross margins, every one of those houses would need a sticker price of $880,000+ to cover all the bases. That's $160,000 (22%) above Toll's average price of net signed contracts for 4Q2013 ($721,000).

And after all houses were sold, the retail value of the completed deal would be approximately $4.7 BL.

Investors, however, may eventually take issue with how this cash-rich company - catering to the wealthiest of homeowners - funded their purchase. To pay for part of the deal, Toll is minting 6.25 ML new shares, with an option to increase the total amount to 7.15 ML shares [($233.7ML) at Friday's stock price of $32.40].

That's about a 4% dilution in shareholder equity. To sweeten the cost of this news to shareholders (or maybe cover it under a sweet-smelling smoke), Toll released blow-out preliminary earnings for Q4 and full year, 2013. The company also said it expects the acquisition to be accretive within 18 months.

In the preliminary earnings, fourth quarter revenues increased 65% in dollars and 36% in units; contracts rose 23% in dollars and 6% in units; backlog increased 57% in dollars and 43% in units. FY 2013's Q4 net signed contracts per community were the highest for any Q4 since FY 2005.

They will flip $500ML of the acquired lots to other builders, thus reducing the overall price for the acquisition down to the $900ML to $1BL range that Shapell is probably worth. In August, the estimated range for this deal was between $1 to $1.5BL.

The two big acquisitions this week - Tri-Pointe/Weyerhaeuser and Toll/Shapell - show just how hungry the acquiring builders are for developed lots in the chronically under-built CA market place, especially coastal CA.

The builders are gearing-up for another strong Spring selling season, in what they believe to be the first innings of an extremely strong real estate cycle in California.

This is in stark contrast to the way the home builder stocks are currently trading, as investors wonder which wild card will be thrown at them next from the government or bond market. The sector has some of the best fundamentals seen in 8 years, yet is trading like a train wreck about to go off the tracks.

For example, Toll initially rallied on its acquisition news, but then sold down 4.6% from the early morning "high". Has the sector reached the point where even exceptional earnings are disregarded?

Disclosure: I am long BRP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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