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Investments in Unconsolidated Entities | 9 Months Ended
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Jul. 31, 2018
Investments in and Advances to Affiliates, Schedule of Investments [Abstract] |
Investments in Unconsolidated Entities | 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.

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- Definition The entire disclosure for the information summarizing investments in and advances to majority-owned subsidiaries, other controlled companies, and other affiliates. It reflects specified information about ownership, financial results from, and financial position in such entities. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 946 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2324412 + Details
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