Toll Bros. to buy Calif.-based home-builder for $1.6B

Toll Bros. said Thursday that it is acquiring the home-building business of Shapell Industries Inc., thus expanding the Horsham-based company's presence in the lucrative California market, which it entered in 1994.

The all-cash transaction, expected to be closed by the end of Toll's 2014 first quarter, will cost the luxury-home builder $1.6 billion and will initially add 5,200 lots to its California portfolio, for a total of 9,200 owned or controlled.

Toll will finance the purchase with a combination of equity and debt. Equity will represent 10 percent to 15 percent of the purchase price. The rest will draw on Toll's existing senior unsecured credit facility and other senior unsecured debt.

The company also announced that it was launching a public offering of 6.25 million shares of its common stock, par value $0.01 per share, and has given the underwriters a 30-day option to purchase up to an additional 937,500 shares, to finance part of the Shapell purchase.

Toll shares closed at $32.68 Thursday, up 16 cents or 0.49 percent.

Privately held Shapell, based in Beverly Hills, also develops commercial properties such as shopping centers and office buildings. The residential operations Toll is acquiring are in the lucrative coastal markets around San Francisco and between Los Angeles and San Diego.

Toll chief executive officer Douglas Yearley Jr. said during a conference call that the builder would dispose of 1,350 lots at the "bottom quarter of price points" to other builders over the next 18 months, for an expected return of $500 million.

The acquisition of Shapell's home-building arm completes a process Toll began in 2012, when it bought for $47 million 113 lots in two Shapell communities in Amalfi Hills, in the Orange County city of Yorba Linda, where the median income exceeds $115,000.

In 18 months, Toll was able to boost sale prices to $1.6 million from $1.3 million in one community, and to $2.3 million from $1.5 million in the other.

"We were able to generate a higher home value than Shapell thought could happen," Yearley said in the conference call.

Toll's decision has strong economic underpinnings, since the housing market's downturn cut annual home production in California to fewer than 61,000 starts from an average of 177,000.

The state needs to build 700,000 more houses in the next four years just to catch up, the builder said.

Since 1994, Toll has delivered 7,750 homes in California, generating about $6.5 billion in revenue. That figure represents about 9 percent of consolidated annual closings.

In a 1995 interview, current chairman Robert I. Toll explained the rationale for expanding to California the previous year.

Toll said he believed that the nation's many regions were, to a large degree, economically independent - that is, the economy hits peaks and valleys at different times in different places.

"We have 80 million people in the Northeast corridor," he said. "But when that economy is down, the economy in California may be fabulous. And by expanding carefully, it smooths out our firm's ability to earn."