Acquisition Acquisition (Notes)

6 Months Ended

Apr. 30, 2014

Acquisition [Abstract]

Business Combination Disclosure [Text Block]

Acquisition

On February 4, 2014, the Company completed its acquisition of Shapell Industries, Inc. (“Shapell”) pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”) dated November 6, 2013, with Shapell Investment Properties, Inc. (“SIPI”). Pursuant to the Purchase Agreement, the Company acquired, for cash, all of the equity interests in Shapell from SIPI for an aggregate purchase price of $1.60 billion (the “Acquisition”). The Company acquired the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California, some of which the Company will sell to other builders. This acquisition provides the Company with a premier California land portfolio including 11 active selling communities, as of the acquisition date, in affluent, high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County and the Carlsbad market. As part of the acquisition, the Company assumed contracts to deliver 126 homes with an aggregate value of approximately $105.3 million.

The Company did not acquire apartment and commercial rental properties owned and operated by Shapell (the “Shapell Commercial Properties”) or Shapell’s mortgage lending activities relating to its home building operations. Accordingly, the Purchase Agreement provides that SIPI will indemnify the Company for any loss arising out of or resulting from, among other things, (i) any liability (other than environmental losses, subject to certain exceptions) related to the Shapell Commercial Properties, and (ii) any liability (other than environmental losses, subject to certain exceptions) to the extent related to Shapell Mortgage, Inc.

The Company financed the Acquisition with a combination of $370.0 million of borrowings under its $1.035 billion unsecured revolving credit facility, $485.0 million from a term loan facility, as well as with $815.7 million in net proceeds from debt and equity financings completed in November 2013. See Note 6, “Loans Payable, Senior Notes and Mortgage Company Loan Facility” and Note 12, “Stock Issuance and Stock Repurchase Program” for further details. As a result of the Acquisition, Shapell became a wholly-owned subsidiary of the Company. Accordingly, the Shapell results are included in the Company’s condensed consolidated financial statements from the date of the Acquisition. For the period from February 5, 2014 to April 30, 2014, revenues and operating income from the Shapell operations, excluding $5.1 million of acquisition-related costs, were $102.0 million and $6.1 million, respectively.

The Acquisition was accounted for in accordance with ASC 805, “Business Combinations” (“ASC 805”), and, therefore, the acquired assets and assumed liabilities were recorded by the Company at their preliminary estimated fair values. The following table summarizes the preliminary amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (amounts in thousands):

Assets acquired and liabilities assumed
Cash and cash equivalents	$	106,233
Inventory	1,509,501
Property, construction and office equipment, net	404
Receivables, prepaid expenses and other assets	10,759
Total assets acquired	1,626,897
Customer deposits	(5,429		)
Accounts payable and accrued liabilities	(26,119		)
Total liabilities assumed	(31,548		)
Total net assets acquired	$	1,595,349

Cash and cash equivalents, customer deposits and accounts payable were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Receivables, prepaid expenses and other assets and accrued expenses were adjusted to reflect fair values.

The Company determined the fair value of inventory on a community-by-community basis primarily using a combination of discounted cash flow models and market comparable land transactions, where available. These estimated cash flows are significantly impacted by estimates related to: (i) expected selling prices, (ii) expected settlement paces, (iii) expected land development and construction timelines, and anticipated land development costs and construction costs, and (iv) overhead costs expected to be incurred in the future. Such estimates must be made for each individual community and may vary significantly between communities. See Note 1 in the Company’s Annual Report on Form 10-K and Note 14 in this Form 10-Q for additional discussion of the factors impacting the fair value of inventory.

The Company completed the majority of its business combination accounting as of April 30, 2014 and expects to substantially complete the remainder by October 31, 2014. The Company is in the process of finalizing its fair value estimates for all of the Shapell assets acquired and liabilities assumed and, therefore, the estimates used at April 30, 2014 are subject to change.

The Company recorded $5.9 million and $5.1 million in acquisition-related costs for the six and three month periods ended April 30, 2014, which are included in the Condensed Consolidated Statements of Operations within “Selling, general and administrative.” Such costs were expensed as incurred in accordance with ASC 805. There were no acquisition-related costs incurred in the six and three month periods ended April 30, 2013.

Supplemental pro forma information

The following presents unaudited pro forma amounts as if the acquisition had been completed as of November 1, 2012 (amounts in thousands, except per share data):

	Six months ended April 30,				Three months ended April 30,
	2014		2013		2014		2013
Revenues	$	1,637,554	$	1,145,337	$	860,374	$	606,564
Net income	137,943		39,485		74,674		29,488
Income per share – basic	0.78		0.22		0.42		0.17
Income per share – diluted	0.75		0.22		0.40		0.16

The unaudited pro forma operating results have been determined after adjusting the operating results of Shapell to reflect the purchase accounting and other acquisition adjustments including interest expense associated with the debt used to fund a portion of the acquisition. The unaudited pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the Company may achieve as a result of the Acquisition, the costs to integrate Shapell’s operations, or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. Accordingly, the unaudited pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations which would have resulted had the acquisition been completed at the beginning of the applicable period or indicative of the results that will be attained in the future.

Certain other adjustments, including those related to conforming accounting policies and interest capitalization, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts.