Edgar Filing: TOLL BROTHERS INC

TOL-2014.4.30-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2014



o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-09186

TOLL BROTHERS, INC.

(Exact name of registrant as specified in its charter)



Delaware (State or other jurisdiction of incorporation or organization)		23-2416878 (I.R.S. Employer Identification No.)

250 Gibraltar Road, Horsham, Pennsylvania (Address of principal executive offices)		19044 (Zip Code)

(215) 938-8000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ			Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)			Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At June 2, 2014, there were approximately 177,773,000 shares of Common Stock, $0.01 par value, outstanding.

(This page intentially left blank)

TOLL BROTHERS, INC.

TABLE OF CONTENTS



	Page No.

Statement on Forward-Looking Information	1

PART I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)	2

Condensed Consolidated Statements of Operations (Unaudited)	3

Condensed Consolidated Statements of Comprehensive Income (Unaudited)	3

Condensed Consolidated Statements of Cash Flows (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3. Quantitative and Qualitative Disclosures About Market Risk	58

Item 4. Controls and Procedures	59

PART II. Other Information

Item 1. Legal Proceedings	59

Item 1A. Risk Factors	59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 6. Exhibits	61

SIGNATURES	62

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included in this report or in other materials we have filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. Such statements may include, but are not limited to, information related to: anticipated operating results; home deliveries; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of revenues; selling, general and administrative expenses; interest expense; inventory write-downs; unrecognized tax benefits; anticipated tax refunds; sales paces and prices; effects of home buyer cancellations; growth and expansion; joint ventures in which we are involved; anticipated results from our investments in unconsolidated entities; the ability to acquire land and pursue real estate opportunities; the ability to gain approvals and open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to secure materials and subcontractors; the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities; legal proceedings and claims; the anticipated benefits to be realized from the consummation of the Shapell acquisition; and post-closing asset sales.

From time to time, forward-looking statements also are included in other periodic reports on Forms 10-Q and 8-K, in press releases, in presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made by us, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements.

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

For a more detailed discussion of these factors, see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and in this report.

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to “fiscal 2013,” “fiscal 2012,” “fiscal 2011,” and “fiscal 2010” refer to our fiscal years ending October 31, 2013, October 31, 2012, October 31, 2011, and October 31, 2010, respectively. References herein to “fiscal 2014” refer to our fiscal year ending October 31, 2014.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)



	April 30, 2014			October 31, 2013
	(unaudited)
ASSETS
Cash and cash equivalents	$	351,821		$	772,972
Marketable securities	13,000			52,508
Restricted cash	22,542			32,036
Inventory	6,548,024			4,650,412
Property, construction and office equipment, net	131,222			131,320
Receivables, prepaid expenses and other assets	249,934			229,295
Mortgage loans held for sale	68,642			113,517
Customer deposits held in escrow	54,417			46,888
Investments in and advances to unconsolidated entities	441,842			403,133
Investments in distressed loans	18,799			36,374
Investments in foreclosed real estate	76,652			72,972
Deferred tax assets, net of valuation allowances	268,171			286,032
	$	8,245,066		$	6,827,459
LIABILITIES AND EQUITY
Liabilities
Loans payable	$	747,088		$	107,222
Senior notes	2,654,438			2,321,442
Mortgage company warehouse loan	56,842			75,000
Customer deposits	254,621			212,669
Accounts payable	204,728			167,787
Accrued expenses	539,673			522,987
Income taxes payable	84,619			81,188
Total liabilities	4,542,009			3,488,295
Equity
Stockholders’ equity
Preferred stock, none issued	—			—
Common stock, 177,761 and 169,353 shares issued at April 30, 2014 and October 31, 2013, respectively	1,778			1,694
Additional paid-in capital	694,335			441,677
Retained earnings	3,002,805			2,892,003
Treasury stock, at cost — 2 shares and 0 shares at April 30, 2014 and October 31, 2013, respectively	(79		)	—
Accumulated other comprehensive loss	(2,030		)	(2,387		)
Total stockholders’ equity	3,696,809			3,332,987
Noncontrolling interest	6,248			6,177
Total equity	3,703,057			3,339,164
	$	8,245,066		$	6,827,459

See accompanying notes

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)



	Six months ended April 30,				Three months ended April 30,
	2014		2013		2014		2013
Revenues	$	1,504,055	$	940,605	$	860,374	$	516,004

Cost of revenues	1,202,030		765,950		687,998		420,013
Selling, general and administrative	202,190		157,597		104,320		79,550
	1,404,220		923,547		792,318		499,563
Income from operations	99,835		17,058		68,056		16,441
Other:
Income from unconsolidated entities	37,242		8,076		14,327		4,993
Other income - net	27,642		24,160		11,101		19,534
Income before income taxes	164,719		49,294		93,484		40,968
Income tax provision	53,917		20,188		28,262		16,294
Net income	$	110,802	$	29,106	$	65,222	$	24,674
Income per share:
Basic	$	0.63	$	0.17	$	0.37	$	0.15
Diluted	$	0.60	$	0.17	$	0.35	$	0.14
Weighted-average number of shares:
Basic	177,278		169,222		178,082		169,380
Diluted	185,665		177,949		186,442		178,136

See accompanying notes

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands)

(Unaudited)



	Six months ended April 30,						Three months ended April 30,
	2014			2013			2014			2013
Net income	$	110,802		$	29,106		$	65,222		$	24,674

Other comprehensive income (loss), net of tax:
Change in pension liability	156			(18		)	103			155
Change in fair value of available-for-sale securities	(22		)	(37		)	9			(133		)
Change in unrealized income (loss) on derivative held by equity investee	223			13			(18		)	(80		)
Other comprehensive income (loss)	357			(42		)	94			(58		)
Total comprehensive income	$	111,159		$	29,064		$	65,316		$	24,616

See accompanying notes

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Six months ended April 30,
	2014			2013
Cash flow used in operating activities:
Net income	$	110,802		$	29,106
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	11,095			12,768
Stock-based compensation	12,294			10,027
Excess tax benefits from stock-based compensation	(1,841		)	—
Income from unconsolidated entities	(37,242		)	(8,076		)
Distributions of earnings from unconsolidated entities	39,471			8,855
Income from distressed loans and foreclosed real estate	(7,934		)	(4,893		)
Deferred tax provision	18,864			18,348
Deferred tax valuation allowances	(1,226		)	(1,277		)
Inventory impairments and write-offs	3,906			1,738
Change in fair value of mortgage loans receivable and derivative instruments	429			292
Gain on marketable securities	(6		)	(137		)
Changes in operating assets and liabilities
Increase in inventory	(319,826		)	(617,360		)
Origination of mortgage loans	(308,466		)	(301,952		)
Sale of mortgage loans	352,349			322,160
Decrease in restricted cash	9,494			13,475
Increase in receivables, prepaid expenses and other assets	(4,587		)	(15,172		)
Increase in customer deposits	28,994			47,119
Increase in accounts payable and accrued expenses	21,973			36,405
Increase in income taxes payable	5,272			3,166
Net cash used in operating activities	(66,185		)	(445,408		)
Cash flow (used in) provided by investing activities:
Purchase of property and equipment — net	(5,767		)	(20,264		)
Purchase of marketable securities				(36,162		)
Sale and redemption of marketable securities	39,243			239,484
Investments in and advances to unconsolidated entities	(80,654		)	(31,994		)
Return of investments in unconsolidated entities	39,014			34,686
Investments in distressed loans and foreclosed real estate	(757		)	(26,155		)
Return of investments in distressed loans and foreclosed real estate	22,424			6,114
Acquisition of a business, net of cash acquired	(1,489,116		)
Net cash (used in) provided by investing activities	(1,475,613		)	165,709
Cash flow provided by financing activities:
Proceeds from issuance of senior notes	600,000			298,050
Debt issuance costs for senior notes	(4,700		)
Proceeds from loans payable	1,597,562			501,884
Debt issuance costs for loans payable	(3,005		)
Principal payments of loans payable	(1,046,677		)	(545,175		)
Redemption of senior notes	(267,960		)	(59,068		)
Net proceeds from issuance of common stock	220,357
Proceeds from stock-based benefit plans	23,333			8,430
Excess tax benefits from stock-based compensation	1,841			—
Receipts related to noncontrolling interest	81			33
Purchase of treasury stock	(185		)	(178		)
Net cash provided by financing activities	1,120,647			203,976
Net decrease in cash and cash equivalents	(421,151		)	(75,723		)
Cash and cash equivalents, beginning of period	772,972			778,824
Cash and cash equivalents, end of period	$	351,821		$	703,101

See accompanying notes

TOLL BROTHERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company”), a Delaware corporation, and those majority-owned subsidiaries it controls. All significant intercompany accounts and transactions have been eliminated. Investments in 50% or less owned partnerships and affiliates are accounted for using the equity method unless it is determined that the Company has effective control of the entity, in which case the entity would be consolidated.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The October 31, 2013 balance sheet amounts and disclosures included herein have been derived from the Company’s October 31, 2013 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements, the Company suggests that they be read in conjunction with the consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended October 31, 2013. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of April 30, 2014, the results of its operations for the six-month and three-month periods ended April 30, 2014 and 2013, and its cash flows for the six-month periods ended April 30, 2014 and 2013. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the Company beginning November 1, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s condensed consolidated financial statements and disclosures.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”), which changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Pursuant to ASU 2014-08, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should be presented as a discontinued operation. If the disposal does qualify as a discontinued operation under ASU 2014-08, the entity will be required to provide expanded disclosures. ASU 2014-08 is effective for the Company beginning November 1, 2015. The adoption of ASU 2014-08 is not expected to have a material effect on the Company’s condensed consolidated financial statements or disclosures.

In January 2014, the FASB issued ASU No. 2014-04, “Receivables - Troubled Debt Restructurings by Creditors” (“ASU 2014-04”), which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. ASU 2014-04 is effective prospectively for the Company beginning November 1, 2015. The adoption of ASU 2014-04 is not expected to have a material effect on the Company’s condensed consolidated financial statements or disclosures.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 is intended to end inconsistent practices regarding the presentation of unrecognized tax benefits when a net operating loss, a similar tax loss, or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from the disallowance of a tax position. ASU 2013-11 is effective for the Company beginning November 1, 2014. The adoption of ASU 2013-11 is not expected to have a material effect on the Company’s condensed consolidated financial statements or disclosures.

2. 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.

3. Inventory

Inventory at April 30, 2014 and October 31, 2013 consisted of the following (amounts in thousands):



	April 30, 2014		October 31, 2013
Land controlled for future communities	$	139,961	$	99,802
Land owned for future communities	2,385,234		1,287,630
Operating communities	4,022,829		3,262,980
	$	6,548,024	$	4,650,412

Operating communities include communities offering homes for sale; communities that have sold all available home sites but have not completed delivery of the homes; communities that were previously offering homes for sale but are temporarily closed due to business conditions or non-availability of improved home sites and that are expected to reopen within twelve months of the end of the fiscal period being reported on; and communities preparing to open for sale. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities, and the carrying cost of model homes.

Communities that were previously offering homes for sale but are temporarily closed due to business conditions that do not have any remaining backlog and are not expected to reopen within twelve months of the end of the fiscal period being reported on have been classified as land owned for future communities. Backlog consists of homes under contract but not yet delivered to the Company’s home buyers (“backlog”).

Information regarding the classification, number and carrying value of these temporarily closed communities, as of the date indicated, is provided in the table below.



	April 30, 2014		October 31, 2013
Land owned for future communities:
Number of communities	20		25
Carrying value (in thousands)	$	136,870	$	153,498
Operating communities:
Number of communities	14		15
Carrying value (in thousands)	$	83,172	$	88,534

The amounts the Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable, for the periods indicated, are shown in the table below (amounts in thousands).



	Six months ended April 30,				Three months ended April 30,
	2014		2013		2014		2013
Land controlled for future communities	$	1,006	$	698	$	324	$	689
Operating communities	2,900		1,040		1,600		340
	$	3,906	$	1,738	$	1,924	$	1,029

See Note 14, “Fair Value Disclosures,” for information regarding the number of operating communities that the Company tested for potential impairment, the number of operating communities in which it recognized impairment charges, the amount of impairment charges recognized, and the fair values of those communities, net of impairment charges.

See Note 16, “Commitments and Contingencies,” for information regarding land purchase commitments.

At April 30, 2014, the Company evaluated its land purchase contracts to determine if any of the selling entities were variable interest entities (“VIEs”) and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers, and the creditors of the sellers generally have no recourse against the Company. At April 30, 2014, the Company determined that 79 land purchase contracts, with an aggregate purchase price of $802.7 million, on which it had made aggregate deposits totaling $47.9 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts. At October 31, 2013, the Company determined that 87 land purchase contracts, with an aggregate purchase price of $1.12 billion, on which it had made aggregate deposits totaling $51.9 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

Interest incurred, capitalized and expensed, for the periods indicated, was as follows (amounts in thousands):



	Six months ended April 30,						Three months ended April 30,
	2014			2013			2014			2013
Interest capitalized, beginning of period	$	343,077		$	330,581		$	356,618		$	340,904
Interest incurred	82,628			64,051			42,684			32,303
Interest expensed to cost of revenues	(54,585		)	(42,990		)	(29,145		)	(23,016		)
Write-off against other income	(1,039		)	(1,221		)	(722		)	(1,133		)
Interest capitalized on investments in unconsolidated entities	(4,757		)	(2,872		)	(2,300		)	(1,509		)
Previously capitalized interest on investments in unconsolidated entities transferred to inventory	1,811			—			—			—
Interest capitalized, end of period	$	367,135		$	347,549		$	367,135		$	347,549

Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. The amounts included in the table directly above reflect the gross amount of capitalized interest without allocation of any impairment charges recognized. The Company estimates that, had inventory impairment charges been allocated on a pro-rata basis to the individual components of inventory, capitalized interest at April 30, 2014 and 2013 would have been reduced by approximately $35.4 million and $43.4 million, respectively.

4. Investments in and Advances to Unconsolidated Entities

The Company has investments in and advances to various unconsolidated entities. These entities include land development joint ventures, home building joint ventures, rental property joint ventures, Toll Brothers Realty Trust and Trust II, and a structured asset joint venture. At April 30, 2014, the Company had investments in and advances to these unconsolidated entities of $441.8 million and was committed to invest or advance up to an additional $101.7 million to these entities if they require additional funding. The Company’s investments in these entities are accounted for using the equity method of accounting.

More specific information regarding the Company’s investments in, advances to, and future commitments to these entities is provided below.

Land Development Joint Ventures

The Company has investments in and advances to a number of joint ventures with unrelated parties to develop land (“Land Development Joint Ventures”). Some of these Land Development Joint Ventures develop land for the sole use of the venture participants, including the Company, and others develop land for sale to the joint venture participants and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites and other land by the Land Development Joint Ventures to other builders. With regard to home sites the Company purchases from the Land Development Joint Ventures, the Company adjusts its cost basis in those home sites by its share of the earnings/losses of the joint venture on the home sites the Company purchases. At April 30, 2014, the Company had approximately $160.5 million invested in or advanced to the Land Development Joint Ventures and a funding commitment of $45.4 million to four of the Land Development Joint Ventures which would be funded if additional investment in the ventures is required. At April 30, 2014, two of these joint ventures had aggregate loan commitments of $105.0 million and outstanding borrowings against these commitments of $29.2 million.

At April 30, 2014, the Company had a purchase commitment to acquire 115 home sites from one of these Land Development Joint Ventures for an aggregate purchase price of $12.6 million. In addition, the Company expects to purchase approximately 3,800 additional lots from several Land Development Joint Ventures in which it has interests. The purchase price of the lots will be determined at a future date. The Company will also receive approximately 935 home sites from one of its Land Development Joint Ventures in consideration of its previous investment in the joint venture. Set forth below is additional information regarding activity in certain Land Development Joint Ventures; such activity is included in the summary information provided above.

In the first quarter of fiscal 2014, the Company entered into a joint venture with an unrelated party to develop a parcel of land in Texas. The joint venture expects to develop a master planned community consisting of up to 6,500 home sites and retail and commercial property. The Company has a 50% interest in this joint venture. Prior to the formation of the joint venture, the Company had entered into a land purchase agreement to acquire the land for approximately $79.3 million. The Company contributed its rights under the purchase agreement to the joint venture and was reimbursed by the Company’s joint venture partner for 50% of the costs the Company incurred prior to the formation of the joint venture. At April 30, 2014, the Company had an investment of $40.6 million in this joint venture. In May 2014, the joint venture obtained outside financing of $40.0 million to help fund the future development of the property.

In the fourth quarter of fiscal 2013, the Company entered into a joint venture with an unrelated party to develop a parcel of land in Maryland. The property consists of 945 acres which the joint venture expects to develop into approximately 1,300 home sites. The Company has a 50% interest in this joint venture. The current plan is to develop the property and sell approximately 50% of the home sites to each of the members of the joint venture. The Company made an initial investment of $11.8 million of cash to the joint venture. At April 30, 2014, the Company had an investment of $11.9 million in this joint venture.

In the second quarter of fiscal 2013, the Company entered into a joint venture with an unrelated party to develop a parcel of land in Texas as a master planned community consisting of approximately 2,900 lots. The Company has a 50% interest in this joint venture. The joint venture expects to develop the property in multiple phases and sell groups of lots to the members of the joint venture and to other home builders. The Company made an initial investment of $15.5 million of cash to the joint venture. The joint venture entered into a $25.0 million line of credit with a bank, secured by a deed of trust on the property which can be expanded up to $40.0 million under certain conditions. At April 30, 2014, the joint venture had $24.2 million of borrowings under this line of credit. At April 30, 2014, the Company had an investment of $24.2 million in this joint venture and was committed to make additional contributions to this joint venture of up to $9.0 million.

The Company has a 50% interest in a joint venture that owns and is developing a master planned community in Orange County, California, consisting of over 2,000 home sites. At April 30, 2014, the joint venture owned approximately 1,200 home sites. At April 30, 2014, the Company had an investment of $77.3 million in this joint venture and was committed to make additional contributions to this joint venture of up to $10.0 million, if needed. The joint venture has an $80.0 million credit facility from a bank to fund the development of the property. At April 30, 2014, the venture had $5.0 million borrowed under the facility.

Home Building Joint Ventures

At April 30, 2014, the Company had an aggregate of $183.0 million of investments in and advances to various joint ventures with unrelated parties to develop approximately 600 luxury for-sale homes. At April 30, 2014, the Company had $33.0 million of funding commitments to two of these joint ventures.

Rental Property Joint Ventures

At April 30, 2014, the Company had an aggregate of $75.3 million of investments in and advances to several joint ventures with unrelated parties to develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”). At April 30, 2014, the Company had $23.3 million of funding commitments to these joint ventures. At April 30, 2014, four of these joint ventures had aggregate loan commitments of $319.8 million and outstanding borrowings against these commitments of $32.2 million. Set forth below is additional information regarding activity in certain Rental Property Joint Ventures; such activity is included in the summary information provided above.

In the first quarter of 2014, two of the Company’s Rental Property Joint Ventures entered into $126.0 million of construction loan agreements to finance construction of multi-family residential apartments in suburban Philadelphia and northern New Jersey. At April 30, 2014, these ventures had $1.3 million borrowings under the new facilities.

In the fourth quarter of fiscal 2013, the Company entered into a joint venture with an unrelated party to develop a 287-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C. on land that the Company owned and conveyed to the joint venture. The Company has a 50% interest in this joint venture. As part of the Company’s initial capital contribution, it contributed land and improvements with a fair value of $27.1 million to the joint venture and subsequently received a cash distribution of $12.5 million to align the capital accounts of each of the members of the joint venture. The joint venture entered into a $54.0 million construction loan agreement with a bank to finance the development of this project. At April 30, 2014, the joint venture had $14.2 million borrowed under the construction loan agreement. At April 30, 2014, the Company had an investment of $14.5 million in this joint venture.

In the second quarter of fiscal 2013, the Company entered into a joint venture with an unrelated party to develop a luxury, 38-story for-rent residential apartment building and retail space in Jersey City, New Jersey on land that the Company owned and conveyed to the joint venture. The Company has a 50% interest in this joint venture. As part of the Company’s initial capital contribution, it contributed land and improvements with a fair value of $28.8 million to the joint venture and subsequently received distributions of $10.2 million and a $1.2 million payment by the joint venture on our behalf to align the capital accounts of each of the members of the joint venture. The joint venture entered into a $120.0 million construction loan agreement with a bank to finance the development of this project. At April 30, 2014, the joint venture had no borrowings under the construction loan agreement. At April 30, 2014, the Company had an investment of $29.4 million in this joint venture and was committed to make additional contributions to this joint venture of up to $0.2 million.

Toll Brothers Realty Trust and Trust II

In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust II (“Trust II”) to invest in commercial real estate opportunities. Trust II is owned 50% by the Company and 50% by an affiliate of PASERS. In December 2013, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, the Company realized income of approximately $23.5 million in the first quarter of fiscal 2014 representing its share of the gain on the sale. In the three-month period ended April 30, 2014, we recognized an additional gain of $0.6 million from the sale of a property by Trust II. The gain on sale of assets is included in “Income from unconsolidated entities” on the Company’s Condensed Consolidated Statement of Operations. In December 2013, the Company received a $20.0 million cash distribution from Trust II. At April 30, 2014, the Company had an investment of $1.2 million in Trust II. In addition, in the first quarter of fiscal 2014, the Company recognized $2.9 million in previously deferred gains on the Company’s initial sales of the properties to Trust II. This gain is included in “Other income - net” on the Company’s Condensed Consolidated Statements of Operations in this Form 10-Q.

In 1998, prior to the formation of Trust II, the Company formed Toll Brothers Realty Trust (“Trust”) to invest in commercial real estate opportunities. The Trust is effectively owned one-third by the Company; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr. and former members of the Company’s senior management; and one-third by an affiliate of PASERS. As of April 30, 2014, the Company had a negative investment in the Trust of $0.9 million resulting primarily from a loss recognized by the Trust in the fourth quarter of fiscal 2013. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $1.1 million in each of the six-month periods ended April 30, 2014 and 2013 and $0.6 million and $0.5 million in the three-month periods ended April 30, 2014 and 2013, respectively. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. The Company received $12.0 million as its share of the proceeds and recognized this distribution as income in the quarter. This income is included in “Income from unconsolidated entities” in the Company’s Condensed Consolidated Statements of Operations in this Form 10-Q.

Structured Asset Joint Venture

The Company, through Gibraltar Capital and Asset Management LLC (“Gibraltar”), is a 20% participant with two unrelated parties that purchased a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At April 30, 2014, the Company had an investment of $22.8 million in this Structured Asset Joint Venture.

Guarantees

The unconsolidated entities in which the Company has investments generally finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities which may include any or all of the following: (i) project completion including any cost overruns, in whole or in part, (ii) repayment guarantees, generally covering a percentage of the outstanding loan, (iii) indemnification of the lender as to environmental matters affecting the unconsolidated entity, (iv) a hazardous material indemnity that holds the lender harmless against any obligations for which the lender may incur liability resulting from the threat or presence of any hazardous or toxic substances at or near the property covered by a loan, and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.

In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, the Company generally has a reimbursement agreement with its partner that provides that neither party is responsible for more than its proportionate share of the guarantee; however, if a joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share.

The Company believes that, as of April 30, 2014, in the event it becomes legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral should be sufficient to repay a significant portion of the obligation. If it is not, the Company and its partners would need to contribute additional capital to the venture. At April 30, 2014, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $424.8 million and had borrowed an aggregate of $61.4 million. The term of these guarantees generally range from 19 months to 44 months. The Company estimates that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $424.8 million before any reimbursement from the Company’s partners. Based on the amounts borrowed at April 30, 2014, the Company’s maximum potential exposure under these guarantees is estimated to be approximately $61.4 million before any reimbursement from the Company’s partners.

In addition, the Company has guaranteed approximately $11.4 million of ground lease payments and insurance deductibles for three joint ventures.

As of April 30, 2014, the estimated aggregate fair value of the guarantees was approximately $2.0 million. The Company has not made payments under any of the guarantees, nor has it been called upon to do so.

Variable Interest Entities

At April 30, 2014, the Company determined that three of its joint ventures were VIEs under the guidance within FASB Accounting Standards Codification (“ASC”) 810, “Consolidation.” The Company has, however, concluded that it was not the primary beneficiary of the VIEs because the power to direct the activities of these VIEs that most significantly impact their performance was shared by the Company and the VIEs’ other members. Business plans, budgets and other major decisions are required to be unanimously approved by all members. Management and other fees earned by the Company are nominal and believed to be at market rates and there is no significant economic disproportionality between the Company and other members.

The information presented below regarding the investments, commitments and guarantees in unconsolidated entities deemed to be VIEs is also included in the information provided above. At April 30, 2014 and October 31, 2013, the Company’s investments in its unconsolidated joint ventures deemed to be VIEs, which are included in “Investments in and advances to unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $31.4 million and $22.9 million, respectively. At April 30, 2014, the maximum exposure of loss to the Company’s investments in unconsolidated joint ventures that are VIEs is limited to its investment in the unconsolidated VIEs, except with regard to $47.8 million of additional commitments to the VIEs and $9.3 million of guarantees under ground lease agreements. At October 31, 2013, the maximum exposure to loss of the Company’s investments in unconsolidated joint ventures that are VIEs is limited to its investment in the unconsolidated VIEs, except with regard to a $41.7 million additional commitment to fund the joint ventures and a $9.6 million guaranty of ground lease payments.

Joint Venture Condensed Financial Information

The condensed balance sheets, as of the dates indicated, and the condensed statements of operations and comprehensive income for the periods indicated, for the unconsolidated entities in which the Company has an investment, aggregated by type of business, are included below (in thousands). The column titled “Rental Property Joint Ventures” includes the Rental Property Joint Ventures and Toll Brothers Realty Trust and Trust II described above.

Condensed Balance Sheets:



	April 30, 2014
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	31,267	$	26,209	$	39,360	$	11,816	$	108,652
Inventory	256,691		409,188		392				666,271
Non-performing loan portfolio							69,909		69,909
Rental properties					125,298				125,298
Rental properties under development					177,390				177,390
Real estate owned (“REO”)							207,358		207,358
Other assets (1)	19,275		78,720		13,774		155,929		267,698
Total assets	$	307,233	$	514,117	$	356,214	$	445,012	$	1,622,576
Debt (1)	$	36,092	$	10,174	$	255,185	$	155,900	$	457,351
Other liabilities	26,279		38,783		19,210		218		84,490
Members’ equity	244,862		465,160		81,819		115,558		907,399
Noncontrolling interest							173,336		173,336
Total liabilities and equity	$	307,233	$	514,117	$	356,214	$	445,012	$	1,622,576
Company’s net investment in unconsolidated entities (2)	$	160,528	$	182,956	$	75,574	$	22,784	$	441,842



	October 31, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	30,826	$	31,164	$	35,014	$	40,097	$	137,101
Inventory	350,150		338,814		4,998				693,962
Non-performing loan portfolio							107,411		107,411
Rental properties					164,325				164,325
Rental properties under development					133,081				133,081
Real estate owned (“REO”)							202,259		202,259
Other assets (1)	12,700		70,180		18,526		155,921		257,327
Total assets	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Debt (1)	$	135,200	$	11,977	$	235,226	$	155,900	$	538,303
Other liabilities	21,015		19,636		9,461		379		50,491
Members’ equity	237,461		408,545		111,257		139,764		897,027
Noncontrolling interest							209,645		209,645
Total liabilities and equity	$	393,676	$	440,158	$	355,944	$	505,688	$	1,695,466
Company’s net investment in unconsolidated entities (2)	$	142,448	$	166,271	$	68,711	$	25,703	$	403,133


(1)	Included in other assets of the Structured Asset Joint Venture at April 30, 2014 and October 31, 2013 is $155.9 million of restricted cash held in a defeasance account which will be used to repay debt of the Structured Asset Joint Venture.

(2)

Differences between the Company’s net investment in unconsolidated entities and its underlying equity in the net assets of the entities is primarily a result of the acquisition price of an investment in a land development joint venture in fiscal 2012 which was in excess of the Company’s pro-rata share of the underlying equity; impairments related to the Company’s investments in unconsolidated entities; a loan made to one of the entities by the Company; interest capitalized on the Company’s investment; and distributions from entities in excess of the carrying amount of the Company’s net investment.

Condensed Statements of Operations and Comprehensive Income:



	For the six months ended April 30, 2014
	Land Development Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	111,950	$	23,228		$	17,006		$	3,789		$	155,973
Cost of revenues	62,170		21,825			7,390			6,482			97,867
Other expenses	465		2,047			21,558			874			24,944
Total expenses	62,635		23,872			28,948			7,356			122,811
Gain on disposition of loans and REO									6,458			6,458
Income (loss) from operations	49,315		(644		)	(11,942		)	2,891			39,620
Other income	5		201			43,199			1,533			44,938
Net income (loss)	49,320		(443		)	31,257			4,424			84,558
Less: income attributable to noncontrolling interest									(2,654		)	(2,654		)
Net income (loss) attributable to controlling interest	49,320		(443		)	31,257			1,770			81,904
Other comprehensive income						729						729
Total comprehensive income (loss)	$	49,320	$	(443	)	$	31,986		$	1,770		$	82,633
Company’s equity in earnings of unconsolidated entities (3)	$	103	$	327		$	36,622		$	190		$	37,242



	For the three months ended April 30, 2014
	Land Development Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	110,406	$	11,647		$	7,557		$	3,505		$	133,115
Cost of revenues	61,488		11,451			3,419			4,132			80,490
Other expenses	210		1,047			9,504			415			11,176
Total expenses	61,698		12,498			12,923			4,547			91,666
Gain on disposition of loans and REO									2,551			2,551
Income (loss) from operations	48,708		(851		)	(5,366		)	1,509			44,000
Other income	4		162			342			1,409			1,917
Net income (loss)	48,712		(689		)	(5,024		)	2,918			45,917
Less: income attributable to noncontrolling interest									(1,751		)	(1,751		)
Net income (loss) attributable to controlling interest	48,712		(689		)	(5,024		)	1,167			44,166
Other comprehensive loss						(56		)				(56		)
Total comprehensive income (loss)	$	48,712	$	(689	)	$	(5,080	)	$	1,167		$	44,110
Company’s equity in earnings of unconsolidated entities (3)	$	135	$	145		$	12,872		$	1,175		$	14,327



	For the six months ended April 30, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture			Total
Revenues	$	35,022	$	22,757	$	20,303	$	21,714		$	99,796
Cost of revenues	17,805		19,973		9,010		19,493			66,281
Other expenses	758		1,154		10,565		2,316			14,793
Total expenses	18,563		21,127		19,575		21,809			81,074
Gain on disposition of loans and REO							39,704			39,704
Income from operations	16,459		1,630		728		39,609			58,426
Other income	5		435		9		154			603
Net income	16,464		2,065		737		39,763			59,029
Less: income attributable to noncontrolling interest							(23,858		)	(23,858		)
Net income attributable to controlling interest	16,464		2,065		737		15,905			35,171
Other comprehensive income					282					282
Total comprehensive income	$	16,464	$	2,065	$	1,019	$	15,905		$	35,453
Company’s equity in earnings of unconsolidated entities (3)	$	2,796	$	1,079	$	1,130	$	3,071		$	8,076



	For the three months ended April 30, 2013
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	33,395	$	13,787	$	10,621		$	12,009		$	69,812
Cost of revenues	16,587		12,868		4,717			9,155			43,327
Other expenses	567		690		5,069			1,259			7,585
Total expenses	17,154		13,558		9,786			10,414			50,912
Gain on disposition of loans and REO								12,812			12,812
Income from operations	16,241		229		835			14,407			31,712
Other income	2		421		3			75			501
Net income	16,243		650		838			14,482			32,213
Less: income attributable to noncontrolling interest								(8,689		)	(8,689		)
Net income attributable to controlling interest	16,243		650		838			5,793			23,524
Other comprehensive loss					(20		)				(20		)
Total comprehensive income	$	16,243	$	650	$	818		$	5,793		$	23,504
Company’s equity in earnings of unconsolidated entities (3)	$	2,894	$	369	$	572		$	1,158		$	4,993

(3)

Differences between the Company’s equity in earnings (losses) of unconsolidated entities and the underlying net income (loss) of the entities is primarily a result of prior impairments related to the Company’s investment in unconsolidated entities, a basis difference of an acquired joint venture interest, distributions from entities in excess of the carrying amount of the Company’s net investment, and the Company’s share of the entities’ profits related to home sites purchased by the Company which reduces the Company’s cost basis of the home sites.

5. Investments in Distressed Loans and Foreclosed Real Estate

Investments in Distressed Loans

The Company’s investments in distressed loans consisted of the following as of the dates indicated (amounts in thousands):



	April 30, 2014			October 31, 2013
Unpaid principal balance	$	35,528		$	63,381
Discount on acquired loans	(16,729		)	(27,007		)
Carrying value	$	18,799		$	36,374

The Company’s investments in distressed loans includes performing loans and non-performing loans and also includes investments in loan participations classified as secured borrowings under ASC 860, “Transfers and Servicing.”

For acquired distressed loans where it is probable that the Company will collect less than the contractual amounts due under the terms of the loan based, at least in part, on the assessment of the credit quality of the borrowers, the loans are accounted for under ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under ASC 310-30, provided the Company does not presently have the intention to utilize real estate secured by the loans for use in its operations or to significantly improve the collateral for resale, the amount by which the future cash flows expected to be collected at the acquisition date exceeds the estimated fair value of the loan, or accretable yield, is recognized in other income - net over the estimated remaining life of the loan using a level yield methodology. The difference between the contractually required payments of the loan as of the acquisition date and the total cash flows expected to be collected, or nonaccretable difference, is not recognized.

The accretable yield activity for the Company’s investments in distressed loans accounted for under ASC 310-30 for the six-month and three-month periods ended April 30, 2014 and 2013 was as follows (amounts in thousands):



	Six months ended April 30,						Three months ended April 30,
	2014			2013			2014			2013
Balance, beginning of period	$	6,606		$	17,196		$	3,090		$	13,406
Loans acquired
Additions	554			471			385			471
Deletions	(3,372		)	(3,915		)	(189		)	(1,528		)
Accretions	(956		)	(2,523		)	(454		)	(1,120		)
Balance, end of period	$	2,832		$	11,229		$	2,832		$	11,229

Additions primarily represent the reclassification to accretable yield from nonaccretable yield and the impact of impairments. Deletions primarily represent loan dispositions, which include foreclosure of the underlying collateral and resulting removal of the loans from the accretable yield portfolios, and reclassifications from accretable yield to nonaccretable yield. The reclassifications between accretable and nonaccretable yield and the accretion of interest income are based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to gather additional information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the six-month and three-month periods ended April 30, 2014 and 2013 is not necessarily indicative of future results.

The Company acquires distressed loans where it has determined that (1) it is possible to collect all contractual amounts due under the terms of the loan, (2) it expects to utilize the real estate secured by the loans in its operations, or (3) forecasted cash flows cannot be reasonably estimated. For non-performing loans acquired meeting any of these conditions, in accordance with ASC 310-10, “Receivable,” (“ASC 310-10”), the loans are classified as nonaccrual and interest income is not recognized. When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. For performing loans, payments are applied to principal and interest in accordance with the terms of the loan when received. As of April 30, 2014 and October 31, 2013, the Company had investments in non-performing loans, accounted for in accordance with ASC 310-10, of $11.5 million and $21.4 million, respectively. At October 31, 2013, the Company had investments in performing loans of $0.8 million. The Company had no investments in performing loans as of April 30, 2014.

Foreclosed Real Estate Owned (REO)

The table below provides, for the periods indicated, the activity in REO (amounts in thousands):



	Six months ended April 30,						Three months ended April 30,
	2014			2013			2014			2013
Balance, beginning of period	$	72,972		$	58,353		$	79,267		$	68,764
Additions	8,036			14,317			871			3,277
Sales	(4,192		)	(911		)	(3,384		)	(472		)
Impairments	(2		)	(15		)	(2		)
Depreciation	(162		)	(286		)	(100		)	(111		)
Balance, end of period	$	76,652		$	71,458		$	76,652		$	71,458

As of April 30, 2014, approximately $7.2 million and $69.5 million of REO was classified as held-for-sale and held-and-used, respectively. As of April 30, 2013, approximately $9.4 million and $62.0 million of REO was classified as held-for-sale and held-and-used, respectively. For the six-month periods ended April 30, 2014 and 2013, the Company recorded gains of $1.5 million and $1.5 million, respectively, from acquisitions of REO through foreclosure. For the three-month periods ended April 30, 2014 and 2013, the Company recorded gains of $5,000 and $0.8 million, respectively, from the acquisition of REO through foreclosure.

General

The Company’s earnings from Gibraltar’s operations, excluding its investment in the Structured Asset Joint Venture, are included in “Other income - net” in its Condensed Consolidated Statements of Operations. In the six-month periods ended April 30, 2014 and 2013, the Company recognized $5.7 million and $1.1 million of earnings (excluding earnings from its investment in the Structured Asset Joint Venture), respectively, from Gibraltar’s operations. In the three-month periods ended April 30, 2014 and 2013, the Company recognized $1.4 million and $1.0 million of earnings (excluding earnings from its investment in the Structured Asset Joint Venture), respectively, from Gibraltar’s operations.

6. Loans Payable, Senior Notes and Mortgage Company Loan Facility

Loans Payable

At April 30, 2014 and October 31, 2013, loans payable consisted of the following (amounts in thousands):



	April 30, 2014		October 31, 2013
Credit facility borrowings	$	95,000
Unsecured bank term loan	485,000
Loans payable - other	167,088		$	107,222
	$	747,088	$	107,222

Credit Facility

On August 1, 2013, the Company entered into an $1.035 billion (“Aggregate Credit Commitment”) unsecured, 5-year credit facility (“Credit Facility”) with 15 banks which extends to August 1, 2018. Up to 75% of the Aggregate Credit Commitment is available for letters of credit. The Credit Facility has an accordion feature under which the Company may, subject to certain conditions set forth in the agreement, increase the Credit Facility up to a maximum aggregate amount of $2.0 billion. The Company may select interest rates for the Credit Facility equal to (i) the London Interbank Offering Rate (“LIBOR”) plus an applicable margin or (ii) the lenders’ base rate plus an applicable margin, which in each case is based on the Company’s credit rating and leverage ratio. At April 30, 2014, the interest rate on outstanding borrowings under the Credit Facility was 1.85% per annum. The Company is obligated to pay an undrawn commitment fee which is based on the average daily unused amount of the Aggregate Credit Commitment and the Company’s credit ratings and leverage ratio. Any proceeds from borrowings under the Credit Facility may be used for general corporate purposes. The Company and substantially all of its 100% owned home building subsidiaries are guarantors under the Credit Facility.

Under the terms of the Credit Facility, the Company is not permitted to allow its maximum leverage ratio (as defined in the Credit Facility) to exceed 1.75 to 1.00 and is required to maintain a tangible net worth (as defined in the Credit Facility) of no less than approximately $2.45 billion. Under the terms of the Credit Facility, at April 30, 2014, the Company’s leverage ratio was approximately 0.81 and its tangible net worth was approximately $3.65 billion. Based upon the minimum tangible net

worth requirement at April 30, 2014, the Company’s ability to repurchase its common stock is limited to approximately $1.71 billion.

At April 30, 2014, the Company had $95.0 million outstanding borrowings under the Credit Facility and had outstanding letters of credit of approximately $90.8 million. As part of the Shapell acquisition, the Company borrowed $370.0 million under the Credit Facility on February 3, 2014, of which $275.0 million was repaid as of April 30, 2014.

Senior Unsecured Term Loan

On February 3, 2014, the Company entered into a 5-year senior, $485.0 million, unsecured term loan facility (the “Term Loan Facility”) with ten banks. The full amount of the Term Loan Facility was borrowed by the Company on February 3, 2014. The Company may select interest rates for the Term Loan Facility equal to (i) LIBOR plus an applicable margin, (ii) the base rate (which is defined as the greatest of (a) SunTrust Bank’s prime rate, (b) the federal funds effective rate plus 0.5% and (c) one-month LIBOR plus 1%) plus an applicable margin or (iii) the federal funds / Euro rate (which is defined as the greater of (a) the sum of the federal funds effective rate plus an applicable margin plus 0.25% and (b) one-month LIBOR), with the applicable margin, in each case, based on the Company’s leverage ratio. At April 30, 2014, the interest rate on the Term Loan Facility was 1.56% per annum.

The Company and substantially all of its 100% owned home building subsidiaries are guarantors under the Term Loan Facility. The Term Loan Facility contains substantially the same financial covenants as the Company’s Credit Facility. The Term Loan Facility will mature, and amounts owing under it will become due and payable, on February 3, 2019.

364-Day Senior Unsecured Revolving Credit Facility

On February 4, 2014, the Company entered into a 364-day senior unsecured revolving credit facility (the “364-Day Facility”) with five banks. The 364-Day Facility provides for an unsecured revolving credit facility to be made available to the Company, from time to time after February 4, 2014 and prior to February 3, 2015, in the amount of $500.0 million. The Company intends for this facility to remain undrawn and its purpose is to provide the Company additional liquidity should unforeseen circumstances arise. The Company may select interest rates for the 364-Day Facility equal to (i) LIBOR plus an applicable margin, (ii) the base rate (which is defined as the greatest of (a) Citibank’s prime rate, (b) the federal funds effective rate plus 0.5% and (c) one-month LIBOR plus 1%) plus an applicable margin or (iii) the federal funds / Euro rate (which is defined as the greater of (a) the sum of the federal funds effective rate plus an applicable margin plus 0.25% and (b) one-month LIBOR), with the applicable margin, in each case, based on the Company’s leverage ratio. The Company is obligated to pay an undrawn commitment fee.

The Company and substantially all of its 100% owned home building subsidiaries are guarantors under the 364-Day Facility. The 364-Day Facility contains substantially the same financial covenants as the Company’s Credit Facility. The 364-Day Facility will terminate, and amounts owed under the 364-Day Facility will become due and payable, on February 3, 2015.

At April 30, 2014, the Company had no outstanding borrowings under the 364-Day Facility.

Loans Payable - Other

The Company’s loans payable - other represent purchase money mortgages on properties the Company had acquired that the seller had financed and various revenue bonds that were issued by government entities on behalf of the Company to finance community infrastructure and the Company’s manufacturing facilities. At April 30, 2014, the weighted-average interest rate on the Company’s loans payable - other was 4.64% per annum.

Senior Notes

At April 30, 2014, the Company, through Toll Brothers Finance Corp, had eight issues of Senior Notes outstanding with an aggregate principal amount of $2.66 billion.

In March 2014, the Company repaid the $268.0 million of outstanding 4.95% Senior Notes due March 15, 2014.

In November 2013, the Company issued $350.0 million principal amount of 4.0% Senior Notes due 2018 (the “4.0% Senior Notes”) and $250.0 million principal amount of 5.625% Senior Notes due 2024 (the “5.625% Senior Notes”). The Company received $596.2 million of net proceeds from the issuance of the 4.0% Senior Notes and the 5.625% Senior Notes.

In September 2013, the Company repaid the $104.8 million of outstanding 5.95% Senior Notes due September 15, 2013.

In April 2013, the Company issued $300.0 million principal amount of 4.375% Senior Notes due 2023 (the “4.375% Senior Notes”) at par. The Company received $298.1 million of net proceeds from this issuance of 4.375% Senior Notes.

In May 2013, the Company issued an additional $100.0 million principal amount of 4.375% Senior Notes at a price equal to 103% of par value. The Company received $102.3 million of net proceeds from this additional issuance of 4.375% Senior Notes.

In November 2012, the Company repaid the $59.1 million of outstanding 6.875% Senior Notes due November 15, 2012.

Mortgage Company Loan Facility

In July 2013, TBI Mortgage Company (“TBI Mortgage”), the Company’s wholly-owned mortgage subsidiary, amended its Master Repurchase Agreement (the “Repurchase Agreement”) with Comerica Bank. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by TBI Mortgage and it is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” The Repurchase Agreement, as amended, provides for loan purchases of up to $50 million, subject to certain sublimits. In addition, the Repurchase Agreement provides for an accordion feature under which TBI Mortgage may request that the aggregate commitments under the Repurchase Agreement be increased to an amount up to $75 million for a short period of time. The Repurchase Agreement, as amended, expires on July 22, 2014 and bears interest at LIBOR plus 2.00% per annum, with a minimum rate of 3.00%. At April 30, 2014, the Company had $56.8 million of outstanding borrowings under the Repurchase Agreement.

7. Accrued Expenses

Accrued expenses at April 30, 2014 and October 31, 2013 consisted of the following (amounts in thousands):



	April 30, 2014		October 31, 2013
Land, land development and construction	$	136,781	$	152,674
Compensation and employee benefit	111,664		111,561
Insurance and litigation	92,814		89,104
Warranty	52,579		43,819
Interest	37,444		25,675
Commitments to unconsolidated entities	4,259		3,804
Other	104,132		96,350
	$	539,673	$	522,987

The Company accrues for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Warranty costs are accrued based upon historical experience. The table below provides, for the periods indicated, a reconciliation of the changes in the Company’s warranty accrual (amounts in thousands):



	Six months ended April 30,						Three months ended April 30,
	2014			2013			2014			2013
Balance, beginning of year	$	43,819		$	41,706		$	42,688		$	41,241
Additions - homes closed during the year	7,302			5,223			4,205			2,934
Addition - Shapell liabilities acquired	9,244						9,244
Increase (decrease) in accruals for homes closed in prior years	1,421			(478		)	1,077			(212		)
Charges incurred	(9,207		)	(5,342		)	(4,635		)	(2,854		)
Balance, end of year	$	52,579		$	41,109		$	52,579		$	41,109

8. Income Taxes

The table below provides, for the periods indicated, reconciliations of the Company’s effective tax rate from the federal statutory tax rate (amounts in thousands):



	Six months ended April 30,
	2014				2013
	$		%*		$		%*
Federal tax provision at statutory rate	57,652		35.0		17,253		35.0
State tax provision, net of federal benefit	7,851		4.8		2,051		4.2
Domestic production activities deduction	(4,251	)	(2.6	)
Other permanent differences	(2,338	)	(1.4	)
Reversal of accrual for uncertain tax positions	(9,112	)	(5.5	)
Accrued interest on anticipated tax assessments	1,126		0.7		1,982		4.0
Increase in unrecognized tax benefits	5,406		3.3
Valuation allowance – reversed	(1,226	)	(0.7	)	(1,277	)	(2.6	)
Other	(1,191	)	(0.7	)	179		0.4
Income tax provision	53,917		32.7		20,188		41.0



	Three months ended April 30,
	2014				2013
	$		%*		$		%*
Federal tax provision at statutory rate	32,719		35.0		14,339		35.0
State tax provision, net of federal benefit	4,866		5.2		1,705		4.2
Domestic production activities deduction	(2,417	)	(2.6	)
Other permanent differences	(1,324	)	(1.4	)
Reversal of accrual for uncertain tax positions	(9,112	)	(9.7	)
Accrued interest on anticipated tax assessments	340		0.4		817		2.0
Increase in unrecognized tax benefits	5,406		5.8
Valuation allowance – reversed	(778	)	(0.8	)	(1,061	)	(2.6	)
Other	(1,438	)	(1.5	)	494		1.2
Income tax provision	28,262		30.2		16,294		39.8

* Due to rounding, amounts may not add.

The Company currently operates in 20 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction, and the Company’s ability to utilize certain tax-saving strategies. Based on the Company’s estimate of the allocation of income or loss among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company estimated its rate for the full fiscal year for state income taxes at 7.3% and 6.5% for fiscal 2014 and 2013, respectively.

For state tax purposes, due to past and projected losses in certain jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company has recognized net cumulative valuation allowances against its state deferred tax assets of $54.5 million and $55.7 million as of April 30, 2014 and October 31, 2013, respectively.

9. Stock-Based Benefit Plans

The Company grants stock options, restricted stock, and various types of restricted stock units to its employees and its non-employee directors. Additionally, the Company has an employee stock purchase plan that allows employees to purchase Company stock at a discount.

Beginning in fiscal 2012, the Company changed the mix of stock-based compensation to its employees (other than certain senior executives) by reducing the number of stock options it grants and, in their place, issued non-performance based restricted stock units (“RSUs”) as a form of compensation. The Company also replaced its stock price-based restricted stock unit (“Stock Price-Based RSUs”) awards for certain senior executives with a performance-based restricted stock (“Performance-Based RSUs”) award program.

Information regarding the amount of total stock-based compensation expense and tax benefit recognized by the Company, for the periods indicated, is as follows (amounts in thousands):



	Six months ended April 30,				Three months ended April 30,
	2014		2013		2014		2013
Total stock-based compensation expense recognized	$	12,294	$	10,027	$	4,625	$	4,343
Income tax benefit recognized	$	4,619	$	3,666	$	1,647	$	1,588

At April 30, 2014 and October 31, 2013, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $33.1 million and $19.9 million, respectively.

Information about the Company’s more significant stock-based compensation programs is outlined below.

Stock Options

The fair value of each option award is estimated on the date of grant using a lattice-based option valuation model that uses assumptions noted in the following table. The lattice-based option valuation model incorporates ranges of assumptions for inputs, which are disclosed in the table below. Expected volatilities were based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock, and other factors. The expected lives of options granted were derived from the historical exercise patterns and anticipated future patterns and represent the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behaviors. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average assumptions and the fair value used for stock option grants in fiscal 2014 and 2013 were as follows:



	2014	2013
Expected volatility	36.44% - 44.71%	44.04% - 48.13%
Weighted-average volatility	42.71%	46.70%
Risk-free interest rate	1.45% - 2.71%	0.64% - 1.56%
Expected life (years)	4.55 - 9.02	4.48 - 8.88
Dividends	none	none
Weighted-average grant date fair value per share of options granted	$14.26	$13.05

Stock compensation expense, related to stock options, for the periods indicated, was as follows (amounts in thousands):



	2014		2013
Six months ended April 30,	$	5,660	$	4,835
Three months ended April 30,	$	1,630	$	1,360

Performance-Based Restricted Stock Units

The Executive Compensation Committee of the Company’s Board of Directors (“Executive Compensation Committee”) approved awards of Performance-Based RSUs relating to shares of the Company’s common stock to certain of its senior management. The Performance-Based RSUs are based on the attainment of certain performance metrics of the Company in the fiscal year of grant if the performance targets are met. The number of shares underlying the Performance-Based RSUs that will be issued to the recipients may range from 90% to 110% of the base award depending on the Company’s actual performance as compared to the target performance goals. The Performance-Based RSUs vest over a four-year period provided the recipients continue to be employed by the Company or serve on the board of directors of the Company (as applicable) as specified in the award document.

The value of the Performance-Based RSUs was determined to be equal to the estimated number of shares of the Company’s common stock to be issued multiplied by the closing price of the Company’s common stock on the New York Stock Exchange (“NYSE”) on the later of the date the performance goals were approved by the Executive Compensation Committee, or on the date the Performance-Based RSUs were granted (“Valuation Date”). The Company evaluates the performance goals quarterly and estimates the number of shares underlying the Performance-Based RSUs that are probable of being issued. Information regarding the issuance, valuation assumptions and amortization of the Company’s Performance-Based RSUs issued in the six-month periods ended April 30, 2014 and 2013 is provided below.



	2014		2013
Number of shares underlying Performance-Based RSUs to be issued	284,037		302,511
Closing price of the Company’s common stock on Valuation Date	$	35.16	$	37.78
Aggregate fair value of Performance-Based RSUs issued (in thousands)	$	9,987	$	11,429
Performance-Based RSU expense recognized in the six months ended April 30, (in thousands)	$	4,453	$	2,588
Performance-Based RSU expense recognized in the three months ended April 30, (in thousands)	$	2,382	$	2,074

Note: The fiscal 2014 number of shares underlying Performance-Based RSUs to be issued and their aggregate fair value is estimated.

Information regarding the aggregate number of outstanding Performance-Based RSUs and the aggregate unamortized value of the outstanding Performance-Based RSUs, as of the date indicated, is provided below.



	April 30, 2014		October 31, 2013
Aggregate outstanding Performance-Based RSUs	956,725		672,687
Cumulative unamortized value of Performance-Based RSUs (in thousands)	$	13,653	$	8,120

Stock Price-Based Restricted Stock Units

Information regarding the amortization of the Company’s Stock Price-Based RSUs, for the periods indicated, is provided below (amounts in thousands):



	2014		2013
Six months ended April 30,	$	231	$	979
Three months ended April 30,	$	—	$	416

Information regarding the aggregate number of outstanding Stock Price-Based RSUs and aggregate unamortized value of the outstanding Stock Price-Based RSUs, as of the date indicated, is provided below:



	April 30, 2014		October 31, 2013
Aggregate outstanding Stock Price-Based RSUs	—		306,000
Cumulative unamortized value of Stock Price-Based RSUs (in thousands)	$	—	$	231

In December 2013 and 2012, the Company distributed 306,000 and 200,000 shares, respectively, of stock pursuant to a Stock Price-Based RSU award.

Non-Performance Based Restricted Stock Units

The Company issued RSUs to various officers, employees and non-employee directors. The value of the RSUs was determined to be equal to the number of shares of the Company’s common stock to be issued pursuant to the RSUs, multiplied by the closing price of the Company’s common stock on the NYSE on the date the RSUs were awarded. Information regarding these RSUs issued in the six months ended April 30, 2014 and 2013 is as follows:



	2014		2013
Number of RSUs issued	99,336		94,080
Closing price of the Company’s common stock on date of issuance	$	35.16	$	32.22
Aggregate fair value of RSUs issued (in thousands)	$	3,493	$	3,031

Information regarding the amortization of the Company’s RSUs, for the periods indicated, is as follows (amounts in thousands):



	2014		2013
Six months ended April 30,	$	1,902	$	1,584
Three months ended April 30,	$	591	$	472

Information regarding the aggregate number of outstanding RSUs and aggregate unamortized value of the outstanding RSUs, as of the date indicated, is as follows:



	April 30, 2014		October 31, 2013
Aggregate outstanding RSUs	307,606		225,252
Cumulative unamortized value of RSUs (in thousands)	$	3,248	$	1,706

10. Employee Retirement Plans

The Company has two unfunded supplemental retirement plans (“SRPs”). The table below provides, for the periods indicated, costs recognized and payments made related to its SRPs (amounts in thousands):



	Six months ended April 30,				Three months ended April 30,
	2014		2013		2014		2013
Service cost	$	235	$	236	$	117	$	117
Interest cost	636		521		318		261
Amortization of prior service cost	322		422		161		211
Amortization of unrecognized losses	6		72		3		36
Total costs	$	1,199	$	1,251	$	599	$	625
Benefits paid	$	444	$	444	$	211	$	211

11. Accumulated Other Comprehensive (Loss) Income

The tables below provide, for the periods indicated, the components of accumulated other comprehensive (loss) income (amounts in thousands):



	Six months ended April 30, 2014
	Employee Retirement Plans			Available-for-Sale Securities			Derivative Instruments			Total
Balance, beginning of period	$	(2,112	)	$	(5	)	$	(270	)	$	(2,387	)
Other comprehensive (loss) income before reclassifications	(77		)	(29		)	365			259
Gross amounts reclassified from accumulated other comprehensive income (loss)	328			(6		)				322
Income tax (expense) benefit	(95		)	13