Edgar Filing: TOLL BROTHERS INC

10-Q

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 January 31, 2016



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 March 1, 2016, there were approximately 168,526,000 shares of Common Stock, $0.01 par value, outstanding.

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 and 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	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk	43

Item 4. Controls and Procedures	43

PART II. Other Information

Item 1. Legal Proceedings	44

Item 1A. Risk Factors	44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 6. Exhibits	45

SIGNATURES	46

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (“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. One can identify these statements by the fact that they do not relate to matters of a strictly historical or factual nature and generally discuss or relate to future events. These statements contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should,” and other words or phrases of similar meaning. 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; and legal proceedings and claims.

From time to time, forward-looking statements also are included in other reports on Forms 10-K, 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 market conditions, 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 SEC 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 year refer to our fiscal years ended or ending October 31.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)



	January 31, 2016			October 31, 2015
	(unaudited)
ASSETS
Cash and cash equivalents	$	336,244		$	918,993
Marketable securities				10,001
Restricted cash	29,350			16,795
Inventory	7,180,050			6,997,516
Property, construction, and office equipment, net	134,746			136,755
Receivables, prepaid expenses, and other assets	293,467			284,130
Mortgage loans held for sale	73,145			123,175
Customer deposits held in escrow	58,302			56,105
Investments in unconsolidated entities	414,864			412,860
Investments in foreclosed real estate and distressed loans	48,576			51,730
Deferred tax assets, net of valuation allowances	194,693			198,455
	$	8,763,437		$	9,206,515
LIABILITIES AND EQUITY
Liabilities
Loans payable	$	615,298		$	1,000,439
Senior notes	2,690,889			2,689,801
Mortgage company loan facility	63,907			100,000
Customer deposits	301,282			284,309
Accounts payable	264,452			236,953
Accrued expenses	607,077			608,066
Income taxes payable	64,567			58,868
Total liabilities	4,607,472			4,978,436
Equity
Stockholders’ equity
Preferred stock, none issued	—			—
Common stock, 177,933 and 177,931 shares issued at January 31, 2016 and October 31, 2015, respectively	1,779			1,779
Additional paid-in capital	718,412			728,125
Retained earnings	3,668,382			3,595,202
Treasury stock, at cost — 7,382 and 3,084 shares at January 31, 2016 and October 31, 2015, respectively	(235,654		)	(100,040		)
Accumulated other comprehensive loss	(2,770		)	(2,509		)
Total stockholders’ equity	4,150,149			4,222,557
Noncontrolling interest	5,816			5,522
Total equity	4,155,965			4,228,079
	$	8,763,437		$	9,206,515

See accompanying notes.

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share data)

(Unaudited)



	Three months ended January 31,
	2016			2015
Revenues	$	928,566		$	853,452

Cost of revenues	712,311			650,032
Selling, general and administrative	121,796			106,314
	834,107			756,346
Income from operations	94,459			97,106
Other:
Income from unconsolidated entities	8,638			4,901
Other income – net	13,720			22,016
Income before income taxes	116,817			124,023
Income tax provision	43,637			42,698
Net income	$	73,180		$	81,325

Other comprehensive (loss) income, net of tax:
Change in pension liability	(288		)	(178		)
Change in fair value of available-for-sale securities				2
Change in unrealized income (loss) on derivative held by equity investee	27			(7		)
Other comprehensive loss	(261		)	(183		)
Total comprehensive income	$	72,919		$	81,142

Income per share:
Basic	$	0.42		$	0.46
Diluted	$	0.40		$	0.44
Weighted-average number of shares:
Basic	174,205			176,076
Diluted	182,391			184,107

See accompanying notes.

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Three months ended January 31,
	2016			2015
Cash flow used in operating activities:
Net income	$	73,180		$	81,325
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	5,533			5,809
Stock-based compensation	9,223			7,446
Excess tax benefits from stock-based compensation	(297		)	(1,866		)
Income from unconsolidated entities	(8,638		)	(4,901		)
Distributions of earnings from unconsolidated entities	3,870			4,393
Income from foreclosed real estate and distressed loans	(1,553		)	(2,345		)
Deferred tax provision	587			(1,433		)
Change in deferred tax valuation allowances	148			(207		)
Inventory impairments and write-offs	1,281			1,144
Other	658			555
Changes in operating assets and liabilities
Increase in inventory	(173,440		)	(114,416		)
Origination of mortgage loans	(215,674		)	(167,063		)
Sale of mortgage loans	265,703			212,356
(Increase) decrease in restricted cash	(12,555		)	880
Increase in receivables, prepaid expenses, and other assets	(9,546		)	(255		)
Increase in customer deposits	14,776			14,039
Increase (decrease) in accounts payable and accrued expenses	17,523			(10,147		)
Increase (decrease) in income taxes payable	5,996			(58,362		)
Net cash used in operating activities	(23,225		)	(33,048		)
Cash flow provided by (used in) investing activities:
Purchase of property and equipment — net	(1,593		)	(2,884		)
Sale and redemption of marketable securities	10,000			2,000
Investments in unconsolidated entities	(11,838		)	(18,684		)
Return of investments in unconsolidated entities	14,804			6,340
Investment in foreclosed real estate and distressed loans	(694		)	(1,468		)
Return of investments in foreclosed real estate and distressed loans	5,321			6,592
Net cash provided by (used in) investing activities	16,000			(8,104		)
Cash flow used in financing activities:
Debt issuance costs for senior notes	(64		)
Proceeds from loans payable	339,854			214,624
Principal payments of loans payable	(770,539		)	(272,334		)
Proceeds from stock-based benefit plans	4,769			17,773
Excess tax benefits from stock-based compensation	297			1,866
Purchase of treasury stock	(150,135		)	(6,242		)
Receipts related to noncontrolling interest, net	294			50
Net cash used in financing activities	(575,524		)	(44,263		)
Net decrease in cash and cash equivalents	(582,749		)	(85,415		)
Cash and cash equivalents, beginning of period	918,993			586,315
Cash and cash equivalents, end of period	$	336,244		$	500,900

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,” “we,” “us,” or “our”), a Delaware corporation, and its majority-owned subsidiaries. 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 we have effective control of the entity, in which case we would consolidate the entity.

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, 2015 balance sheet amounts and disclosures included herein have been derived from our October 31, 2015 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, we suggest that they be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015 (“2015 Form 10-K”). 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 our financial position as of January 31, 2016; the results of our operations for the three-month periods ended January 31, 2016 and 2015; and our cash flows for the three-month periods ended January 31, 2016 and 2015. 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 January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. We adopted ASU 2014-04 on November 1, 2015, and the adoption did not have a material effect on our condensed consolidated financial statements or disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for us beginning February 1, 2019, and, at that time, we will adopt the new standard using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 may have on our condensed consolidated financial statements and disclosures.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which eliminates the deferral granted to investment companies from applying the variable interest entities (“VIEs”) guidance and makes targeted amendments to the current consolidation guidance. The new guidance applies to all entities involved with limited partnerships or similar entities and will require re-evaluation of these entities under the revised guidance which may change previous consolidation conclusions. ASU 2015-02 is effective for us beginning February 1, 2016. Upon adoption of ASU 2015-02, we expect that one unconsolidated joint venture, not previously identified as a VIE, will be determined to be a VIE, which will result in a modification of our current disclosures. However, the adoption of ASU 2015-02 is not expected to have a material effect on our condensed consolidated financial statements.

In May 2014, the FASB issued 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 Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in ASC 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 the current guidance. These judgments and estimates 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. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (“ASU 2015-14”), which delays the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended by ASU 2015-14, is effective for us beginning November 1, 2018, and, at that time, we may adopt the new standard

under the full retrospective approach or the modified retrospective approach. We are currently evaluating the method of adoption and the impact that the adoption of ASU 2014-09 may have on our condensed consolidated financial statements and disclosures.

2. Inventory

Inventory at January 31, 2016 and October 31, 2015 consisted of the following (amounts in thousands):



	January 31, 2016		October 31, 2015
Land controlled for future communities	$	78,191	$	75,214
Land owned for future communities	1,913,008		2,033,447
Operating communities	5,188,851		4,888,855
	$	7,180,050	$	6,997,516

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 nonavailability of improved home sites and that are expected to reopen within 12 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 and that do not have any remaining backlog and are not expected to reopen within 12 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 our home buyers (“backlog”).

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



	January 31, 2016		October 31, 2015
Land owned for future communities:
Number of communities	21		15
Carrying value (in thousands)	$	144,979	$	119,138
Operating communities:
Number of communities	7		11
Carrying value (in thousands)	$	39,901	$	63,668

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



	Three months ended January 31,
	2016		2015
Land controlled for future communities	$	381	$	244
Land owned for future communities	300
Operating communities	600		900
	$	1,281	$	1,144

See Note 12, “Fair Value Disclosures,” for information regarding the number of operating communities that we tested for potential impairment, the number of operating communities in which we recognized impairment charges, the amount of impairment charges recognized, and the fair values of those communities, net of impairment charges.

See Note 14, “Commitments and Contingencies,” for information regarding land purchase commitments.

At January 31, 2016, we evaluated our land purchase contracts to determine whether any of the selling entities were VIEs and, if they were, whether we were the primary beneficiary of any of them. Under these land purchase contracts, we do not possess legal title to the land. Our risk is generally limited to deposits paid to the sellers and predevelopment costs incurred, and the creditors of the sellers generally have no recourse against us. At January 31, 2016, we determined that 59 land purchase

contracts, with an aggregate purchase price of $640.5 million, on which we had made aggregate deposits totaling $41.0 million, were VIEs, and that we were not the primary beneficiary of any VIE related to our land purchase contracts. At October 31, 2015, we determined that 61 land purchase contracts, with an aggregate purchase price of $663.6 million, on which we had made aggregate deposits totaling $45.0 million, were VIEs, and that we were not the primary beneficiary of any VIE related to our land purchase contracts.

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



	Three months ended January 31,
	2016			2015
Interest capitalized, beginning of period	$	373,128		$	356,180
Interest incurred	40,107			40,504
Interest expensed to cost of revenues	(32,023		)	(28,377		)
Write-off against other income	(275		)	(1,328		)
Interest capitalized on investments in unconsolidated entities	(1,007		)	(2,751		)
Interest capitalized, end of period	$	379,930		$	364,228

3. Investments in Unconsolidated Entities

We have investments in various unconsolidated entities. These joint ventures (i) develop land for the joint venture participants and, in other cases, for sale to other third-party builders (“Land Development Joint Ventures”); (ii) develop for-sale homes and condominiums (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”), which includes our investments in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in a portfolio of distressed loans and real estate (“Structured Asset Joint Venture”).

The table below provides information as of January 31, 2016, regarding active joint ventures that we are invested in, by joint venture category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Number of unconsolidated entities	7		3		10		1		21
Investment in unconsolidated entities	$	211,965	$	76,972	$	116,338	$	9,589	$	414,864
Number of unconsolidated entities with funding commitments by the Company	5		2		2		—		9
Company's remaining funding commitment to unconsolidated entities (a)	$	251,607	$	18,768	$	4,439	$	—	$	274,814


(a)	The remaining funding commitment for our Land Development Joint Ventures includes $90.0 million, which one of the joint ventures expects to fund through outside financing.

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at January 31, 2016, regarding the debt financing obtained by category ($ amounts in thousands):



	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Total
Number of joint ventures with debt financing	4		2		9		15
Aggregate loan commitments	$	470,000	$	222,000	$	779,902	$	1,471,902
Amounts borrowed under commitments	$	429,056	$	126,869	$	562,546	$	1,118,471

More specific and/or recent information regarding our investments in and future commitments to these entities is provided below.

Land Development Joint Ventures

See Note 14, “Commitments and Contingencies,” for information regarding land purchase agreements that we have with our Land Development Joint Ventures.

In the fourth quarter of fiscal 2015, we entered into a joint venture with an unrelated party to purchase and develop a parcel of land located in Irvine, California. The joint venture expects to develop approximately 840 home sites on this land in multiple phases. We have a 50% interest in this joint venture. The joint venture intends to develop the property and sell approximately 50% of the value of the home sites to each of the members of the joint venture. At January 31, 2016, we had an investment of $77.0 million in this joint venture and were committed to make additional contributions to this joint venture of up to $220.3 million. To finance a portion of the land purchase, the joint venture entered into a $320.0 million purchase money mortgage with the seller.

Home Building Joint Ventures

In the first quarter of fiscal 2015, we entered into a joint venture with an unrelated party to complete the development of a high-rise luxury condominium project in New York City on property that we owned. We contributed $15.9 million as our initial contribution for a 25% interest in this joint venture. We sold the property to the joint venture for $78.5 million, and we were reimbursed for development and construction costs incurred by us prior to the sale. The gain of $9.3 million that we realized on the sale was deferred and will be recognized in our results of operations as units are sold and delivered to the ultimate home buyer. At January 31, 2016, we had an investment of $17.0 million in this joint venture. The joint venture entered into a construction loan agreement of $124.0 million to fund the land purchase and a portion of the cost of the development of the property. At January 31, 2016, the joint venture had $79.8 million borrowed under the construction loan.

We have an investment in a joint venture in which we have a 50% interest to develop a high-rise luxury condominium project in conjunction with a luxury hotel in New York City being developed by a related joint venture, discussed below in Rental Property Joint Ventures. At January 31, 2016, we had invested $40.2 million in this joint venture and expect to make additional investments of approximately $10.5 million for the development of this project. In the first quarter of fiscal 2015, this joint venture, along with the related hotel joint venture, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and the hotel, of which we allocated $98.0 million to the condominium project. At January 31, 2016, this joint venture had $47.1 million of outstanding borrowings under the construction loan agreement.

Rental Property Joint Ventures

In the second quarter of fiscal 2015, we entered into two joint ventures with an unrelated party to develop luxury for-rent residential apartment buildings. Prior to the formation of these joint ventures, we acquired the properties, through two 100%-owned entities, and incurred $18.8 million of land and land development costs. Our partner acquired a 75% interest in each of these entities for $14.5 million. At January 31, 2016, we had a combined investment of $10.1 million in these ventures. In addition, in fiscal 2015, these joint ventures entered into construction loan agreements with several banks to provide up to $87.0 million of financing for the development of their respective apartment buildings. At January 31, 2016, these joint ventures had $0.9 million of borrowings under the construction loan agreements.

We have an investment in a joint venture in which we have a 50% interest to develop a luxury hotel in conjunction with a high-rise luxury condominium project in the urban New York market being developed by a related joint venture, discussed in Home Building Joint Ventures above. At January 31, 2016, we had invested $27.0 million in this joint venture and expect to make additional investments of approximately $4.0 million for the development of the luxury hotel. In the first quarter of fiscal 2015, this joint venture, along with the related condominium joint venture, entered into a $160.0 million construction loan agreement to complete the construction of the condominiums and the hotel, of which we allocated $62.0 million to the hotel project. At January 31, 2016, this joint venture had $27.5 million of outstanding borrowings under the construction loan agreement.

In 1998, we formed the Trust to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr., and former members of our senior management; and one-third by an unrelated party. As of January 31, 2016, our investment in the Trust was zero as cumulative distributions received from the Trust have been in excess of the carrying amount of our net investment. We provide development, finance, and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $0.4 million and $0.6 million in the three-month periods ended January 31, 2016 and 2015, respectively. In each of the three months ended January 31, 2016 and 2015, we received a $2.0 million distribution from the Trust, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.

Guarantees

The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender

harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; 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, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed upon share of the guarantee; however, if a joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share.

We believe that, as of January 31, 2016, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral in such entity should be sufficient to repay all or a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the venture. At January 31, 2016, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $945.2 million and had borrowed an aggregate of $591.8 million. The terms of these guarantees generally range from 10 months to 51 months. We estimate that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $945.2 million, without taking into account any recoveries from the underlying collateral or any reimbursement from our partners. Of this maximum potential exposure, $85.8 million is related to repayment and carry cost guarantees. Based on the amounts borrowed at January 31, 2016, our maximum potential exposure under all guarantees is estimated to be approximately $591.8 million, without taking into account any recoveries from the underlying collateral or any reimbursement from our partners. Of the estimated $591.8 million, $59.9 million is related to repayment and carry cost guarantees.

In addition, we have guaranteed approximately $10.2 million of ground lease payments and insurance deductibles for three joint ventures.

As of January 31, 2016, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $4.8 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At January 31, 2016 and October 31, 2015, we determined that one of our joint ventures was a VIE under the guidance of ASC 810, “Consolidation.” However, we have concluded that we were not the primary beneficiary of the VIE because the power to direct the activities of such VIE that most significantly impact its performance was shared by us and such VIE’s other partners. Business plans, budgets, and other major decisions are required to be unanimously approved by all members. Management and other fees earned by us are nominal and believed to be at market rates, and there is no significant economic disproportionality between us and the 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 January 31, 2016 and October 31, 2015, our investment in the unconsolidated joint venture deemed to be a VIE, which is included in “Investments in unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $6.5 million and $6.7 million, respectively. At January 31, 2016 and October 31, 2015, the maximum exposure of loss to our investment in the unconsolidated joint venture that is a VIE is limited to our investment in the unconsolidated VIE, except with regard to $89.8 million of loan guarantees and $0.4 million of additional commitments to the VIE. Of our potential exposure for these loan guarantees, $14.3 million is related to repayment and carry cost guarantees.

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 we have an investment, aggregated by type of business, are included below (in thousands):

Condensed Balance Sheets:



	January 31, 2016
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	35,054	$	7,830	$	27,710	$	37,785	$	108,379
Inventory	713,254		338,853						1,052,107
Non-performing loan portfolio							17,976		17,976
Rental properties					361,191				361,191
Rental properties under development					381,411				381,411
Real estate owned (“REO”)							98,372		98,372
Other assets	75,522		68,576		11,976		2,469		158,543
Total assets	$	823,830	$	415,259	$	782,288	$	156,602	$	2,177,979
Debt (1)	$	430,143	$	132,430	$	562,546			$	1,125,119
Other liabilities	31,673		75,017		29,145		4,125		139,960
Members’ equity	362,014		207,812		190,597		61,004		821,427
Noncontrolling interest							91,473		91,473
Total liabilities and equity	$	823,830	$	415,259	$	782,288	$	156,602	$	2,177,979
Company’s net investment in unconsolidated entities (2)	$	211,965	$	76,972	$	116,338	$	9,589	$	414,864



	October 31, 2015
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures		Structured Asset Joint Venture		Total
Cash and cash equivalents	$	29,281	$	11,203	$	44,310	$	10,469	$	95,263
Inventory	701,527		322,630						1,024,157
Non-performing loan portfolio							27,572		27,572
Rental properties					278,897				278,897
Rental properties under development					390,399				390,399
Real estate owned (“REO”)							117,758		117,758
Other assets (1)	70,799		61,144		12,199		80,475		224,617
Total assets	$	801,607	$	394,977	$	725,805	$	236,274	$	2,158,663
Debt (1)	$	417,025	$	117,251	$	514,895	$	77,950	$	1,127,121
Other liabilities	29,772		70,078		30,329		136		130,315
Members’ equity	354,810		207,648		180,581		63,288		806,327
Noncontrolling interest							94,900		94,900
Total liabilities and equity	$	801,607	$	394,977	$	725,805	$	236,274	$	2,158,663
Company’s net investment in unconsolidated entities (2)	$	214,060	$	76,120	$	110,454	$	12,226	$	412,860


(1)	Included in other assets of the Structured Asset Joint Venture at October 31, 2015 is $78.0 million of restricted cash held in a defeasance account that was used to repay debt of the Structured Asset Joint Venture in December 2015.

(2)

Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities are primarily a result of the acquisition price of an investment in a land development joint venture in fiscal 2012 that was in excess of our pro rata share of the underlying equity; impairments related to our investment in unconsolidated entities; interest capitalized on our investment; the estimated fair value of the guarantees provided to the joint ventures; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations and Comprehensive Income:



	For the three months ended January 31, 2016
	Land Development Joint Ventures		Home Building Joint Ventures			Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	12,622	$	16,042		$	12,884		$	938		$	42,486
Cost of revenues	7,159		13,476			7,691			7,187			35,513
Other expenses	1,029		1,522			6,190			566			9,307
Total expenses	8,188		14,998			13,881			7,753			44,820
Gain on disposition of loans and REO									25,983			25,983
Income (loss) from operations	4,434		1,044			(997		)	19,168			23,649
Other income (loss)	821		(73		)	75			182			1,005
Net income (loss)	5,255		971			(922		)	19,350			24,654
Less: income attributable to noncontrolling interest									(11,610		)	(11,610		)
Net income (loss) attributable to controlling interest	5,255		971			(922		)	7,740			13,044
Other comprehensive income						87						87
Total comprehensive income (loss)	$	5,255	$	971		$	(835	)	$	7,740		$	13,131
Company’s equity in earnings of unconsolidated entities (3)	$	5,006	$	343		$	1,742		$	1,547		$	8,638



	For the three months ended January 31, 2015
	Land Development Joint Ventures		Home Building Joint Ventures		Rental Property Joint Ventures			Structured Asset Joint Venture			Total
Revenues	$	18,276	$	19,294	$	7,611		$	889		$	46,070
Cost of revenues	9,630		16,913		3,269			6,074			35,886
Other expenses	135		1,575		4,388			326			6,424
Total expenses	9,765		18,488		7,657			6,400			42,310
Gain on disposition of loans and REO								7,631			7,631
Income (loss) from operations	8,511		806		(46		)	2,120			11,391
Other income			72					586			658
Net income (loss)	8,511		878		(46		)	2,706			12,049
Less: income attributable to noncontrolling interest								(1,623		)	(1,623		)
Net income (loss) attributable to controlling interest	8,511		878		(46		)	1,083			10,426
Other comprehensive loss					(22		)				(22		)
Total comprehensive income (loss)	$	8,511	$	878	$	(68	)	$	1,083		$	10,404
Company’s equity in earnings of unconsolidated entities (3)	$	2,442	$	542	$	1,700		$	217		$	4,901

(3)

Differences between our equity in earnings of unconsolidated entities and the underlying net income (loss) of the entities are primarily a result of a basis difference of an acquired joint venture interest, distributions from entities in excess of the carrying amount of our net investment, recoveries of previously incurred charges, and our share of the entities’ profits related to home sites purchased by us, which reduces our cost basis of the home sites acquired.

4. Investments in Foreclosed Real Estate and Distressed Loans

Investments in REO and distressed loans consisted of the following, as of the dates indicated (amounts in thousands):



	January 31, 2016		October 31, 2015
Investment in REO:
Held and used classification	$	35,128	$	48,514
Held for sale classification	12,197		1,719
	47,325		50,233
Investment in distressed loans	1,251		1,497
	$	48,576	$	51,730

Investments in REO

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



	Three months ended January 31,
	2016			2015
Balance, beginning of period	$	50,233		$	69,799
Additions	694			1,676
Sales	(3,367		)	(4,286		)
Impairments	(155		)	(169		)
Depreciation	(80		)	(86		)
Balance, end of period	$	47,325		$	66,934

Investments in Distressed Loans

Our investments in distressed loans represent nonperforming loans classified as nonaccrual in accordance with ASC 310-10, “Receivable.” Interest income is not recognized on nonaccrual loans. When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method.

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

Loans Payable

At January 31, 2016 and October 31, 2015, loans payable consisted of the following (amounts in thousands):



	January 31, 2016			October 31, 2015
Senior unsecured term loan	$	500,000		$	500,000
Credit facility borrowings	—			350,000
Loans payable – other	116,464			151,702
Deferred issuance costs	(1,166		)	(1,263		)
	$	615,298		$	1,000,439

Senior Unsecured Term Loan

On February 3, 2014, we entered into a five-year senior, $485.0 million, unsecured term loan facility (the “Term Loan Facility”) with a syndicate of banks. We borrowed the full amount of the Term Loan Facility on February 3, 2014. In October 2014, we increased the Term Loan Facility by $15.0 million and borrowed the full amount of the increase. At January 31, 2016, the interest rate on borrowings under the Term Loan Facility was 1.83% per annum.

We and substantially all of our 100%-owned home building subsidiaries are guarantors under the Term Loan Facility. The Term Loan Facility contains substantially the same financial covenants as our Credit Facility, as described below. The Term Loan Facility will mature and amounts owing thereunder will become due and payable on February 3, 2019.

Credit Facility

On August 1, 2013, we entered into a $1.035 billion, unsecured, five-year revolving credit facility (the “Credit Facility”) with a syndicate of banks (the “Aggregate Credit Commitment”). The commitments under the Credit Facility are scheduled to expire on August 1, 2018. We are obligated to pay an undrawn commitment fee to the lenders under the Credit Facility, which is based on the average daily unused amount of the Aggregate Credit Commitment and our leverage ratio. Any proceeds from borrowings under the Credit Facility may be used for general corporate purposes. We and substantially all of our 100%-owned home building subsidiaries are guarantors under the Credit Facility.

Under the terms of the Credit Facility, our maximum leverage ratio (as defined in the credit agreement) may not exceed 1.75 to 1.00, and we are required to maintain a minimum tangible net worth (as defined in the credit agreement) of no less than approximately $2.53 billion. Under the terms of the Credit Facility, at January 31, 2016, our leverage ratio was approximately 0.74 to 1.00, and our tangible net worth was approximately $4.12 billion. Based upon the minimum tangible net worth requirement in the Credit Facility, our ability to repurchase our common stock was limited to approximately $1.90 billion as of January 31, 2016.

At January 31, 2016, we had no outstanding borrowings under the Credit Facility and had outstanding letters of credit of approximately $108.3 million. At January 31, 2016, the interest rate on borrowings under the Credit Facility would have been 1.93% per annum. Subsequent to January 31, 2016, we borrowed $75.0 million under the Credit Facility.

Loans Payable – Other

Our “Loans payable – other” represent purchase money mortgages on properties we acquired that the seller had financed and various revenue bonds that were issued by government entities on our behalf to finance community infrastructure and our manufacturing facilities. At January 31, 2016, the weighted-average interest rate on “Loans payable – other” was 3.83% per annum.

Senior Notes

At January 31, 2016, we, through Toll Brothers Finance Corp., had eight issues of Senior Notes outstanding with an aggregate principal amount of $2.71 billion.

In October 2015, we issued $350.0 million aggregate principal amount of 4.875% Senior Notes due 2025 (the “4.875% Senior Notes”) at par. We received $347.7 million of net proceeds from this issuance of the 4.875% Senior Notes.

In May 2015, we repaid, at maturity, the $300.0 million of then-outstanding outstanding principal amount of 5.15% Senior Notes due May 15, 2015.

Mortgage Company Loan Facility

In July 2015, TBI Mortgage^® Company (“TBI Mortgage”), our 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 the Repurchase Agreement is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” The Repurchase Agreement, as amended, provides for loan purchases up to $50.0 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 $100.0 million for a short period of time. The Repurchase Agreement, as amended, expires on July 18, 2016, and borrowings thereunder bear interest at LIBOR plus 2.00% per annum, with a minimum rate of 2.00%. At January 31, 2016, the interest rate on the Repurchase Agreement was 2.19% per annum. In addition, we are subject to an under usage fee based on outstanding balances, as defined in the Repurchase Agreement. At January 31, 2016, we had $63.9 million of outstanding borrowings under the Repurchase Agreement.

6. Accrued Expenses

Accrued expenses at January 31, 2016 and October 31, 2015 consisted of the following (amounts in thousands):



	January 31, 2016		October 31, 2015
Land, land development, and construction	$	106,885	$	118,634
Compensation and employee benefits	121,262		125,045
Self-insurance	115,084		113,727
Warranty	90,661		93,083
Interest	39,195		26,926
Commitments to unconsolidated entities	5,534		5,534
Other	128,456		125,117
	$	607,077	$	608,066

As previously disclosed in Note 7, “Accrued Expenses” in our 2015 Form 10-K, we determined that we will need to make stucco-related repairs to homes in certain completed communities located in Pennsylvania and Delaware (which are in our Mid-Atlantic region). We continue to review our potential liability as new claims are submitted, and we believe that at January 31, 2016, our existing reserves and insurance were sufficient. Due to the degree of judgment required and the potential for variability in our underlying assumptions, our actual future costs could differ from those estimated.

In addition, also as previously disclosed in Note 7, “Accrued Expenses” in our 2015 Form 10-K, we have received construction claims from three related multifamily community associations in California alleging issues with design and construction and damage to exterior common area elements. We believe that we have coverage under multiple owner controlled insurance policies with deductibles or self-insured retention requirements that vary from policy year to policy year. We completed a settlement of one of the claims during fiscal 2015. In addition, we completed a settlement on a second claim in December 2015, which was previously accrued for as of October 31, 2015. As of January 31, 2016, we believe that our existing reserves and insurance were sufficient. Due to issues related to insurance coverage on all three construction claims, the degree of judgment required, and the potential for variability in our underlying assumptions, our actual future costs could differ from our estimates.

We do not believe that any resolution of the above matters in excess of the amounts currently accrued would be material to our financial condition.

We accrue 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 our warranty accrual (amounts in thousands):



	Three months ended January 31,
	2016			2015
Balance, beginning of period	$	93,083		$	86,282
Additions – homes closed during the period	4,496			3,918
Increase in accruals for homes closed in prior years	2,453			868
Charges incurred	(9,371		)	(6,373		)
Balance, end of period	$	90,661		$	84,695

7. Income Taxes

We recorded an income tax provision of $43.6 million and $42.7 million for the three months ended January 31, 2016 and 2015, respectively. The effective tax rate for the three months ended January 31, 2016, was 37.4%, compared to 34.4% for the three months ended January 31, 2015. The income tax provisions for both periods included the provision for state income taxes and interest accrued on anticipated tax assessments, offset by tax benefits related to the utilization of domestic production activities deductions and other permanent differences.

We currently operate in 19 states and are subject to various state tax jurisdictions. We estimate our state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction, and our ability to utilize certain tax-saving strategies. Based on our estimate of the allocation of income or loss among the various taxing jurisdictions and changes in tax regulations and their impact on our tax strategies, we estimate our rate for the full fiscal year 2016 for state income taxes at 6.7%. Our state income tax rate for the full fiscal year 2015 was 6.3%.

For state tax purposes, due to past and projected losses in certain jurisdictions where we do not have carryback potential and/or cannot sufficiently forecast future taxable income, we recognized net cumulative valuation allowances against our state deferred tax assets of $31.3 million and $31.1 million as of January 31, 2016 and October 31, 2015, respectively.

At January 31, 2016, we had $52.5 million of gross unrecognized tax benefits, including interest and penalties. If these unrecognized tax benefits were to reverse in the future, they would have a beneficial impact on our effective tax rate at that time. During the next 12 months, it is reasonably possible that our unrecognized tax benefits will change, but we are not able to provide a range of such change. The possible changes would be principally due to the expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax positions taken, and the accrual of estimated interest and penalties.

8. Stock-Based Benefit Plans

We grant stock options and various types of restricted stock units to our employees and our nonemployee directors. Additionally, we have an employee stock purchase plan that allows employees to purchase our stock at a discount.

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



	Three months ended January 31,
	2016		2015
Total stock-based compensation expense recognized	$	9,223	$	7,446
Income tax benefit recognized	$	3,555	$	2,809

At January 31, 2016 and October 31, 2015, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $44.7 million and $25.2 million, respectively.

9. Accumulated Other Comprehensive Loss

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



	Three months ended January 31, 2016
	Employee retirement plans			Derivative instruments			Total
Balance, beginning of period	$	(2,478	)	$	(31	)	$	(2,509	)
Other comprehensive (loss) income before reclassifications	(757		)	43			(714		)
Gross amounts reclassified from accumulated other comprehensive income	230						230
Income tax benefit (expense)	239			(16		)	223
Other comprehensive (loss) income, net of tax	(288		)	27			(261		)
Balance, end of period	$	(2,766	)	$	(4	)	$	(2,770	)



	Three months ended January 31, 2015
	Employee retirement plans			Available-for-sale securities			Derivative instruments			Total
Balance, beginning of period	$	(2,789	)	$	(2	)	$	(47	)	$	(2,838	)
Other comprehensive (loss) income before reclassifications	(501		)	3			(11		)	(509		)
Gross amounts reclassified from accumulated other comprehensive income	216									216
Income tax benefit (expense)	107			(1		)	4			110
Other comprehensive (loss) income, net of tax	(178		)	2			(7		)	(183		)
Balance, end of period	$	(2,967	)	$	—		$	(54	)	$	(3,021	)

Reclassifications for the amortization of the employee retirement plans are included in “Selling, general and administrative”

expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.

10. Stock Repurchase Program

In March 2003, our Board of Directors authorized the repurchase of up to 20 million shares of our common stock in open market transactions or otherwise for the purpose of providing shares for our various employee benefit plans.

On December 16, 2014, our Board of Directors authorized the repurchase of 20 million shares of our common stock in open market transactions or otherwise for the purpose of providing shares for the Company’s equity award and other employee benefit plans and for any other additional purpose or purposes as may be determined from time to time by the Board of Directors. Additionally, our Board of Directors terminated, effective December 31, 2014, our March 2003 share repurchase program. The table below provides, for the periods indicated, information about our share repurchase programs:



	Three months ended January 31,
	2016		2015
Number of shares purchased (in thousands)	4,770		201
Average price per share	$	31.48	$	31.08
Remaining authorization at January 31 (in thousands)	13,765		19,999

Subsequent to January 31, 2016, we repurchased approximately 2.0 million shares of our common stock at an average price of $27.19 per share.

11. Income per Share Information

The table below provides, for the periods indicated, information pertaining to the calculation of income per share, common stock equivalents, weighted-average number of antidilutive options, and shares issued (amounts in thousands):



	Three months ended January 31,
	2016		2015
Numerator:
Net income as reported	$	73,180	$	81,325
Plus interest and costs attributable to 0.5% Exchangeable Senior Notes, net of income tax benefit	389		394
Numerator for diluted earnings per share	$	73,569	$	81,719

Denominator:
Basic weighted-average shares	174,205		176,076
Common stock equivalents (a)	2,328		2,173
Shares attributable to 0.5% Exchangeable Senior Notes	5,858		5,858
Diluted weighted-average shares	182,391		184,107

Other information:
Weighted-average number of antidilutive options and restricted stock units (b)	2,954		2,367
Shares issued under stock incentive and employee stock purchase plans	473		677


(a)	Common stock equivalents represent the dilutive effect of outstanding in-the-money stock options using the treasury stock method and shares expected to be issued under performance-based restricted stock units and nonperformance-based restricted stock units.


(b)	Weighted-average number of antidilutive options and restricted stock units are based upon the average closing price of our common stock on the NYSE for the period.

12. Fair Value Disclosures

Financial Instruments

The table below provides, as of the dates indicated, a summary of assets (liabilities) related to our financial instruments, measured at fair value on a recurring basis (amounts in thousands):



		Fair value
Financial Instrument	Fair value hierarchy	January 31, 2016			October 31, 2015
Marketable Securities	Level 2				$	10,001
Residential Mortgage Loans Held for Sale	Level 2	$	73,145		$	123,175
Forward Loan Commitments — Residential Mortgage Loans Held for Sale	Level 2	$	478		$	186
Interest Rate Lock Commitments (“IRLCs”)	Level 2	$	871		$	(297	)
Forward Loan Commitments — IRLCs	Level 2	$	(871	)	$	297

At January 31, 2016 and October 31, 2015, the carrying value of cash and cash equivalents and restricted cash approximated fair value.

Marketable Securities

The fair value of our marketable securities approximates the amortized cost basis as of October 31, 2015. The estimated fair value of marketable securities was based on quoted prices provided by brokers.

Mortgage Loans Held for Sale

At the end of the reporting period, we determine the fair value of our mortgage loans held for sale and the forward loan commitments we have entered into as a hedge against the interest rate risk of our mortgage loans and commitments using the market approach to determine fair value.

The table below provides, as of the dates indicated, the aggregate unpaid principal and fair value of mortgage loans held for sale (amounts in thousands):



	Aggregate unpaid principal balance		Fair value		Excess
At January 31, 2016	$	71,875	$	73,145	$	1,270
At October 31, 2015	$	121,904	$	123,175	$	1,271

Inventory

We recognize inventory impairment charges based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. The fair value of the aforementioned inventory was determined using Level 3 criteria. See Note 1, “Significant Accounting Policies – Inventory,” in our 2015 Form 10-K for information regarding our methodology for determining fair value. The table below summarizes, for the periods indicated, the ranges of certain quantitative unobservable inputs utilized in determining the fair value of impaired operating communities:



Three months ended:	Selling price per unit ($ in thousands)	Sales pace per year (in units)	Discount rate
Fiscal 2016:
January 31	—	—	—

Fiscal 2015:
January 31	289 - 680	1 - 7	13.5% - 16.0%
April 30	527 - 600	13 - 25	17.0%
July 31	788 - 1,298	4 - 8	15.5% - 16.2%
October 31	301 - 764	3 - 24	16.3% - 22.0%

The table below provides, for the periods indicated, the fair value of operating communities whose carrying value was adjusted and the amount of impairment charges recognized ($ amounts in thousands):



		Impaired operating communities
Three months ended:	Number of communities tested	Number of communities	Fair value of communities, net of impairment charges		Impairment charges recognized
Fiscal 2016:
January 31	43	2	$	1,713	$	600
					$	600
Fiscal 2015:
January 31	58	4	$	24,968	$	900
April 30	52	1	$	16,235	11,100
July 31	40	3	$	13,527	6,000
October 31	44	3	$	8,726	4,300
					$	22,300

Debt

The table below provides, as of the dates indicated, the book value and estimated fair value of our debt (amounts in thousands):



		January 31, 2016				October 31, 2015
	Fair value hierarchy	Book value		Estimated fair value		Book value		Estimated fair value
Loans payable (a)	Level 2	$	616,464	$	616,213	$	1,001,702	$	1,001,366
Senior notes (b)	Level 1	2,707,376		2,799,841		2,707,376		2,877,039
Mortgage company loan facility (c)	Level 2	63,907		63,907		100,000		100,000
		$	3,387,747	$	3,479,961	$	3,809,078	$	3,978,405


(a)	The estimated fair value of loans payable was based upon contractual cash flows discounted at interest rates that we believed were available to us for loans with similar terms and remaining maturities as of the applicable valuation date.


(b)	The estimated fair value of our senior notes is based upon their market prices as of the applicable valuation date.


(c)	We believe that the carrying value of our mortgage company loan borrowings approximates their fair value.

13. Other Income – Net

The table below provides, for the periods indicated, the components of other income – net (amounts in thousands):



	Three months ended January 31,
	2016		2015
Interest income	$	404	$	488
Income from ancillary businesses	3,729		10,839
Gibraltar	828		822
Management fee income from unconsolidated entities	2,107		2,979
Retained customer deposits	2,113		1,340
Income from land sales	3,998		4,817
Other	541		731
Total other income – net	$	13,720	$	22,016

In the three months ended January 31, 2016 and 2015, our security monitoring business recognized gains of $1.6 million and $8.1 million, respectively, from a bulk sale of security monitoring accounts in the fiscal 2015 period, which is included in income from ancillary businesses in the table above.

Income from ancillary businesses includes our mortgage, title, landscaping, security monitoring, and golf course and country club operations. The table below provides, for the periods indicated, revenues and expenses for our ancillary businesses (amounts in thousands):



	Three months ended January 31,
	2016		2015
Revenue	$	24,869	$	31,280
Expense	$	21,140	$	20,441

The table below provides, for the periods indicated, revenues and expenses recognized from land sales (amounts in thousands):



	Three months ended January 31,
	2016			2015
Revenue	$	10,691		$	104,021
Deferred gain on land sale to joint venture				(9,260		)
Expense	(6,693		)	(89,944		)
Income from land sales	$	3,998		$	4,817

Land sale revenues for the three months ended January 31, 2015, include $78.5 million related to property sold to a Home Building Joint Venture in which we have a 25% interest. Due to our continued involvement in the joint venture through our ownership interest and guarantees provided on the joint venture’s debt, we deferred the $9.3 million gain realized on the sale. We will recognize the gain as units are sold to the ultimate home buyers. See Note 3, “Investments in Unconsolidated Entities,” for more information on this transaction.

14. Commitments and Contingencies

Legal Proceedings

We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that adequate provision for resolution of all current claims and pending litigation has been made for probable losses. We believe that the disposition of these matters will not have a material adverse effect on our results of operations and liquidity or on our financial condition.

Investments in Unconsolidated Entities

At January 31, 2016, we had investments in a number of unconsolidated entities, were committed to invest or advance additional funds, and had guaranteed a portion of the indebtedness and/or loan commitments of these entities. See Note 3, “Investments in Unconsolidated Entities,” for more information regarding our commitments to these entities.

Land Purchase Commitments

Generally, our purchase agreements to acquire land parcels do not require us to purchase those land parcels, although we, in some cases, forfeit any deposit balance outstanding if and when we terminate a purchase agreement. If market conditions are weak, approvals needed to develop the land are uncertain, or other factors exist that make the purchase undesirable, we may choose not to acquire the land. Whether a purchase agreement is legally terminated or not, we review the amount recorded for the land parcel subject to the purchase agreement to determine whether the amount is recoverable. While we may not have formally terminated the purchase agreements for those land parcels that we do not expect to acquire, we write off any nonrefundable deposits and costs previously capitalized to such land parcels in the periods that we determine such costs are not recoverable.

Information regarding our land purchase commitments, as of the dates indicated, is provided in the table below (amounts in thousands):



	January 31, 2016		October 31, 2015
Aggregate purchase commitments:
Unrelated parties	$	1,099,657	$	1,081,008
Unconsolidated entities that the Company has investments in	136,340		136,340
Total	$	1,235,997	$	1,217,348
Deposits against aggregate purchase commitments	$	78,097	$	79,072
Additional cash required to acquire land	1,157,900		1,138,276
Total	$	1,235,997	$	1,217,348
Amount of additional cash required to acquire land in accrued expenses	$	1,680	$	4,809

In addition, we expect to purchase approximately 3,600 additional home sites over a number of years from several joint ventures in which we have interests; the purchase prices of these home sites will be determined at a future date.

At January 31, 2016, we also had purchase commitments to acquire land for apartment developments of approximately $63.5 million, of which we had outstanding deposits in the amount of $2.2 million.

We have additional land parcels under option that have been excluded from the aforementioned aggregate purchase amounts since we do not believe that we will complete the purchase of these land parcels and no additional funds will be required from us to terminate these contracts.

Surety Bonds and Letters of Credit

At January 31, 2016, we had outstanding surety bonds amounting to $620.5 million, primarily related to our obligations to governmental entities to construct improvements in our communities. We estimate that $331.7 million of work remains on these improvements. We have an additional $130.1 million of surety bonds outstanding that guarantee other obligations. We do not believe that it is probable that any outstanding bonds will be drawn upon.

At January 31, 2016, we had outstanding letters of credit of $108.3 million under our Credit Facility. These letters of credit were issued to secure our various financial obligations, including insurance policy deductibles and other claims, land deposits, and security to complete improvements in communities in which we are operating. We do not believe that it is probable that any outstanding letters of credit will be drawn upon.

Backlog

At January 31, 2016, we had agreements of sale outstanding to deliver 4,251 homes with an aggregate sales value of $3.66 billion.

Mortgage Commitments

Information regarding our mortgage commitments, as of the dates indicated, is provided in the table below (amounts in thousands):



	January 31, 2016		October 31, 2015
Aggregate mortgage loan commitments:
IRLCs	$	371,770	$	316,184
Non-IRLCs	1,026,586		941,243
Total	$	1,398,356	$	1,257,427
Investor commitments to purchase:
IRLCs	$	371,770	$	316,184
Mortgage loans receivable	67,374		115,859
Total	$	439,144	$	432,043

15. Information on Operating Segments

We operate in two segments: traditional home building and urban infill. We build and sell detached and attached homes in luxury residential communities located in affluent suburban markets that cater to move-up, empty-nester, active-adult, age-qualified, and second-home buyers in the United States (“Traditional Home Building”). We also build and sell homes in urban infill markets through Toll Brothers City Living^® (“City Living”).

We have determined that our Traditional Home Building operations operate in five geographic segments: North, Mid-Atlantic, South, West, and California. The states comprising each geographic segment are as follows:

North: Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, and New York

Mid-Atlantic: Delaware, Maryland, Pennsylvania, and Virginia

South: Florida, North Carolina, and Texas

West: Arizona, Colorado, Nevada, and Washington

California: California

Prior to October 31, 2015, California was included in the West geographic segment. Due to the increase in our assets and operations in California, effective October 31, 2015, California is presented as a separate geographic segment. Amounts reported in priors years have been reclassified herein to conform to this current presentation.

Revenue and income (loss) before income taxes for each of our segments, for the periods indicated, were as follows (amounts in thousands):



	Three months ended January 31,
	2016			2015
Revenues:
Traditional Home Building:
North	$	120,818		$	132,436
Mid-Atlantic	169,808			163,388
South	146,798			161,867
West	137,258			122,353
California	216,903			165,589
Traditional Home Building	791,585			745,633
City Living	136,981			107,819
Total	$	928,566		$	853,452

Income (loss) before income taxes:
Traditional Home Building:
North	$	8,033		$	10,567
Mid-Atlantic	16,983			18,724
South	21,245			23,324
West	19,688			20,431
California	43,536			24,928
Traditional Home Building	109,485			97,974
City Living	43,680			51,345
Corporate and other	(36,348		)	(25,296		)
Total	$	116,817		$	124,023

“Corporate and other” is comprised principally of general corporate expenses such as the offices of our executive officers; the corporate finance, accounting, audit, tax, human resources, risk management, information technology, marketing, and legal groups; interest income; income from certain of our ancillary businesses, including Gibraltar; and income from a number of our unconsolidated entities.

Total assets for each of our segments, as of the dates indicated, are shown in the table below (amounts in thousands):



	January 31, 2016		October 31, 2015
Traditional Home Building:
North	$	1,103,413	$	1,061,777
Mid-Atlantic	1,220,407		1,225,988
South	1,244,100		1,196,650
West	1,028,305		949,566
California	2,277,125		2,243,309
Traditional Home Building	6,873,350		6,677,290
City Living	846,668		873,013
Corporate and other	1,043,419		1,656,212
Total	$	8,763,437	$	9,206,515

“Corporate and other” is comprised principally of cash and cash equivalents, marketable securities, restricted cash, deferred tax assets, the assets of our Gibraltar investments, manufacturing facilities, and our mortgage subsidiary.

Inventory for each of our segments, as of the dates indicated, is shown in the table below (amounts in thousands):



	Land controlled for future communities		Land owned for future communities		Operating communities		Total
Balances at January 31, 2016:
Traditional Home Building:
North	$	18,073	$	149,220	$	908,254	$	1,075,547
Mid-Atlantic	34,612		190,805		959,860		1,185,277
South	4,389		97,072		969,104		1,070,565
West	3,308		231,142		776,103		1,010,553
California	17,056		828,158		1,246,340		2,091,554
Traditional Home Building	77,438		1,496,397		4,859,661		6,433,496
City Living	753		416,611		329,190		746,554
	$	78,191	$	1,913,008	$	5,188,851	$	7,180,050

Balances at October 31, 2015:
Traditional Home Building:
North	$	12,858	$	146,063	$	865,553	$	1,024,474
Mid-Atlantic	33,196		194,058		956,749		1,184,003
South	4,861		205,562		806,513		1,016,936
West	8,417		198,689		726,256		933,362
California	14,386		899,675		1,149,112		2,063,173
Traditional Home Building	73,718		1,644,047		4,504,183		6,221,948
City Living	1,496		389,400		384,672		775,568
	$	75,214	$	2,033,447	$	4,888,855	$	6,997,516

The amounts we have provided for inventory impairment charges and the expensing of costs that we believed not to be recoverable for each our of segments, for the periods indicated, are shown in the table below (amounts in thousands):



	Three months ended January 31,
	2016		2015
Traditional Home Building:
North	$	12	$	430
Mid-Atlantic	9		161
South	635		549
West	625		4
Total	$	1,281	$	1,144

Investments in unconsolidated entities and equity in earnings from such investments for each of our segments, as of the dates indicated, are shown in the table below (amounts in thousands):



					Equity in earnings from unconsolidated entities
	Investments in unconsolidated entities				Three months ended January 31,
	January 31, 2016		October 31, 2015		2016			2015
Traditional Home Building:
Mid-Atlantic	$	12,332	$	12,167	$	—		$	—
South	95,394		97,041		2,424			2,766
West	—		—		2,921			504
California	123,951		128,338		187			83
Traditional Home Building	231,677		237,546		5,532			3,353
City Living	57,260		52,634		(183		)	(369		)
Corporate and other	125,927		122,680		3,289			1,917
Total	$	414,864	$	412,860	$	8,638		$	4,901

“Corporate and other” is comprised of our investments in the Rental Property Joint Ventures and the Structured Asset Joint Venture.

16. Supplemental Disclosure to Condensed Consolidated Statements of Cash Flows

The following are supplemental disclosures to the Condensed Consolidated Statements of Cash Flows, for the periods indicated (amounts in thousands):



	Three months ended January 31,
	2016			2015
Cash flow information:
Interest capitalized, net of amount paid	$	8,227		$	1,299
Income tax payments	$	38,781		$	102,772
Income tax refunds	$	1,874		$	71
Noncash activity:
Cost of inventory acquired through seller financing or municipal bonds, net	$	10,534		$	26,211
Reduction in inventory for our share of earnings in land purchased from unconsolidated entities	$	160		$	2,324
Defined benefit plan amendment	$	757		$	501
Deferred tax decrease related to stock based compensation activity included in additional paid-in capital	$	3,249
Increase in accrued expenses related to stock based compensation	$	6,230
Income tax benefit recognized in total comprehensive income	$	223		$	110
Unrealized gain (loss) on derivatives held by equity investees	$	43		$	(11	)
(Decrease) increase in investments in unconsolidated entities for change in the fair value of debt guarantees	$	(1	)	$	1,431
Miscellaneous decreases to investments in unconsolidated entities				$	(96	)

17. Supplemental Guarantor Information

Our 100%-owned subsidiary, Toll Brothers Finance Corp. (the “Subsidiary Issuer”), has issued the following Senior Notes (amounts in thousands):



	Original amount issued and amount outstanding at
	January 31, 2016
8.91% Senior Notes due 2017	$	400,000
4.0% Senior Notes due 2018	$	350,000
6.75% Senior Notes due 2019	$	250,000
5.875% Senior Notes due 2022	$	419,876
4.375% Senior Notes due 2023	$	400,000
5.625% Senior Notes due 2024	$	250,000
4.875% Senior Notes due 2025	$	350,000
0.50% Exchangeable Senior Notes due 2032	$	287,500

The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by us and substantially all of our 100%-owned home building subsidiaries (the “Guarantor Subsidiaries”). The guarantees are full and unconditional. Our non-home building subsidiaries and several of our home building subsidiaries (together, the “Nonguarantor Subsidiaries”) do not guarantee the debt. The Subsidiary Issuer generates no operating revenues and does not have any independent operations other than the financing of our other subsidiaries by lending the proceeds from the above-described debt issuances. The indentures under which the Senior Notes were issued provide that any of our subsidiaries that provide a guarantee of our obligations under the Credit Facility will guarantee the Senior Notes. The indentures further provide that any Guarantor Subsidiary may be released from its guarantee so long as (i) no default or event of default exists or would result from release of such guarantee; (ii) the Guarantor Subsidiary being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of our most recent fiscal quarter; (iii) the Guarantor Subsidiaries released from their guarantees in any fiscal year comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of our consolidated net worth as of the end of our most recent fiscal quarter; (iv) such release would not have a material adverse effect on our and our subsidiaries’ home building business; and (v)

the Guarantor Subsidiary is released from its guaranty under the Credit Facility. If there are no guarantors under the Credit Facility, all Guarantor Subsidiaries under the indentures will be released from their guarantees.

Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such disclosures would not be material to investors.

Supplemental consolidating financial information of Toll Brothers, Inc., the Subsidiary Issuer, the Guarantor Subsidiaries, the Nonguarantor Subsidiaries, and the eliminations to arrive at Toll Brothers, Inc. on a consolidated basis is presented below ($ amounts in thousands).

Condensed Consolidating Balance Sheet at January 31, 2016:

Toll

Brothers,

Inc.

Subsidiary

Issuer

Guarantor

Subsidiaries

Nonguarantor

Subsidiaries

Eliminations

Consolidated

ASSETS

Cash and cash equivalents

—

178,762