Edgar Filing: TOLL BROTHERS INC

Document

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 July 31, 2018



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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
			Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 September 4, 2018, there were approximately 147,364,000 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	31

Item 3. Quantitative and Qualitative Disclosures About Market Risk	48

Item 4. Controls and Procedures	48

PART II. Other Information

Item 1. Legal Proceedings	49

Item 1A. Risk Factors	49

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 6. Exhibits	50

SIGNATURES	51

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; home warranty and construction defect claims; 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, government investigations, 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)



	July 31, 2018			October 31, 2017
	(unaudited)
ASSETS
Cash and cash equivalents	$	522,181		$	712,829
Restricted cash	686			2,482
Inventory	7,957,616			7,281,453
Property, construction, and office equipment, net	195,728			189,547
Receivables, prepaid expenses, and other assets	622,402			542,217
Mortgage loans held for sale	94,291			132,922
Customer deposits held in escrow	136,322			102,017
Investments in unconsolidated entities	419,994			481,758
	$	9,949,220		$	9,445,225
LIABILITIES AND EQUITY
Liabilities
Loans payable	$	694,409		$	637,416
Senior notes	2,860,771			2,462,463
Mortgage company loan facility	82,274			120,145
Customer deposits	470,231			396,026
Accounts payable	327,872			275,223
Accrued expenses	936,084			959,353
Income taxes payable	40,199			57,509
Total liabilities	5,411,840			4,908,135
Equity
Stockholders’ equity
Preferred stock, none issued	—			—
Common stock, 177,937 shares issued at July 31, 2018 and October 31, 2017	1,779			1,779
Additional paid-in capital	722,461			720,115
Retained earnings	4,866,980			4,474,064
Treasury stock, at cost — 29,707 and 20,732 shares at July 31, 2018 and October 31, 2017, respectively	(1,060,746		)	(662,854		)
Accumulated other comprehensive loss	(1,810		)	(1,910		)
Total stockholders’ equity	4,528,664			4,531,194
Noncontrolling interest	8,716			5,896
Total equity	4,537,380			4,537,090
	$	9,949,220		$	9,445,225

See accompanying notes.

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Amounts in thousands, except per share data)

(Unaudited)



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017

Revenues	$	4,688,020	$	3,787,151	$	1,913,353	$	1,502,909

Cost of revenues	3,742,256		2,986,471		1,509,619		1,176,028
Selling, general and administrative	497,990		438,497		174,071		154,650
	4,240,246		3,424,968		1,683,690		1,330,678
Income from operations	447,774		362,183		229,663		172,231
Other:
Income from unconsolidated entities	53,913		112,274		12,469		19,925
Other income – net	35,756		38,107		10,965		11,418
Income before income taxes	537,443		512,564		253,097		203,574
Income tax provision	100,268		168,947		59,839		55,011
Net income	$	437,175	$	343,617	$	193,258	$	148,563

Other comprehensive income, net of tax	512		504		170		167
Total comprehensive income	$	437,687	$	344,121	$	193,428	$	148,730

Per share:
Basic earnings	$	2.85	$	2.11	$	1.28	$	0.91
Diluted earnings	$	2.81	$	2.01	$	1.26	$	0.87
Cash dividends declared	$	0.30	$	0.16	$	0.11	$	0.08

Weighted-average number of shares:
Basic	153,290		163,186		151,257		163,478
Diluted	155,733		171,127		153,173		171,562

See accompanying notes.

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Nine months ended July 31,
	2018			2017
Cash flow (used in) provided by operating activities:
Net income	$	437,175		$	343,617
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	18,724			18,423
Stock-based compensation	21,879			22,088
Income from unconsolidated entities	(53,913		)	(112,274		)
Distributions of earnings from unconsolidated entities	53,166			125,138
Income from foreclosed real estate and distressed loans	(1,269		)	(4,287		)
Deferred tax (benefit) provision	(19,747		)	59,266
Change in deferred tax valuation allowances				(32,154		)
Inventory impairments and write-offs	28,746			11,314
Other	208			2,299
Changes in operating assets and liabilities
Increase in inventory	(541,889		)	(228,887		)
Origination of mortgage loans	(941,336		)	(821,265		)
Sale of mortgage loans	979,715			979,625
Decrease in restricted cash	1,796			12,461
(Increase) decrease in receivables, prepaid expenses, and other assets	(123,521		)	46,941
Increase in customer deposits	39,900			64,252
Increase (decrease) in accounts payable and accrued expenses	24,428			(133,845		)
Increase in income taxes payable	3,698			55,273
Net cash (used in) provided by operating activities	(72,240		)	407,985
Cash flow provided by (used in) investing activities:
Purchase of property and equipment — net	(21,701		)	(22,401		)
Sale and redemption of marketable securities and restricted investments — net				18,049
Investments in unconsolidated entities	(15,189		)	(119,714		)
Return of investments in unconsolidated entities	93,669			139,346
Investment in foreclosed real estate and distressed loans	(519		)	(688		)
Return of investments in foreclosed real estate and distressed loans	3,934			12,429
Acquisition of a business				(85,183		)
Net cash provided by (used in) investing activities	60,194			(58,162		)
Cash flow provided by (used in) financing activities:
Proceeds from issuance of senior notes	400,000			455,483
Debt issuance costs for senior notes	(3,531		)	(4,446		)
Proceeds from loans payable	1,908,085			1,083,472
Principal payments of loans payable	(2,020,495		)	(1,513,078		)
Proceeds from stock-based benefit plans	9,731			57,958
Purchase of treasury stock	(426,895		)	(90,716		)
Dividends paid	(45,519		)	(26,016		)
Receipts related to noncontrolling interest, net	22
Net cash used in financing activities	(178,602		)	(37,343		)
Net (decrease) increase in cash and cash equivalents	(190,648		)	312,480
Cash and cash equivalents, beginning of period	712,829			633,715
Cash and cash equivalents, end of period	$	522,181		$	946,195

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, 2017 balance sheet amounts and disclosures included herein have been derived from our October 31, 2017 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, 2017 (“2017 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 July 31, 2018; the results of our operations for the nine-month and three-month periods ended July 31, 2018 and 2017; and our cash flows for the nine-month periods ended July 31, 2018 and 2017. 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 February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 and also requires entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. We elected to adopt ASU 2018-02 in the first quarter of fiscal 2018, and the adoption did not have a material effect on our consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 requires an employer to report the service cost component of pension and other post-retirement benefit costs in the same line item as other compensation costs arising from services rendered by the pertinent employees while the other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. We adopted ASU 2017-07 on November 1, 2017, and the adoption did not have a material effect on our consolidated financial statements and disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes and forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. We adopted ASU 2016-09 on November 1, 2017. Excess tax benefits or deficiencies for stock-based compensation are now reflected in our Condensed Consolidated Statements of Operations and Comprehensive Income as a component of income tax expense, whereas previously they were recognized in equity. We have also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of adopting ASU 2016-09, the impact of recognizing excess tax benefits and deficiencies in our Condensed Consolidated Statements of Operations and Comprehensive Income resulted in a $4.0 million reduction in our income tax expense in the nine-month period ended July 31, 2018. The remaining aspects of adopting ASU 2016-09 did not have a material impact on our financial statements and disclosures.

In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 is meant to clarify the scope of the original guidance within Subtopic 610-20 that was issued in connection with ASU 2014-09, as defined below, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 also added guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for our fiscal year beginning November 1, 2018 and we are required to

adopt ASU 2017-05 concurrent with the adoption of ASU 2014-09. We are currently evaluating the impact that the adoption of ASU 2017-05 may have on our consolidated financial statements and disclosures.

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. ASU 2014-09 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 our fiscal year beginning November 1, 2018, and, at that time, we expect to adopt the new standard under the modified retrospective approach. We do not believe the adoption of ASU 2014-09 will have a material impact on the amount or timing of our home building revenues. However, we currently expect that the adoption of ASU 2014-09 will result in the following changes:

•

Retained customer deposits are currently classified in “Other income-net” on our Condensed Consolidated Statements of Operations and Comprehensive Income. As of November 1, 2018, we expect these retained customer deposits will be reclassified to “Revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income. Prior period balances for retained customer deposits will not be reclassified and are not material to our condensed consolidated financial statements.

•

We currently capitalize certain costs related to our marketing efforts, including sales offices and model home upgrades and furnishings within “Inventory” on our Condensed Consolidated Balance Sheets and amortize such costs through “Selling, general, and administrative” on our Condensed Consolidated Statements of Operations and Comprehensive Income. As of November 1, 2018, we expect to reclassify approximately $105.0 million to “Property, construction, and office equipment, net” on our Condensed Consolidated Balance Sheets, primarily related to sales offices and model home improvement costs, that we plan to continue depreciating through “Selling, general, and administrative” on our Condensed Consolidated Statements of Operations and Comprehensive Income. Additionally, we expect to record a cumulative effect adjustment to retained earnings of approximately $25.0 million for certain other marketing costs that will no longer qualify for capitalization under the new guidance, and such costs will be expensed as incurred in the future.

We additionally expect our accounting for incomplete deliverables at the time a home closes may be impacted upon adoption of the new guidance, and we expect a change to the timing of recognition of revenues and profits on land sale transactions and certain management fees that we earn from our unconsolidated entities. We are currently quantifying the impact of these changes. We continue to evaluate the impact the adoption of ASU 2014-09 may have on other aspects of our business and on our consolidated financial statements and 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. In July 2018, the FASB issued ASU No. 2018-11, “Leases: Targeted Improvements” (“ASU 2018-11”), which provides an entity with the option to apply the transition provisions of the new standard at its adoption date instead of at its earliest comparative period presented. ASU 2016-02 also provides an entity with a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. ASU 2016-02, as amended by ASU 2018-11, is effective for our fiscal year beginning November 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, as amended by ASU 2018-11, may have on our consolidated financial statements and disclosures.

Reclassification

The Condensed Consolidated Statement of Cash Flows for the nine months ended July 31, 2017 was restated to reflect a reclassification of approximately $18.0 million of cash flow from “Net cash (used in) provided by operating activities” to “Net cash provided by (used in) investing activities” related to restricted investment activity. In addition, certain other prior period amounts have been reclassified to conform to the fiscal 2018 presentation.

2. Inventory

Inventory at July 31, 2018 and October 31, 2017 consisted of the following (amounts in thousands):



	July 31, 2018		October 31, 2017
Land controlled for future communities	$	126,288	$	87,158
Land owned for future communities	1,224,504		1,142,870
Operating communities	6,606,824		6,051,425
	$	7,957,616	$	7,281,453

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 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, 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.

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



	July 31, 2018		October 31, 2017
Land owned for future communities:
Number of communities	16		14
Carrying value (in thousands)	$	125,766	$	110,732
Operating communities:
Number of communities	1		6
Carrying value (in thousands)	$	2,733	$	26,749

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):



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017
Land controlled for future communities	$	1,073	$	1,479	$	696	$	697
Land owned for future communities	1,547		1,540		1,300		340
Operating communities	26,126		8,295		9,065		1,360
	$	28,746	$	11,314	$	11,061	$	2,397

See Note 11, “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.

At July 31, 2018, we evaluated our land purchase contracts, including those to acquire land for apartment developments, 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 July 31, 2018, we determined that 113 land purchase contracts, with an aggregate purchase price of $1.83 billion, on which we had made aggregate deposits totaling $109.6 million, were VIEs, and that we were not the primary beneficiary of any VIE related to our land purchase contracts. At October 31, 2017, we determined that 104 land purchase contracts, with an aggregate purchase price of $1.43 billion, on which we had made aggregate deposits totaling $65.6 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):



	Nine months ended July 31,						Three months ended July 31,
	2018			2017			2018			2017
Interest capitalized, beginning of period	$	352,049		$	369,419		$	349,918		$	376,213
Interest incurred	123,028			130,887			41,760			45,577
Interest expensed to cost of revenues	(128,915		)	(114,365		)	(50,003		)	(45,879		)
Interest expensed in other income	(2,259		)	(2,097		)	(1,259		)	(102		)
Interest capitalized on investments in unconsolidated entities	(5,423		)	(6,485		)	(1,821		)	(2,271		)
Previously capitalized interest transferred to investments in unconsolidated entities				(4,030		)
Previously capitalized interest on investments in unconsolidated entities transferred to inventory	1,687			979			1,572			770
Interest capitalized, end of period	$	340,167		$	374,308		$	340,167		$	374,308

3. Investments in Unconsolidated Entities

We have investments in various unconsolidated entities. These entities, which are structured as joint ventures, (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”), which includes our investment in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in distressed loans and real estate and provide financing and land banking to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).

The table below provides information as of July 31, 2018, 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		Gibraltar Joint Ventures		Total
Number of unconsolidated entities	7		4		13		5		29
Investment in unconsolidated entities	$	198,001	$	79,111	$	132,938	$	9,944	$	419,994
Number of unconsolidated entities with funding commitments by the Company	4		1		1		1		7
Company’s remaining funding commitment to unconsolidated entities	$	21,153	$	8,300	$	1,150	$	9,621	$	40,224

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at July 31, 2018, 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		3		12		19
Aggregate loan commitments	$	181,081	$	381,902	$	1,022,085	$	1,585,068
Amounts borrowed under loan commitments	$	166,156	$	255,842	$	793,135	$	1,215,133

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

Land Development Joint Ventures

During the nine months ended July 31, 2018, our Land Development Joint Ventures sold approximately 675 lots and recognized revenues of $176.4 million. We acquired 125 of these lots for $50.0 million. Our share of the joint venture income from the lots we acquired of $1.4 million was deferred by reducing our basis in those lots. During the nine months ended July 31, 2017, our Land Development Joint Ventures sold approximately 871 lots and recognized revenues of $215.9 million. We acquired 288 of these lots for $122.5 million. Our share of the income from the lots we acquired of $12.9 million was deferred by reducing our basis in those lots. We recognized other than temporary impairment charges in connection with one Land Development Joint

Venture of $4.0 million and $2.0 million in the nine months ended July 31, 2018 and 2017, respectively, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.

During the three months ended July 31, 2018, our Land Development Joint Ventures sold approximately 226 lots and recognized revenues of $73.7 million. We acquired 70 of these lots for $42.7 million. Our share of the joint venture income of $0.5 million from the lots we acquired was deferred by reducing our basis in those lots. During the three months ended July 31, 2017, our Land Development Joint Ventures sold approximately 362 lots and recognized revenues of $115.0 million. We acquired 126 of these lots for $76.3 million. Our share of the income of $5.9 million from the lots we acquired was deferred by reducing our basis in those lots. We recognized other than temporary impairment charges in connection with one Land Development Joint Venture of $4.0 million in the three months ended July 31, 2018, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statement of Operations and Comprehensive Income. There were no other than temporary impairment charges recognized in the three months ended July 31, 2017.

Home Building Joint Ventures

Our Home Building Joint Ventures are delivering homes in New York, New York, and Jupiter, Florida. During the nine months ended July 31, 2018 and 2017, our Home Building Joint Ventures delivered 73 homes with a sales value of $104.0 million, and 176 homes with a sales value of $451.6 million, respectively. During the three months ended July 31, 2018 and 2017, our Home Building Joint Ventures delivered 19 homes with a sales value of $36.0 million and 33 homes with a sales value of $81.0 million, respectively.

Rental Property Joint Ventures

As of July 31, 2018, our Rental Property Joint Ventures owned 14 for-rent apartment projects and a hotel, which are located in the metro Boston, Massachusetts to metro Washington, D.C. corridor. At July 31, 2018, our joint ventures had approximately 2,500 units that were occupied or ready for occupancy, 750 units in the lease-up stage, and 1,850 units under development. In addition, we either own, have under contract, or under a letter of intent approximately 9,800 units, of which 750 units are under active development. We intend to develop these units in joint ventures with unrelated parties in the future.

In the third quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 289-unit luxury for-rent residential apartment project in a suburb of Boston, Massachusetts. We contributed cash of $15.9 million for our initial 85% ownership interest in this joint venture. Due to our controlling financial interest, given our power to direct the activities that most significantly impact the joint venture’s performance and our obligation to absorb expected losses or receive benefits from the joint venture, we have consolidated this joint venture at July 31, 2018. The carrying value of the joint venture’s assets totaling $18.7 million are reflected in “Receivables, prepaid expenses, and other assets” in our Condensed Consolidated Balance Sheet as of July 31, 2018. Our partner’s 15% interest of $2.8 million in the joint venture is reflected as a component of “Noncontrolling interest” in our Condensed Consolidated Balance Sheet as of July 31, 2018. The joint venture expects to admit an additional investor and secure third-party financing at a later date. At such time, it is intended that the entity will no longer be consolidated.

In the third quarter of fiscal 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $65.5 million. The joint venture had owned, developed, and operated a multifamily rental property located in Westborough, Massachusetts. In connection with the sale, the joint venture’s outstanding loan balance of $30.1 million was repaid. We received cash of $12.1 million and recognized a gain of $8.7 million in the nine months and three months ended July 31, 2018, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.

In the second quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 308-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C. Prior to the formation of this joint venture, we acquired the property and incurred approximately $27.4 million of land and land development costs. Our partner acquired a 50% interest in this entity for $17.8 million, including subsequent reimbursement by our partner for development and construction costs incurred by us prior to the sale. As a result of the sale of 50% of our interest to our partner, we recognized a gain of $1.0 million in the second quarter of fiscal 2018. In addition, due to our continued involvement in the joint venture primarily through guarantees provided on the joint venture’s debt, we deferred $3.8 million of gain from the sale. Concurrent with its formation, the joint venture entered into a $72.7 million construction loan agreement to finance the development of this project. At July 31, 2018, we had an investment of $11.7 million in this joint venture. At July 31, 2018, there were $5.8 million of outstanding borrowings under the construction loan facility.

In the first quarter of fiscal 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $219.0 million. The joint venture had owned, developed, and operated a student housing community in College Park, Maryland. In connection with the sale, the joint venture’s existing $110.0 million loan was repaid. We received cash of $39.3 million and

recognized a gain of $30.8 million in the nine months ended July 31, 2018, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.

In the first quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 112-unit luxury for-rent residential apartment project in Belmont, Massachusetts. Prior to the formation of this joint venture, we acquired the property and incurred approximately $22.1 million of land and land development costs. Our partner acquired a 50% interest in this entity for $11.0 million and we subsequently received cash of $10.8 million from our partner. At January 31, 2018, our partner had the right, if certain events did not occur, to exit the venture and require us to repurchase their interest. Given this contingency, as of January 31, 2018, our investment, net of our partner’s contribution, was recorded in “Receivables, prepaid expenses, and other assets” on our Condensed Consolidated Balance Sheet. This right of our partner expired in the second quarter of fiscal 2018 and, accordingly, during the second quarter of fiscal 2018, our net investment in this property of $11.3 million was reclassified to “Investments in unconsolidated entities” on our Condensed Consolidated Balance Sheet. In March 2018, the joint venture entered into a $42.4 million construction loan agreement to provide financing for the development of this property. At July 31, 2018, this joint venture had $7.2 million of outstanding borrowings under the construction loan facility. At July 31, 2018, we had an investment of $17.1 million in this joint venture.

In the second quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated third party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $112.2 million construction loan with a $133.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $42.9 million and recognized a gain of $20.5 million in the nine months ended July 31, 2017 which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At July 31, 2018, we had a 25% interest and a $5.9 million investment in this joint venture.

In the first quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $54.1 million construction loan with a $56.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $12.0 million and recognized a gain of $6.2 million in the nine months ended July 31, 2017, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At July 31, 2018, we had a 25% interest and a $2.5 million investment in this joint venture.

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 current and former members of our senior management; and one-third by an unrelated party. As of July 31, 2018, 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 amount of $1.7 million and $1.4 million in the nine-month periods ended July 31, 2018 and 2017, respectively. We recognized fees of $0.6 million in both the three-month periods ended July 31, 2018 and 2017.

Subsequent Events

In August 2018, the Trust sold one of its assets to an unrelated party for $193.0 million. The joint venture had owned, developed, and operated a multifamily rental property located in suburban Washington, D.C. In connection with the sale, the joint venture’s outstanding loan balance of $99.5 million was repaid. From our investment in the Trust, we received cash of $27.7 million and expect to recognize a gain from the sale of approximately $27.7 million in the fourth quarter of fiscal 2018.

In August 2018, we entered into a joint venture with an unrelated party to develop a 1,244-unit luxury for-rent residential apartment project in Washington, D.C. Prior to the formation of this joint venture, we had acquired the property and incurred approximately $65.4 million of land and land development costs. Our partner acquired a 50% interest in this entity for $32.9 million. We have an initial investment in the joint venture of $32.9 million. The joint venture expects to secure third-party financing in the near future.

Gibraltar Joint Ventures

We, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), are a member in several ventures with an institutional investor to provide builders and developers with land banking and venture capital. These ventures finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies. We also are a member in a separate venture with the same institutional investor, which purchased, from Gibraltar, certain foreclosed real estate owned and distressed loans in fiscal 2016. Our ownership interest in these ventures is approximately 25%. As of July 31, 2018, we had an aggregate investment of $9.9 million in these ventures.

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 July 31, 2018, in the event we become legally obligated to perform under a guarantee of an obligation of an unconsolidated entity due to a triggering event, the collateral in such entity should be sufficient to repay a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the venture. At July 31, 2018, certain unconsolidated entities have loan commitments aggregating $1.14 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $293.0 million to be our maximum exposure related to repayment and carry cost guarantees. At July 31, 2018, the unconsolidated entities had borrowed an aggregate of $767.1 million, of which we estimate $242.5 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 11 months to 44 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.

As of July 31, 2018, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $5.3 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.

Variable Interest Entities

At July 31, 2018 and October 31, 2017, we determined that nine and eight, respectively, of our joint ventures were VIEs under the guidance of ASC 810, “Consolidation.” For eight of these VIEs as of July 31, 2018 and October 31, 2017, we concluded that we were not the primary beneficiary of these VIEs because the power to direct the activities of such VIEs that most significantly impact their performance was either shared by us and such VIEs’ other partners or such activities were controlled by our partner. For VIEs where the power to direct significant activities is shared, 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.

As discussed under “Rental Property Joint Ventures” above, we consolidated one joint venture as of July 31, 2018. The joint venture was determined to be a VIE due to its current inability to finance its activities without additional subordinated financial support as well as our partner’s inability to participate in the significant decisions of the joint venture in addition to their lack of substantive kick-out rights. We further concluded that we were the primary beneficiary of this VIE due to our controlling financial interest in such venture as we have the power to direct the activities that most significantly impact the joint venture’s performance and the obligation to absorb expected losses or receive benefits from the joint venture. The assets of this VIE can only be used to settle the obligations of the VIE. In addition, in the event additional contributions are required to be funded to the joint venture prior to the admission of an additional investor at a future date, we will fund 100% of such contributions, including our partner’s pro rata share, which will be funded through an interest-bearing loan.

At July 31, 2018 and October 31, 2017, our investments in the unconsolidated entities deemed to be VIEs totaled $26.6 million and $35.9 million, respectively. At July 31, 2018, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.8 million of additional commitments to the VIEs. Of our potential exposure for these loan guarantees, $70.0 million is related to repayment and carry cost guarantees, of which $68.3 million was borrowed at July 31, 2018. At October 31, 2017, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.5 million of additional commitments to the VIEs. At October 31, 2017, $70.0 million of our potential exposure for these loan guarantees was related to repayment and carry cost guarantees, of which $61.3 million was borrowed at October 31, 2017.

Joint Venture Condensed Financial Information

The Condensed Balance Sheets, as of the dates indicated, and the Condensed Statements of Operations, for the periods indicated, for the unconsolidated entities in which we have an investment are included below (in thousands):

Condensed Balance Sheets:



	July 31, 2018		October 31, 2017
Cash and cash equivalents	$	113,526	$	153,828
Inventory	1,042,117		1,148,209
Loans receivable, net	9,758		22,495
Rental properties	788,206		970,497
Rental properties under development	394,620		190,541
Real estate owned	26,546		53,902
Other assets	165,600		156,618
Total assets	$	2,540,373	$	2,696,090
Debt, net of deferred financing costs	$	1,201,543	$	1,199,583
Other liabilities	173,826		135,292
Members’ equity	1,141,773		1,332,285
Noncontrolling interest	23,231		28,930
Total liabilities and equity	$	2,540,373	$	2,696,090
Company’s net investment in unconsolidated entities (1)	$	419,994	$	481,758

(1)

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 investments in unconsolidated entities; interest capitalized on our investments; the estimated fair value of the guarantees provided to the joint ventures; gains recognized from the sale of our ownership interests; and distributions from entities in excess of the carrying amount of our net investment.

Condensed Statements of Operations:



	Nine months ended July 31,						Three months ended July 31,
	2018			2017			2018			2017
Revenues	$	393,522		$	690,441		$	117,239		$	189,714
Cost of revenues	303,209			389,996			93,799			99,102
Other expenses	64,462			62,193			19,880			22,472
Total expenses	367,671			452,189			113,679			121,574
Gain on disposition of loans and real estate owned	52,444			39,530			25,964			7,891
Income from operations	78,295			277,782			29,524			76,031
Other income	106,141			11,175			25,275			1,678
Income before income taxes	184,436			288,957			54,799			77,709
Income tax provision	587			7,453			238			1,138
Net income including earnings from noncontrolling interests	183,849			281,504			54,561			76,571
Less: income attributable to noncontrolling interest	(28,017		)	(16,417		)	(16,079		)	(3,328		)
Net income attributable to controlling interest	$	155,832		$	265,087		$	38,482		$	73,243
Company’s equity in earnings of unconsolidated entities (2)	$	53,913		$	112,274		$	12,469		$	19,925

(2)

Differences between our equity in earnings of unconsolidated entities and the underlying net income 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; unrealized gains on our retained joint venture interests; 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. Receivables, Prepaid Expenses, and Other Assets

Receivables, prepaid expenses, and other assets at July 31, 2018 and October 31, 2017, consisted of the following (amounts in thousands):



	July 31, 2018		October 31, 2017
Expected recoveries from insurance carriers and others	$	139,413	$	153,774
Improvement cost receivable	100,690		99,311
Escrow cash held by our captive title company	33,037		45,923
Properties held for rental apartment and commercial development	255,616		146,288
Prepaid expenses	21,787		23,223
Other	71,859		73,698
	$	622,402	$	542,217

See Note 6, “Accrued Expenses,” for additional information regarding the expected recoveries from insurance carriers and others.

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

Loans Payable

At July 31, 2018 and October 31, 2017, loans payable consisted of the following (amounts in thousands):



	July 31, 2018			October 31, 2017
Senior unsecured term loan	$	500,000		$	500,000
Loans payable – other	195,820			139,116
Deferred issuance costs	(1,411		)	(1,700		)
	$	694,409		$	637,416

Senior Unsecured Term Loan

We have a $500.0 million, five-year senior unsecured term loan facility (the “Term Loan Facility”) with a syndicate of banks. The Term Loan Facility, as amended, matures in August 2021. At July 31, 2018, the interest rate on borrowings was 3.48% 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.

Credit Facility

We have a $1.295 billion, unsecured, five-year revolving credit facility (the “Credit Facility”) with a syndicate of banks. The Credit Facility is scheduled to expire in May 2021. We and substantially all of our 100%-owned home building subsidiaries are guarantors under the Credit Facility.

Under the terms of the Credit Facility, at July 31, 2018, 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 $2.41 billion. Under the terms of the Credit Facility, at July 31, 2018, our leverage ratio was approximately 0.71 to 1.00, and our tangible net worth was approximately $4.48 billion. Based upon the limitations related to our repurchase of common stock in the Credit Facility, our ability to repurchase our common stock was limited to approximately $2.39 billion as of July 31, 2018.

At July 31, 2018, we had no outstanding borrowings under the Credit Facility and had approximately $174.0 million of outstanding letters of credit that were issued under the Credit Facility. At July 31, 2018, the interest rate on borrowings under the Credit Facility would have been 3.58% per annum.

Loans Payable – Other

“Loans payable – other” primarily 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 July 31, 2018, the weighted-average interest rate on “Loans payable – other” was 4.74% per annum.

Senior Notes

At July 31, 2018, we had eight issues of senior notes outstanding with an aggregate principal amount of $2.87 billion. In January 2018, we issued $400.0 million principal amount of 4.350% Senior Notes due 2028. We received $396.4 million of net proceeds from the issuance of these senior notes. In March 2017, we issued $300.0 million principal amount of 4.875% Senior Notes due 2027 (“4.875% Senior Notes”). We received $297.2 million of net proceeds from the issuance of these senior notes. In June 2017, we issued an additional $150.0 million principal amount of the previously established 4.875% Senior Notes at a premium to par value plus accrued interest. We received $156.4 million of net proceeds from the issuance of these additional notes.

Mortgage Company Loan Facility

In October 2017, TBI Mortgage^® Company (“TBI Mortgage”), our wholly owned mortgage subsidiary, entered into a mortgage warehousing agreement (the “Warehousing Agreement”) with a bank to finance the origination of mortgage loans by TBI Mortgage. The Warehousing Agreement is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” In December 2017, the Warehousing Agreement was amended to provide for loan purchases up to $75.0 million, subject to certain sublimits. Prior to this amendment, the Warehousing Agreement provided for loan purchases up to $100.0 million. In addition, the Warehousing Agreement, as amended, provides for an accordion feature under which TBI Mortgage may request that the aggregate commitments under the Warehousing Agreement be increased to an amount up to $150.0 million for a short period of time. The Warehousing Agreement, as amended, expires on December 6, 2018, and borrowings thereunder bear interest at LIBOR plus 1.90% per annum. At July 31, 2018, the interest rate on the Warehousing Agreement, as amended, was 3.98% per annum.

6. Accrued Expenses

Accrued expenses at July 31, 2018 and October 31, 2017 consisted of the following (amounts in thousands):



	July 31, 2018		October 31, 2017
Land, land development, and construction	$	166,034	$	146,168
Compensation and employee benefits	150,679		149,145
Escrow liability	33,105		45,209
Self-insurance	163,330		149,303
Warranty	277,753		329,278
Deferred income	38,102		42,798
Interest	45,809		36,035
Commitments to unconsolidated entities	8,945		8,870
Other	52,327		52,547
	$	936,084	$	959,353

As previously disclosed in Note 7, “Accrued Expenses” in our 2017 Form 10-K, in response to a significant number of water intrusion claims received in fiscal 2014 and thereafter from owners of stucco and non-stucco homes in communities located in Pennsylvania and Delaware (which are in our Mid-Atlantic region), we reviewed homes built in these communities from 2002 through 2013 to determine whether repairs related to these homes would likely be needed.

Our quarterly review process includes an analysis of many factors in these communities to determine whether a claim is likely to be received and the estimated costs to resolve any such claim, including: the closing dates of the homes; the number of claims received; our inspection of homes; an estimate of the number of homes we expect to repair; the type and cost of repairs that have been performed in each community; the estimated costs to remediate pending and future claims; the expected recovery from our insurance carriers and suppliers; and the previously recorded amounts related to these claims. We also monitor legal developments relating to these types of claims and review the volume and relative merits of claims in litigation or arbitration.

Based on our review performed as of July 31, 2018, we determined that no adjustments to our previously recorded estimated costs were necessary. Our estimates are predicated on several assumptions for which there is uncertainty including assumptions about, but not limited to, the number of homes to be repaired, the extent of repairs needed, the repair methodology, the cost of those repairs, outcomes of pending litigations, arbitrations, and investigations, and expected recoveries from insurance carriers and suppliers. Due to the degree of judgment required and the potential for variability in the underlying assumptions, it is reasonably possible that our actual costs and recoveries could differ from those recorded, such differences could be material, and therefore, we are unable to estimate the range of any such differences. As of July 31, 2018 and 2017, our recorded aggregate estimated repair costs to be incurred for known and unknown water intrusion claims was $324.4 million, which

remains unchanged from the amounts recorded as of October 31, 2017 and 2016. As of July 31, 2018, we recorded an aggregate of $152.6 million of estimated recoveries from our insurance carriers and suppliers for these claims, which also remains unchanged from the amounts recorded as of October 31, 2017 and 2016. We believe our collection of our recorded insurance receivables is probable based on the legal merits that support our coverage positions and the high credit ratings of our carriers; however, due to the complexity of the underlying claims and the variability of the other factors as described above, it is reasonably possible that our actual insurance recoveries could materially differ from those recorded.

Our recorded remaining estimated repair costs related to water intrusion were approximately $199.0 million as of July 31, 2018 and $251.8 million as of October 31, 2017. Our recorded remaining expected recoveries from insurance carriers and suppliers were approximately $95.0 million as of July 31, 2018 and $119.7 million as of October 31, 2017.

The table below provides, for the periods indicated, a reconciliation of the changes in our warranty accrual (amounts in thousands):



	Nine months ended July 31,						Three months ended July 31,
	2018			2017			2018			2017
Balance, beginning of period	$	329,278		$	370,992		$	297,343		$	355,934
Additions – homes closed during the period	24,588			21,220			9,901			8,519
Addition – liabilities acquired in a business acquisition				1,111
Increase in accruals for homes closed in prior years	4,770			5,539			1,615			2,351
Reclassification from other accruals				1,082
Charges incurred	(80,883		)	(55,579		)	(31,106		)	(22,439		)
Balance, end of period	$	277,753		$	344,365		$	277,753		$	344,365

7. Income Taxes

We recorded income tax provisions of $100.3 million and $168.9 million for the nine months ended July 31, 2018 and 2017, respectively. The effective tax rate was 18.7% for the nine months ended July 31, 2018, compared to 33.0% for the nine months ended July 31, 2017. For the three months ended July 31, 2018 and 2017, we recorded income tax provisions of $59.8 million and $55.0 million, respectively. The effective tax rate for the three months ended July 31, 2018 was 23.6%, compared to 27.0% for the three months ended July 31, 2017. The income tax provision for the nine months and three months ended July 31, 2018 reflects the impact of the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law on December 22, 2017. The income tax provision for the nine months ended July 31, 2018 also reflects excess tax benefits related to stock-based compensation resulting from the adoption of ASU 2016-09; excess tax benefits are now reflected as a component of income taxes. The income tax provisions for all periods included a provision for state income taxes; interest accrued on anticipated tax assessments; tax benefits related to the utilization of domestic production activities deductions; and other permanent differences.

The Tax Act, among other changes, reduced the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. For companies with a fiscal year that does not end on December 31, the change in law requires the application of a blended tax rate for the year of the change. Our blended tax rate for our fiscal year ending October 31, 2018 will be 23.3%. Thereafter, the applicable statutory rate will be 21%. ASC 740, “Income Taxes” (“ASC 740”), requires all companies to reflect the effects of the new law in the period in which the law was enacted. Accordingly, we reduced the statutory tax rate applied to earnings for the nine months and three months ended July 31, 2018 from 35% to 23.3%. In addition, we remeasured our net deferred tax liability for the tax law change, which resulted in income tax benefits of $36.2 million and $5.0 million in the nine months and three months ended July 31, 2018, respectively. Since the Tax Act includes many broad and complex changes to the U.S. tax code, we continue to analyze the impact of the provisions of the Tax Act on our financial statements and disclosures.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting relating to the Tax Act under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements.

In connection with our initial analysis of the impact of the Tax Act on the three months ended January 31, 2018, and in accordance with SAB 118, we recorded a provisional net tax benefit of $31.2 million related to the re-measurement of our net deferred tax liability based on the rates at which our deferred tax balances are expected to reverse in the future. As of July 31, 2018, we increased the provisional net tax benefit by $5.0 million due primarily to the results included in the filing of our fiscal

2017 tax return in the third quarter of fiscal 2018. In addition, we are still analyzing certain aspects of the Tax Act including the impact of the Tax Act on our deferred tax assets and liabilities, including the estimate of the reversal of existing deferred tax assets and deferred tax liabilities at varying statutory rates and an estimate of the impact of the grandfathering provisions related to performance based executive compensation. The final impact of the Tax Act may differ significantly from this provisional amount, due to, among other things, changes in interpretations and assumptions made by us as a result of additional information and additional guidance that may be issued by the U.S. Department of the Treasury or any other relevant governing body. Any change to the provisional amount would be reflected as a discrete benefit or expense in the quarter that the adjustment is identified.

We currently operate in 21 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. We estimate our rate for the full fiscal year 2018 for state income taxes will be approximately 7.2%. Our state income tax rate for the full fiscal year 2017 was 6.5%.

At July 31, 2018, we had $17.6 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):



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017
Total stock-based compensation expense recognized	$	21,879	$	22,088	$	6,532	$	6,503
Income tax benefit recognized	$	6,236	$	8,718	$	1,877	$	2,624

At July 31, 2018 and October 31, 2017, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $27.6 million and $24.2 million, respectively.

9. Stock Repurchase Program and Cash Dividend

Effective December 13, 2017, our Board of Directors terminated our previous share repurchase program and authorized, under a new repurchase program, the repurchase of 20 million shares of our common stock in open market transactions or otherwise for general corporate purposes, including to obtain shares for the Company’s equity award and other employee benefit plans. The Board of Directors did not fix any expiration date for this repurchase program.

The table below provides, for the periods indicated, information about our share repurchase programs:



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017
Number of shares purchased (in thousands)	9,874		2,492		3,653		1,929
Average price per share	$	43.30	$	36.40	$	37.24	$	39.02
Remaining authorization at July 31 (in thousands)	13,223		13,347		13,223		13,347

Approximately 3.1 million shares purchased in the nine months ended July 31, 2018 were acquired under the previous share repurchase program.

Subsequent to July 31, 2018, we repurchased approximately 978,000 shares of our common stock at an average price of $36.32 per share.

On February 21, 2017, our Board of Directors approved the initiation of quarterly cash dividends to shareholders. During the nine months ended July 31, 2018 and 2017, we declared and paid dividends of $0.30 and $0.16 per share, respectively. During the three months ended July 31, 2018 and 2017, we declared and paid dividends of $0.11 and $0.08 per share, respectively.

10. Earnings per Share Information

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



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017
Numerator:
Net income as reported	$	437,175	$	343,617	$	193,258	$	148,563
Plus interest and costs attributable to 0.5% Exchangeable Senior Notes, net of income tax benefit (a)			1,147				378
Numerator for diluted earnings per share	$	437,175	$	344,764	$	193,258	$	148,941

Denominator:
Basic weighted-average shares	153,290		163,186		151,257		163,478
Common stock equivalents (b)	2,443		2,077		1,916		2,210
Shares attributable to 0.5% Exchangeable Senior Notes (a)			5,864				5,874
Diluted weighted-average shares	155,733		171,127		153,173		171,562

Other information:
Weighted-average number of antidilutive options and restricted stock units (c)	486		2,556		635		600
Shares issued under stock incentive and employee stock purchase plans	899		2,762		19		788


(a)	On September 15, 2017, we redeemed these notes for cash.


(b)	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 upon the conversion of restricted stock units under our equity award programs.


(c)	Weighted-average number of antidilutive options and restricted stock units are based upon the average closing price of our common stock on the New York Stock Exchange for the period.

11. 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	July 31, 2018			October 31, 2017
Mortgage Loans Held for Sale	Level 2	$	94,291		$	132,922
Forward Loan Commitments — Mortgage Loans Held for Sale	Level 2	$	324		$	861
Interest Rate Lock Commitments (“IRLCs”)	Level 2	$	(1,232	)	$	(1,293	)
Forward Loan Commitments — IRLCs	Level 2	$	1,232		$	1,293

At July 31, 2018 and October 31, 2017, the carrying value of cash and cash equivalents, restricted cash, and customer deposits approximated fair value.

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 July 31, 2018	$	93,481	$	94,291	$	810
At October 31, 2017	$	131,861	$	132,922	$	1,061

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 inventory was determined using Level 3 criteria. See Note 1, “Significant Accounting Policies – Inventory,” in our 2017 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 2018:
January 31	381 - 1,029	7 - 10	13.8% - 19.0%
April 30	485 - 522	10 - 16	16.9%
July 31 (1)	–	–	–

Fiscal 2017:
January 31	692 - 880	4 - 12	16.3%
April 30	827 - 856	6 - 11	16.3%
July 31	465 - 754	3 - 10	16.5% - 19.5%
October 31	467 - 540	12 - 30	16.4%


(1)	The impairment charges recognized were related to our decisions to sell lots in a bulk sale in certain communities rather than sell and construct homes as previously intended. The sale price per lot used in the fair value determination for these bulk sales ranged from $10,000 to $155,000.

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 2018:
January 31	64	5	$	13,318	$	3,736
April 30 (2)	65	4	$	21,811	13,325
July 31 (3)	55	5	$	43,063	9,065
					$	26,126
Fiscal 2017:
January 31	57	2	$	8,372	$	4,000
April 30	46	6	$	25,092	2,935
July 31	53	4	$	5,965	1,360
October 31	51	1	$	6,982	1,500
					$	9,795


(2)	Includes $12.0 million of impairments from one community located in our North segment.


(3)	Includes $7.3 million of impairments from two communities located in our Mid-Atlantic segment.

Debt

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



		July 31, 2018				October 31, 2017
	Fair value hierarchy	Book value		Estimated fair value		Book value		Estimated fair value
Loans payable (a)	Level 2	$	695,820	$	697,187	$	639,116	$	639,088
Senior notes (b)	Level 1	2,869,876		2,833,514		2,469,876		2,626,131
Mortgage company loan facility (c)	Level 2	82,274		82,274		120,145		120,145
		$	3,647,970	$	3,612,975	$	3,229,137	$	3,385,364


(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.

12. Other Income – Net

The table below provides the significant components of other income – net (amounts in thousands):



	Nine months ended July 31,					Three months ended July 31,
	2018		2017			2018		2017
Interest income	$	5,259	$	3,834		$	1,967	$	1,904
Income from ancillary businesses	10,209		13,205			2,753		3,489
Management fee income from home building unconsolidated entities, net	9,600		10,448			2,175		2,477
Retained customer deposits	4,951		4,461			796		1,407
Income from land and other sales	4,175		7,503			888		2,417
Other	1,562		(1,344		)	2,386		(276		)
Total other income – net	$	35,756	$	38,107		$	10,965	$	11,418

Management fee income from home building unconsolidated entities presented above primarily represents fees earned by Toll Brothers City Living^® (“City Living”) and traditional home building operations. In addition, in the nine-month periods ended July 31, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $5.8 million and $4.2 million, respectively. In the three-month periods ended July 31, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $1.9 million and $1.4 million, respectively. Fees earned by our apartment living operations are included in income from ancillary businesses.

Income from ancillary businesses is generated by our mortgage, title, landscaping, security monitoring, Gibraltar, 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):



	Nine months ended July 31,				Three months ended July 31,
	2018		2017		2018		2017
Revenues	$	103,049	$	96,536	$	37,815	$	35,242
Expenses	$	92,840	$	83,331	$	35,062	$	31,753

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



	Nine months ended July 31,						Three months ended July 31,
	2018			2017			2018			2017
Revenues	$	56,136		$	151,470		$	10,949		$	4,633
Expenses	(48,127		)	(148,625		)	(10,061		)	(2,420		)
Deferred gain on land sale to joint venture	(3,834		)
Deferred gain recognized				4,658						204
Income from land and other sales	$	4,175		$	7,503		$	888		$	2,417

Land sale revenues for the nine months ended July 31, 2018 include $28.8 million related to in substance real estate sale transactions which resulted in two Rental Property Joint Ventures in which we have a 50% interest in each. On one of these transactions, we recognized a gain of $1.0 million in the second quarter of fiscal 2018. In addition, due to our continued involvement in the joint venture primarily through guarantees provided on the joint venture’s debt, we deferred $3.8 million of gain from the sale in the nine-month period ended July 31, 2018. We expect to recognize this deferred gain as the related guarantees expire.

Land sale revenues for the nine months ended July 31, 2017 include $143.3 million related to an in substance real estate sale transaction which resulted in a new Home Building Joint Venture in which we have a 20% interest. No gain or loss was realized on the sale. The deferred gains recognized in the fiscal 2017 periods relate to the sale of a property in fiscal 2015 to a Home Building Joint Venture in which we had a 25% interest. Due to our continued involvement in this unconsolidated entity through our ownership interest and guarantees provided on the entity’s debt, we deferred the $9.3 million gain realized on the sale. We recognized the gain as units were sold to the ultimate home buyers which is included in deferred gains recognized above. In the fourth quarter of fiscal 2017, we purchased the remaining inventory from this Home Building Joint Venture. The remaining unamortized deferred gain was used to reduce the basis of the inventory acquired.

13. 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.

In April 2017, the SEC informed the Company that it was conducting an investigation and requested that we voluntarily produce documents and information relating to our estimated repair costs for stucco and other water intrusion claims in fiscal 2016. The Company has produced detailed information and documents in response to this request. See Note 6, “Accrued Expenses” for additional information regarding these warranty charges. In March 2018, the Pennsylvania Attorney General informed the Company that it was conducting a review of our construction of stucco homes in Pennsylvania after January 1, 2005 and requested that we voluntarily produce documents and information. The Company will produce documents and information in response to this request. Management cannot at this time predict the eventual scope or outcome of these matters.

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



	July 31, 2018		October 31, 2017
Aggregate purchase commitments:
Unrelated parties	$	2,361,064	$	1,986,276
Unconsolidated entities that the Company has investments in	178,065		248,801
Total	$	2,539,129	$	2,235,077

Deposits against aggregate purchase commitments	$	157,488	$	97,706
Credits to be received from unconsolidated entities	101,857		134,630
Additional cash required to acquire land	2,279,784		2,002,741
Total	$	2,539,129	$	2,235,077
Amount of additional cash required to acquire land included in accrued expenses	$	683	$	4,329

In addition, we expect to purchase approximately 2,300 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 July 31, 2018, we also had purchase commitments to acquire land for apartment developments of approximately $190.0 million, of which we had outstanding deposits in the amount of $10.1 million. We intend to develop these projects in joint ventures with unrelated parties in the future.

We have additional land parcels under option that have been excluded from the aggregate purchase commitments 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.

Investments in Unconsolidated Entities

At July 31, 2018, 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.

Surety Bonds and Letters of Credit

At July 31, 2018, we had outstanding surety bonds amounting to $731.3 million, primarily related to our obligations to governmental entities to construct improvements in our communities. We estimate that approximately $345.1 million of work remains on these improvements. We have an additional $181.6 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 July 31, 2018, we had outstanding letters of credit of $174.0 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 July 31, 2018, we had agreements of sale outstanding to deliver 7,100 homes with an aggregate sales value of $6.48 billion.

Mortgage Commitments

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



	July 31, 2018		October 31, 2017
Aggregate mortgage loan commitments:
IRLCs	$	673,305	$	350,740
Non-IRLCs	1,515,409		1,146,872
Total	$	2,188,714	$	1,497,612
Investor commitments to purchase:
IRLCs	$	673,305	$	350,740
Mortgage loans held for sale	85,907		125,710
Total	$	759,212	$	476,450

14. Information on 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 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, Idaho, Nevada, Utah, and Washington

California: California

In the first quarter of fiscal 2018, we acquired our first parcel of land in Salt Lake City, Utah. We commenced operations in Utah in the third quarter of fiscal 2018.

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



	Nine months ended July 31,						Three months ended July 31,
	2018			2017			2018			2017
Revenues:
Traditional Home Building:
North	$	626,719		$	560,812		$	266,226		$	225,829
Mid-Atlantic	765,925			692,457			304,060			281,915
South	711,466			591,211			299,259			253,904
West	989,877			821,241			382,455			307,406
California	1,336,183			928,303			610,737			335,224
Traditional Home Building	4,430,170			3,594,024			1,862,737			1,404,278
City Living	257,850			193,127			50,616			98,631
Total	$	4,688,020		$	3,787,151		$	1,913,353		$	1,502,909

Income (loss) before income taxes:
Traditional Home Building:
North	$	23,276		$	37,042		$	21,240		$	16,436
Mid-Atlantic	54,958			69,171			20,614			35,628
South	74,006			67,496			34,729			33,566
West	138,773			111,002			60,120			43,180
California	286,797			199,232			140,278			72,703
Traditional Home Building	577,810			483,943			276,981			201,513
City Living	60,266			131,782			13,617			46,750
Corporate and other	(100,633		)	(103,161		)	(37,501		)	(44,689		)
Total	$	537,443		$	512,564		$	253,097		$	203,574

“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 our Rental Property Joint Ventures and Gibraltar Joint Ventures.

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



	July 31, 2018		October 31, 2017
Traditional Home Building:
North	$	1,062,941	$	1,074,969
Mid-Atlantic	1,216,005		1,121,013
South	1,291,591		1,184,956
West	1,561,175		1,275,298
California	2,908,607		2,630,041
Traditional Home Building	8,040,319		7,286,277
City Living	540,532		647,174
Corporate and other	1,368,369		1,511,774
Total	$	9,949,220	$	9,445,225

“Corporate and other” is comprised principally of cash and cash equivalents, restricted cash, deferred tax assets, investments in our Rental Property Joint Ventures, expected recoveries from insurance carriers and suppliers, our Gibraltar investments and operations, manufacturing facilities, and our mortgage and title subsidiaries.

15. 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):



	Nine months ended July 31,
	2018			2017
Cash flow information:
Interest paid, net of amount capitalized	$	7,191		$	3,142
Income tax payments	$	116,638		$	88,281
Income tax refunds	$	322		$	1,719
Noncash activity:
Cost of inventory acquired through seller financing or municipal bonds, net	$	142,003		$	25,880
Financed portion of land sale				$	625
(Increase) decrease in inventory for capitalized interest, our share of earnings, and allocation of basis difference in land purchased from unconsolidated entities	$	(253	)	$	12,235
Rental property acquired by capital land lease				$	7,167
Deferred tax decrease related to stock-based compensation activity included in additional paid-in capital				$	5,119
Transfer of other assets to inventory	$	20,763
Transfer of inventory to investment in unconsolidated entities				$	36,256
Transfer of other assets to investment in unconsolidated entities	$	21,546
Reclassification of deferred income from accrued expenses to investment in unconsolidated entities	$	5,995
Increase in other assets for noncontrolling interest in VIE	$	2,801
Miscellaneous (decreases) increases to investments in unconsolidated entities	$	(311	)	$	1,977
Acquisition of a Business:
Fair value of assets purchased				$	90,560
Liabilities assumed				$	5,377
Cash paid				$	85,183

16. Supplemental Guarantor Information

At July 31, 2018, our 100%-owned subsidiary, Toll Brothers Finance Corp. (the “Subsidiary Issuer”), has issued the following outstanding Senior Notes (amounts in thousands):



	Original amount issued and amount outstanding
4.0% Senior Notes due December 31, 2018	$	350,000
6.75% Senior Notes due November 1, 2019	$	250,000
5.875% Senior Notes due February 15, 2022	$	419,876
4.375% Senior Notes due April 15, 2023	$	400,000
5.625% Senior Notes due January 15, 2024	$	250,000
4.875% Senior Notes due November 15, 2025	$	350,000
4.875% Senior Notes due March 15, 2027	$	450,000
4.350% Senior Notes due February 15, 2028	$	400,000

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 these Senior Notes. 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.

As of October 31, 2017, one of our 100%-owned subsidiaries was released from its guarantee obligation on these Senior Notes. The Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) and of Cash Flows for the nine months and three months ended July 31, 2017 presented below has been retroactively restated to reflect this subsidiary as a Nonguarantor Subsidiary.

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 July 31, 2018:



	Toll Brothers, Inc.	Subsidiary Issuer	Guarantor Subsidiaries	Nonguarantor Subsidiaries	Eliminations		Consolidated
ASSETS
Cash and cash equivalents	—	—	333,839	188,342	—		522,181
Restricted cash				686			686
Inventory			7,810,796	146,820			7,957,616
Property, construction and office equipment, net			171,560	24,168			195,728
Receivables, prepaid expenses and other assets			302,064	420,319	(99,981	)	622,402
Mortgage loans held for sale				94,291			94,291
Customer deposits held in escrow			129,855	6,467			136,322
Investments in unconsolidated entities			44,991	375,003			419,994
Investments in and advances to consolidated entities	4,569,837	2,921,962	155,315	128,331	(7,775,445	)	—
	4,569,837	2,921,962	8,948,420	1,384,427	(7,875,426	)	9,949,220
LIABILITIES AND EQUITY
Liabilities
Loans payable			694,409				694,409
Senior notes		2,860,771					2,860,771
Mortgage company loan facility				82,274			82,274
Customer deposits			457,712	12,519			470,231
Accounts payable			326,518	1,354			327,872
Accrued expenses	974	43,350	581,208	418,578	(108,026	)	936,084
Advances from consolidated entities			1,592,201	592,763	(2,184,964	)	—
Income taxes payable	40,199						40,199
Total liabilities	41,173	2,904,121	3,652,048	1,107,488	(2,292,990	)	5,411,840
Equity
Stockholders’ equity
Common stock	1,779		48