News Column

TOLL BROTHERS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

June 6, 2014

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements, notes thereto, and the related Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013. It also should be read in conjunction with the disclosure under "Statement on Forward-Looking Information" in this report. Unless otherwise stated, net contracts signed represents a number or value equal to the gross number or value of contracts signed during the relevant period, less the number or value of contracts canceled during the relevant period, which includes contracts that were signed during the relevant period and in prior periods. Contracts acquired in an acquisition of a business are not considered signed contracts and are not included in the amounts reported by us in net contracts signed. OVERVIEW Financial Highlights In the six-month period ended April 30, 2014, we recognized $1.50 billion of revenues and net income of $110.8 million, as compared to $940.6 million of revenues and net income of $29.1 million in the six-month period ended April 30, 2013. During the fiscal 2014 six-month period, we recognized an income tax provision of $53.9 million, as compared to $20.2 million in the fiscal 2013 period. At April 30, 2014, we had $364.8 million of cash, cash equivalents and marketable securities on hand; approximately $849.2 million available under our $1.035 billion revolving credit facility that matures in August 2018; and $500.0 million available under our 364-day senior unsecured credit facility that expires in February 2015. At April 30, 2014, we had $95.0 million of outstanding borrowings and $90.8 million of letters of credit issued under the revolving credit facility. Our Business We design, build, market and arrange financing for detached and attached homes in luxury residential communities. We cater to move-up, empty-nester, active-adult, age-qualified and second-home buyers in the United States. We also build and sell homes in urban infill markets through Toll City LivingŪ ("City Living"). At April 30, 2014, we were operating in 20 states. Over the past several years, we have acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites. At April 30, 2014, we controlled a number of land parcels as for-rent apartment projects containing approximately 5,300 units. Through Toll Brothers Realty Trust ("Trust"), we also have interests in approximately 1,500 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey. See "Toll Brothers Apartment Living/Toll Brothers Campus Living" section of this "Overview." We operate our own land development, architectural, engineering, mortgage, title, landscaping, security monitoring, lumber distribution, house component assembly, and manufacturing operations. We also develop, own and operate golf courses and country clubs, which generally are associated with several of our master planned communities. We have investments in a number of joint ventures to develop land for the sole use of the venture participants, including ourselves, and to develop land for sale to the joint venture participants and to unrelated builders. We are a participant in joint ventures with unrelated parties to develop luxury condominium projects, including for-sale and rental residential units and commercial space, a single master planned community, and a high-rise luxury for-sale condominium/hotel project. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. The Company received $12.0 million as its share of the proceeds and recognized this distribution as income in the quarter. This income is included in "Income from unconsolidated entities" in the six-month and three-month periods ended April 30, 2014 in our Condensed Consolidated Statements of Operations. In addition, we own interests in Toll Brothers Realty Trust II ("Trust II") which invests in commercial real estate opportunities. In the three-month period ended January 31, 2014, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, we realized a profit of approximately $23.5 million representing our share of the gain on the sale; this gain is included in "Income from unconsolidated entities" in our Condensed Consolidated Statements of Operations. In addition, we recognized $2.9 million of previously deferred gains on the Company's initial sales of the properties to Trust II. This gain was included in "Other income - net" for the three-month period ended January 31, 2014 of our Condensed Consolidated Statement of Operations. In the three-month period ended April 30, 2014, we recognized an additional gain of $0.6 million from the sale of a property by Trust II. 41 -------------------------------------------------------------------------------- In fiscal 2010, we formed Gibraltar Capital and Asset Management LLC ("Gibraltar") to invest in distressed real estate opportunities. Gibraltar focuses primarily on residential loans and properties, from unimproved ground to partially and fully improved developments, as well as commercial opportunities. See "Gibraltar Capital Asset and Management LLC" in this "Overview." Acquisition On February 4, 2014, we completed our acquisition of Shapell Industries, Inc. ("Shapell") pursuant to the Purchase and Sale Agreement (the "Purchase Agreement") dated November 6, 2013, with Shapell Investment Properties, Inc. ("SIPI"). Pursuant to the Purchase Agreement, we acquired, for cash, all of the equity interests in Shapell from SIPI for an aggregate purchase price of $1.60 billion (the "Acquisition"). We acquired the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California, some of which the Company will sell to other builders. This acquisition provides us with a premier California land portfolio including 11 active selling communities, as of the acquisition date, in affluent, high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County and the Carlsbad market. As part of the acquisition, we assumed contracts to deliver 126 homes with an aggregate value of approximately $105.3 million. We did not acquire the apartment and commercial rental properties owned and operated by Shapell (the "Shapell Commercial Properties") or Shapell's mortgage lending activities relating to its home building operations. Accordingly, the Purchase Agreement provides that SIPI will indemnify us for any loss arising out of or resulting from, among other things, (i) any liability (other than environmental losses, subject to certain exceptions) related to the Shapell Commercial Properties, and (ii) any liability (other than environmental losses, subject to certain exceptions) to the extent related to Shapell Mortgage, Inc. We financed the Acquisition with a combination of $370.0 million of borrowings under our $1.035 billion unsecured revolving credit facility, $485.0 million from a term loan facility, as well as with $815.7 million in net proceeds from debt and equity financings completed in November 2013. See Note 6, "Loans Payable, Senior Notes and Mortgage Company Loan Facility" and Note 12, "Stock Issuance and Stock Repurchase Program" of our condensed consolidated financial statements for further details. As a result of the Acquisition, Shapell became our wholly-owned subsidiary. Accordingly, the Shapell results are included in our consolidated financial statements from the date of the Acquisition. For the period from February 5, 2014 to April 30, 2014, revenues and operating income from the Shapell operations, excluding $5.1 million of acquisition expenses, were $102.0 million and $6.1 million, respectively. We expect to selectively sell assets to reduce land concentration and outstanding borrowings; however, the timing and size of any asset sale transactions will be dependent on market and other factors, some of which are outside of our control. We make no assurance that we will be able to complete asset sale transactions on attractive terms or at all. Our Challenging Business Environment and Current Outlook During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number and value of new sales contracts signed. Our net contracts signed in fiscal 2012 and 2013, as compared to fiscal 2011, increased approximately 50% and 90%, respectively, in the number of net contracts signed and 59% and 126%, respectively, in the value of net contracts signed. Although the number and value of fiscal 2012 and 2013 net contracts signed increased over fiscal 2011, they were still significantly below what we recorded in fiscal 2005. We have experienced a leveling of demand which began in the fourth quarter of fiscal 2013 and has continued into fiscal 2014. In the six-month period ended April 30, 2014, we signed 2,665 contracts with an aggregate value of $1.98 billion, compared to 2,726 contracts with an aggregate value of $1.80 billion in the six-month period ended April 30, 2013. We believe this to be a temporary pause and expect continued growth in the future as demand grows to more normalized levels. We market our high quality homes to upscale luxury home buyers, generally those persons who have previously owned a principal residence and who are seeking to buy a larger or more desirable home - the so-called "move-up" market. We believe our reputation as a developer of homes for this market enhances our competitive position with respect to the sale of our smaller, more moderately priced, detached homes, as well as our attached homes. We also market to the 50+ year-old "empty-nester" market, which we believe has strong growth potential. We have developed a number of home designs with features such as one-story living and first-floor master bedroom suites, as well as communities with recreational amenities such as golf courses, marinas, pool complexes, country clubs and recreation centers that we believe appeal to this category of home buyers. We have integrated certain of these designs and features in some of our other home types and communities. We develop active-adult, age-qualified communities for households in which at least one member is 55 years of age or older. As of April 30, 2014, we were selling from 29 such communities and expect to open additional age-qualified communities during 42 -------------------------------------------------------------------------------- the next few years. For the six-month periods ended April 30, 2014 and 2013, the value of net contracts signed in active-adult communities were 9% and 7% of total contracts signed in the respective periods. As a percentage of the total number of contracts signed in the six-month periods ended April 30, 2014 and 2013, active-adult communities were 13% and 10%, respectively. Of the value and number of net contracts signed in fiscal 2013, approximately 9% and 12%, respectively, were in active-adult communities and in fiscal 2012, approximately 8% and 10%, respectively, were in such communities. In order to serve a growing market of affluent move-up families, empty-nesters and young professionals seeking to live in or close to major cities, we have developed and are developing a number of high-density, high-, mid- and low-rise urban luxury communities. These communities are currently marketed under the Toll City Living brand. These communities, which we are currently developing or planning to develop on our own or through joint ventures, are located in Phoenix, Arizona; Hoboken, New Jersey; the boroughs of Manhattan and Brooklyn, New York; and Philadelphia, Pennsylvania and its suburbs. We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified and second-home upscale markets will provide us with the potential for growth in the coming decade. According to the U.S. Census Bureau, the number of households earning $100,000 or more (in constant 2012 dollars) at September 2013 stood at 26.9 million, or approximately 22% of all U.S. households. This group has grown at three times the rate of increase of all U.S. households since 1980. According to Harvard University'sJune 2013 "The State of the Nation's Housing," the growth and aging of the current population, assuming the economic recovery is sustained over the next few years, supports the addition of about 1.16 million new household formations per year during the next decade. Preliminary estimates using the Census Bureau's 2012 population projections suggest even stronger growth in net new households of 1.28 million between now and 2020. According to the April 2014U.S. Census Bureau's New Home Sales Report, new home inventory stands at just 5.3 months' supply, based on current sales paces. If demand and pace increase, the 5.3 months' supply could quickly be drawn down. According to the U.S. Census Bureau, during the period 1970 through 2007, total housing starts in the United States averaged approximately 1.6 million per year, while in the period 2008 through 2013, total housing starts averaged approximately 0.9 million per year. During the 2006-2011 downturn, the pipeline of approved and improved home sites dwindled in many markets as many builders and developers lacked both the capital and the economic benefit for bringing sites through approvals. We believe that, as demand continues to strengthen, builders and developers with approved land in well-located markets will be poised to benefit. We believe that this will be particularly true for us because much of our land portfolio is in the Washington, D.C. to Boston corridor and in California where land is scarce and approvals are more difficult to obtain. We continue to believe that many of our communities are in desirable locations that are difficult to replace and in markets where approvals have been increasingly difficult to obtain. We believe that many of these communities have substantial embedded value that may be realized in the future as the housing recovery strengthens. Competitive Landscape Based on our experience during prior downturns in the housing industry, we believe that attractive land acquisition opportunities arise in difficult times for those builders that have the financial strength to take advantage of them. In the current environment, we believe our strong balance sheet, liquidity, access to capital, broad geographic presence, diversified product line, experienced personnel, and national brand name all position us well for such opportunities now and in the future. We continue to see reduced competition from the small and mid-sized private builders that had been our primary competitors in the luxury market. We believe that many of these builders are no longer in business and that access to capital by the remaining private builders continues to be severely constrained. There are fewer and more selective lenders serving our industry as the market rebounds and we believe it is likely that those lenders will gravitate to the home building companies that offer them the greatest security, the strongest balance sheets, and the broadest array of potential business opportunities. While some builders may re-emerge with new capital, the scarcity of attractive land is a further impediment to their re-emergence. We believe that reduced competition, combined with attractive long-term demographics, will reward those well-capitalized builders that can persevere through the current challenging environment. We believe that geographic and product diversification, access to lower-cost capital, and strong demographics benefit those builders, like us, who can control land and persevere through the increasingly difficult regulatory approval process. We believe that these factors favor a large publicly traded home building company with the capital and expertise to control home sites and gain market share. We also believe that over the past five years, many builders and land developers reduced the number of home sites that were taken through the approval process. The process continues to be difficult and lengthy, and the political pressure from no-growth proponents continues to increase, but we believe our expertise in taking land through the approval process and our already-approved land positions will allow us to grow in the years to come as market conditions improve. 43 -------------------------------------------------------------------------------- Land Acquisition and Development Because of the length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it, and deliver a home after a home buyer signs an agreement of sale, we are subject to many risks. In certain cases, we attempt to reduce some of these risks by utilizing one or more of the following methods: controlling land for future development through options (also referred to herein as "land purchase contracts" or "option and purchase agreements"), thus allowing the necessary governmental approvals to be obtained before acquiring title to the land; generally commencing construction of a detached home only after executing an agreement of sale and receiving a substantial down payment from the buyer; and using subcontractors to perform home construction and land development work on a fixed-price basis. Based on our belief that the housing market is in the early stages of recovery and the increased attractiveness of land available for purchase, we have increased our land positions. During fiscal 2013 and 2012, we acquired control of approximately 12,500 home sites (net of options terminated) and 6,100 home sites (net of options terminated), respectively. During the six-month period ended April 30, 2014, we acquired control of approximately 3,900 home sites (net of lot options terminated and land we expect to sell). In February 2014, we acquired all of the equity interests in the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California of which we currently expect to develop approximately 4,400 home sites and sell the remaining to other builders. See "Overview - Acquisition" in this MD&A for more information about the Shapell acquisition. At April 30, 2014, we controlled approximately 50,400 home sites of which we owned approximately 37,700. Significant improvements were completed on approximately 13,800 of the home sites we owned. At April 30, 2014, we were selling from 252 communities, including 11 well-established selling communities in California that we acquired in February 2014 as part of the Shapell acquisition. We were selling from 232 communities at October 31, 2013 and 225 at April 30, 2013. In addition, we expect to purchase approximately 3,800 additional home sites from several joint ventures in which we have interests. We expect to be selling from 250 to 290 communities at October 31, 2014. At April 30, 2014, we had 20 communities that were temporarily closed due to market conditions. We do not expect to re-open any of these communities during the next twelve months. Availability of Customer Mortgage Financing We maintain relationships with a widely diversified group of mortgage financial institutions, many of which are among the largest and, we believe, most reliable in the industry. We believe that regional and community banks continue to recognize the long-term value in creating relationships with high-quality, affluent customers such as our home buyers, and these banks continue to provide such customers with financing. We believe that our home buyers generally are, and will continue to be, better able to secure mortgages due to their typically lower loan-to-value ratios and attractive credit profiles as compared to the average home buyer. Nevertheless, in recent years, tightened credit standards have reduced the pool of potential home buyers and hindered accessibility of or eliminated certain loan products previously available to our home buyers. Our home buyers continue to face stricter mortgage underwriting guidelines, higher down payment requirements and narrower appraisal guidelines than in the past. In addition, some of our home buyers continue to find it more difficult to sell their existing homes as prospective buyers of their homes may face difficulties obtaining a mortgage. In addition, other potential buyers may have little or negative equity in their existing homes and may not be able or willing to purchase a larger or more expensive home. While the range of mortgage products available to a potential home buyer is not what it was in the period 2005 through 2007, we have seen improvements over the past several years. Indications from industry participants, including commercial banks, mortgage banks, mortgage real estate investment trusts and mortgage insurance companies are that availability, parameters and pricing of jumbo loans are all improving. We believe that improvement should not only enhance financing alternatives for existing jumbo loan buyers, but also help to offset the reduction in Fannie Mae/Freddie Mac-eligible loan amounts in some markets. Based on the mortgages provided by our mortgage subsidiary, we do not expect the change in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact on our business. There has been significant media attention given to mortgage put-backs, a practice by which a buyer of a mortgage loan tries to recoup losses from the loan originator. This has not been, and we do not believe this is, a material issue for our mortgage subsidiary. Of the approximately 18,300 loans sold by our mortgage subsidiary since November 1, 2004, only 30 have been the subject of either actual indemnification payments or take-backs or contingent liability loss provisions related thereto. We believe that this is due to (i) our typical home buyer's financial position and sophistication; (ii) on average, our home buyers who use mortgage financing to purchase a home pay approximately 30% of the purchase price in cash; (iii) our general practice of not originating certain loan types such as option adjustable rate mortgages and down payment assistance products, and our origination of few sub-prime and high loan-to-value/no documentation loans; (iv) our elimination of "early payment default" provisions from each of our agreements with our mortgage investors several years ago; and (v) the quality of our controls, 44 -------------------------------------------------------------------------------- processes and personnel in our mortgage subsidiary. We have recently entered into two agreements with investors that contain limited early payment default provisions. As of April 30, 2014, we sold 21 loans under these agreements. We believe that these limited early payment default provisions will not expose us to a significant risk. The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a number of new requirements relating to residential mortgage lending practices. These include, among others, minimum standards for mortgages and related lender practices, the definitions and parameters of a Qualified Mortgage and a Qualified Residential Mortgage, future risk retention requirements, limitations on certain fees, prohibition of certain tying arrangements, and remedies for borrowers in foreclosure proceedings in the event that a lender violates fee limitations or minimum standards. We do not believe that the effect of these requirements on our mortgage subsidiary will be significant, although it will restrict us from providing a comprehensive package of services to some of our home buyers due to fee restrictions imposed upon our home buyers as to what they are permitted to pay to our affiliated businesses. Gibraltar Capital and Asset Management LLC We continue to look for distressed real estate opportunities through Gibraltar. Gibraltar continues to selectively review new opportunities, including bank portfolios and other distressed real estate investments. In the six-month period ended April 30, 2013, Gibraltar acquired four loans directly and invested in a loan participation for an aggregate purchase price of approximately $26.0 million. No loans were acquired in the six-month period ended April 30, 2014. At April 30, 2014, Gibraltar had investments in distressed loans of approximately $18.8 million, investments in foreclosed real estate of $76.7 million, and an investment in a structured asset joint venture of $22.8 million. In the six-month periods ended April 30, 2014 and 2013, we recognized income from Gibraltar's operations, including Gibraltar's equity in the earnings (losses) from its investment in a structured asset joint venture, of $5.9 million and $4.2 million, respectively. In the three-month periods ended April 30, 2014 and 2013, we recognized income from Gibraltar's operations, including Gibraltar's equity in the earnings (losses) from its investment in a structured asset joint venture, of $2.6 million and $2.1 million, respectively. Toll Brothers Apartment Living/Toll Brothers Campus Living Over the past several years, we have acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites. At April 30, 2014, we controlled a number of land parcels as for-rent apartment projects containing approximately 5,300 units. These projects, which are located in the metro-Boston to metro-Washington, D.C. corridor, are being developed or will be developed with partners under the brand names Toll Brothers Apartment Living and Toll Brothers Campus Living. A number of these sites had been acquired by us as part of a larger purchase or were originally acquired to develop as for-sale homes. Of the 5,300 planned units, 1,500 are owned by joint ventures in which we have a 50% interest; approximately 1,900 are owned by us; 1,200 of them are under contract to be purchased; and 700 of them are under letters of intent. Through the Trust, we also have interests in approximately 1,500 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey. CONTRACTS AND BACKLOG The aggregate value of net contracts signed increased $174.2 million or 9.7% in the six-month period ended April 30, 2014, as compared to the six-month period ended April 30, 2013. The value of net contracts signed was $1.98 billion (2,665 homes) and $1.80 billion (2,726 homes) in the six-month periods ended April 30, 2014 and 2013, respectively. The increase in the aggregate value of net contracts signed in the fiscal 2014 period, as compared to the fiscal 2013 period, was the result of a 12.2% increase in the average value of each contract signed, offset, in part, by a 2.2% decline in the number of net contracts signed. The increase in the average value of each contract signed in the fiscal 2014 period, as compared to the fiscal 2013 period, was due primarily to a change in mix of contracts signed to more expensive areas and/or higher priced products, increased prices, and reduced incentives given on new contracts signed. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand, as well as the negative impact on our business due to the severe weather we have seen in many of our markets in the fiscal 2014 period. The aggregate value of net contracts signed increased $87.0 million or 7.3% in the three-month period ended April 30, 2014, as compared to the three-month period ended April 30, 2013. The value of net contracts signed was $1.27 billion (1,749 homes) and $1.19 billion (1,753 homes) in the three-month periods ended April 30, 2014 and 2013, respectively. The increase in the aggregate value of net contracts signed in the fiscal 2014 period, as compared to the fiscal 2013 period, was the result of a 7.6% increase in the average value of each contract signed, offset, in part, by a 0.2% decline in the number of net contracts signed. The increase in the average value of each contract signed in the fiscal 2014 period, as compared to the fiscal 2013 period, was due primarily to a change in mix of contracts signed to more expensive areas and/or higher priced products, increased prices, 45 -------------------------------------------------------------------------------- and reduced incentives given on new contracts signed. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand. Backlog consists of homes under contract but not yet delivered to our home buyers. The value of our backlog at April 30, 2014 of $3.21 billion (4,324 homes) increased 26.7%, as compared to our backlog at April 30, 2013 of $2.53 billion (3,655 homes). Our backlog at October 31, 2013 and 2012 was $2.63 billion (3,679 homes) and $1.67 billion (2,569 homes), respectively. The increase in the value of the backlog at April 30, 2014, as compared to the backlog at April 30, 2013, was primarily attributable to the higher backlog at October 31, 2013, as compared to the backlog at October 31, 2012 and the increase in the aggregate value of net contracts signed in the six-month period ended April 30, 2014, as compared to the six-month period ended April 30, 2013, offset, in part, by the increase in the aggregate value of our deliveries in the six-month period ended April 30, 2014, as compared to the aggregate value of deliveries in the six-month period ended April 30, 2013. The 57.5% and 43.2% increases in the value and number of homes in backlog at October 31, 2013, as compared to October 31, 2012, were due to the increase in the number and the average value of net contracts signed in fiscal 2013, as compared to fiscal 2012, offset, in part, by the increase in the aggregate value and number of our deliveries in fiscal 2013, as compared to the aggregate value and number of deliveries in fiscal 2012. In February 2014, as part of the Shapell acquisition, we assumed contracts to deliver approximately 126 homes with an aggregate value of approximately $105.3 million. At April 30, 2014, 35 of these contracts remained in backlog. For more information regarding revenues, net contracts signed and backlog by operating segment, see "Operating Segments" in this MD&A. CRITICAL ACCOUNTING POLICIES As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013, our most critical accounting policies relate to inventory, income taxes-valuation allowances and revenue and cost recognition. Since October 31, 2013, there have been no material changes to those critical accounting policies. OFF-BALANCE SHEET ARRANGEMENTS We have investments in and advances to various unconsolidated entities. We have investments in joint ventures (i) to develop land for the joint venture participants and for sale to outside builders ("Land Development Joint Ventures"); (ii) to develop for-sale homes ("Home Building Joint Ventures"); (iii) to develop luxury for-rent residential apartments, commercial space and a hotel ("Rental Property Joint Ventures"); (iv) to invest in commercial real estate opportunities (Trust and Trust II); and (v) to invest in a portfolio of distressed loans and real estate ("Structured Asset Joint Venture"). Our investments in these entities are accounted for using the equity method of accounting. At April 30, 2014, we had investments in and advances to these entities of $441.8 million, and were committed to invest or advance $101.7 million to these entities if they require additional funding. At April 30, 2014, we had joint venture purchase commitments to acquire 115 home sites for approximately $12.6 million. In addition, we expect to purchase approximately 3,800 additional home sites from several joint ventures in which we have interests; the purchase price of these home sites will be determined at a future date. We will also receive approximately 935 home sites from one of our Land Development Joint Ventures in consideration of our previous investment in the joint venture. 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 which may include any, or all, of the following: (i) project completion including any cost overruns, in whole or in part; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) indemnification of the lender from environmental matters of the unconsolidated entity; (iv) a hazardous material indemnity that holds the lender harmless against any obligations for which the lender may incur liability resulting from the threat or presence of any hazardous or toxic substances at or near the property covered by a loan; and (v) indemnification of the lender from "bad boy acts" of the unconsolidated entity. In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share of the guarantee; however, if the 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 April 30, 2014, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral 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 April 30, 2014, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $424.8 million and had borrowed an aggregate of $61.4 million. We estimate that our maximum potential exposure under these guarantees, if the full 46 -------------------------------------------------------------------------------- amount of the loan commitments were borrowed, would be $424.8 million before any reimbursement from our partners. Based on the amounts borrowed at April 30, 2014, our maximum potential exposure under these guarantees is estimated to be $61.4 million before any reimbursement from our partners. In addition, we have guaranteed approximately $11.4 million of ground lease payments and insurance deductibles for three joint ventures. For more information regarding these joint ventures, see Note 4, "Investments in and Advances to Unconsolidated Entities" in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. The trends, uncertainties or other factors that have negatively impacted our business and the industry in general have also impacted the unconsolidated entities in which we have investments. We review each of our investments on a quarterly basis for indicators of impairment. A series of operating losses of an investee, the inability to recover our invested capital, or other factors may indicate that a loss in value of our investment in the unconsolidated entity has occurred. If a loss exists, we further review to determine if the loss is other than temporary, in which case we write down the investment to its fair value. The evaluation of our investment in unconsolidated entities entails a detailed cash flow analysis using many estimates including but not limited to expected sales pace, expected sales prices, expected incentives, costs incurred and anticipated, sufficiency of financing and capital, competition, market conditions and anticipated cash receipts, in order to determine projected future distributions. Each of the unconsolidated entities evaluates its inventory in a similar manner. See "Critical Accounting Policies - Inventory" contained in the MD&A in our Annual Report on Form 10-K for the year ended October 31, 2013 for more detailed disclosure on our evaluation of inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, our proportionate share is reflected in income (loss) from unconsolidated entities with a corresponding decrease to our investment in unconsolidated entities. Based upon our evaluation of the fair value of our investments in unconsolidated entities, we determined that no impairments of our investments occurred in the six-month and three-month periods ended April 30, 2014 and 2013. RESULTS OF OPERATIONS The following table sets forth, for the six-month and three-month periods ended April 30, 2014 and 2013, a comparison of certain items in the Condensed Consolidated Statements of Operations ($ amounts in millions): Six months ended April 30, Three months ended April 30, 2014 2013 2014 2013 $ %* $ %* $ %* $ %* Revenues 1,504.1 940.6 860.4 516.0 Cost of revenues 1,202.0 79.9 766.0 81.4 688.0 80.0 420.0 81.4 Selling, general and administrative 202.2 13.4 157.6 16.8 104.3 12.1 79.6 15.4 1,404.2 93.4 923.5 98.2 792.3 92.1 499.6 96.8 Income from operations 99.8 17.1 68.1 16.4 Other Income from unconsolidated entities 37.2 8.1 14.3 5.0 Other income - net 27.6 24.2 11.1 19.5 Income before income taxes 164.7 49.3 93.5 41.0 Income tax provision 53.9 20.2 28.3 16.3 Net income 110.8 29.1 65.2 24.7 * Percent of revenues Note: Due to rounding, amounts may not add. REVENUES AND COST OF REVENUES Revenues for the six months ended April 30, 2014 were higher than those for the comparable period of fiscal 2013 by approximately $563.5 million, or 59.9%. This increase was primarily attributable to a 30.9% increase in the number of homes delivered and a 22.2% increase in the average price of the homes delivered. In the fiscal 2014 six-month period, we delivered 2,146 homes with a value of $1.50 billion, as compared to 1,640 homes in the fiscal 2013 six-month period with a value of $940.6 million. The average price of the homes delivered in the fiscal 2014 period was $700,900, as compared to $573,500 in the fiscal 2013 period. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to the higher number of homes in backlog at the beginning of fiscal 2014, as compared to the beginning of fiscal 2013 and the homes closed from home building operations of Shapell which we acquired in February 2014. 47 -------------------------------------------------------------------------------- The increase in the average price of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily attributable to a shift in the number of homes delivered to more expensive areas and higher priced products and price increases, or both. For the period from February 5, 2014 to April 30, 2014, revenue from the Shapell acquisition was $102.0 million (119 homes). Cost of revenues as a percentage of revenues was 79.9% in the six-month period ended April 30, 2014, as compared to 81.4% in the six-month period ended April 30, 2013. In the six-month periods ended April 30, 2014 and 2013, we recognized inventory impairment charges and write-offs of $3.9 million and $1.7 million, respectively. Cost of revenues as a percentage of revenues, excluding inventory impairments, was 79.7% of revenues in the fiscal 2014 period, as compared to 81.2% in the fiscal 2013 period. The decrease in cost of revenues, excluding inventory impairment charges, as a percentage of revenue in the fiscal 2014 period, as compared to the fiscal 2013 period, was due primarily to a change in product mix/areas to higher margin areas, lower interest, and increased prices in the fiscal 2014 period, as compared to the fiscal 2013 period, offset in part, by an increase in cost of sales of approximately 1.0% due to the application of purchase accounting for the homes sold from the Shapell acquisition inventory. In the six-month periods ended April 30, 2014 and 2013, interest cost as a percentage of revenues was 3.6% and 4.6%, respectively. Revenues for the three months ended April 30, 2014 were higher than those for the comparable period of fiscal 2013 by approximately $344.4 million, or 66.7%. This increase was primarily attributable to a 36.2% increase in the number of homes delivered and a 22.4% increase in the average price of the homes delivered. In the fiscal 2014 period, we delivered 1,218 homes with a value of $860.4 million, as compared to 894 homes in the fiscal 2013 period with a value of $516.0 million. The average price of the homes delivered in the fiscal 2014 period was $706,400, as compared to $577,200 in the fiscal 2013 period. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to the higher number of homes in backlog at the beginning of fiscal 2014, as compared to the beginning of fiscal 2013 and the revenues generated from home building operations of Shapell which we acquired in February 2014. The increase in the average price of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily attributable either to a shift in the number of homes delivered to more expensive areas or higher priced products and price increases, or both. For the period from February 5, 2014 to April 30, 2014, revenue from the Shapell acquisition was $102.0 million (119 homes). Cost of revenues as a percentage of revenues was 80.0% in the three-month period ended April 30, 2014, as compared to 81.4% in the three-month period ended April 30, 2013. In the three-month periods ended April 30, 2014 and 2013, we recognized inventory impairment charges and write-offs of $1.9 million and $1.0 million, respectively. Cost of revenues as a percentage of revenues, excluding inventory impairments, was 79.7% of revenues in the fiscal 2014 period, as compared to 81.2% in the fiscal 2013 period. The decrease in cost of revenues, excluding inventory impairment charges, as a percentage of revenue in the fiscal 2014 period, as compared to the fiscal 2013 period, was due primarily to a change in product mix/areas to higher margin areas, lower interest, and increased prices in the fiscal 2014 period, as compared to the fiscal 2013 period, offset in part, by an increase in cost of sales of approximately 1.5% due to the application of purchase accounting for the homes sold from the Shapell acquisition inventory. In the three-month periods ended April 30, 2014 and 2013, interest cost as a percentage of revenues was 3.4% and 4.5%, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") SG&A increased by $44.6 million in the six-month period ended April 30, 2014, as compared to the six-month period ended April 30, 2013. As a percentage of revenues, SG&A was 13.4% in the fiscal 2014 period, as compared to 16.8% in the fiscal 2013 period. The fiscal 2014 period includes $5.9 million of expenses incurred in the Shapell acquisition. The decline in SG&A, excluding the Shapell acquisition costs, as a percentage of revenues was due to SG&A spending increasing by 24.5% while revenues increased 59.9%. The dollar increase in SG&A costs, excluding the Shapell acquisition costs, was due primarily to increased compensation costs due to our increased number of employees and higher sales commissions, increased sales and marketing costs, and increased insurance costs. The higher sales commissions were the result of our increase in sales revenues and the increase in the value of sales contracts signed during the fiscal 2014 period over the comparable period of fiscal 2013. SG&A increased by $24.8 million in the three-month period ended April 30, 2014, as compared to the three-month period ended April 30, 2013. As a percentage of revenues, SG&A was 12.1% in the fiscal 2014 period, as compared to 15.4% in the fiscal 2013 period. The fiscal 2014 period includes $5.1 million of expenses incurred in the Shapell acquisition. The decline in SG&A, excluding the Shapell acquisition costs, as a percentage of revenues was due to SG&A spending increasing by 24.7% while revenues increased 66.7%. The dollar increase in SG&A costs, excluding the Shapell acquisition costs, was due primarily to increased compensation costs due to our increased number of employees and higher sales commissions, and increased sales and marketing costs. The higher sales commissions were the result of our increase in sales revenues and the increase in the value of sales contracts signed during the fiscal 2014 period over the comparable period of fiscal 2013. 48 -------------------------------------------------------------------------------- INCOME FROM UNCONSOLIDATED ENTITIES We are a participant in several joint ventures. We recognize our proportionate share of the earnings and losses from these entities. Many of our joint ventures are land development projects or high-rise/mid-rise construction projects and do not generate revenues and earnings for a number of years during the development of the property. Once development is complete, it has been our experience that these joint ventures generally, over a relatively short period of time, generate revenues and earnings until all assets of the entity are sold. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities will vary significantly from quarter-to-quarter and year-to-year. In the six-month period ended April 30, 2014, we recognized $37.2 million of income from unconsolidated entities, as compared to $8.1 million in the comparable period of fiscal 2013. The increase in income from unconsolidated entities was due primarily from our recognition of a $23.5 million gain representing our share of the gain on the sale by Trust II of substantially all of its assets to an unrelated party in December 2013 and a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust's apartment complexes. The increase attributable to the Trust and Trust II gains was partially offset by lower income realized from Gibraltar's Structured Asset Joint Venture and several of our Land Development Joint Ventures in the fiscal 2014 period, as compared to the income recognized in the fiscal 2013 period. The lower income from the Land Development Joint Ventures was attributable primarily to decreased activity from these joint ventures in the fiscal 2014 period as compared to the fiscal 2013 period. In the three-month period ended April 30, 2014, we recognized $14.3 million of income from unconsolidated entities, as compared to $5.0 million in the comparable period of fiscal 2013. The increase in income from unconsolidated entities was due primarily to our recognition of a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust's apartment complexes. The increase attributable to the Trust gain was partially offset by lower income realized from several of our Land Development Joint Ventures in the fiscal 2014 period, as compared to the income recognized in the fiscal 2013 period. The lower income from the Land Development Joint Ventures was attributable primarily to decreased activity from these joint ventures in the fiscal 2014 period as compared to the fiscal 2013 period. OTHER INCOME - NET Other income - net includes the gains and losses from our ancillary businesses, income from Gibraltar, interest income, management fee income, retained customer deposits, income/losses on land sales, directly expensed interest and other miscellaneous items. For the six months ended April 30, 2014 and 2013, other income - net was $27.6 million and $24.2 million, respectively. The increase in other income - net in the six-month period ended April 30, 2014, as compared to the fiscal 2013 period, was primarily due to an increase in income from higher earnings from land sales, increased income from our Gibraltar operations and higher management fee and other miscellaneous income in the fiscal 2014 period, as compared to the fiscal 2013 period, offset, in part, by the recognition of $13.2 million of income in the fiscal 2013 period from the settlement of litigation, lower interest income in the fiscal 2014 period as compared to the fiscal 2013 period, and the recognition of $0.7 million of directly expensed interest in the 2014 period. Included in Land sales, net, is $2.9 million of previously deferred gains on our initial sales of the properties to Trust II. For the three months ended April 30, 2014 and 2013, other income - net was $11.1 million and $19.5 million, respectively. The decrease in other income - net in the three-month period ended April 30, 2014, as compared to the fiscal 2013 period, was primarily due to the recognition of $13.2 million of income in the fiscal 2013 period from the settlement of litigation, lower interest income in the fiscal 2014 period, as compared to the fiscal 2013 period, and the recognition of $0.7 million of directly expensed interest in the 2014 period, offset in part, by an increase in income from higher earnings from land sales, increased income from our Gibraltar operations, higher management fee and other miscellaneous income in the fiscal 2014 period, as compared to the fiscal 2013 period. INCOME BEFORE INCOME TAXES For the six-month period ended April 30, 2014, we reported income before income taxes of $164.7 million, as compared to $49.3 million in the six-month period ended April 30, 2013. For the three-month period ended April 30, 2014, we reported income before income taxes of $93.5 million, as compared to $41.0 million in the three-month period ended April 30, 2013. INCOME TAX PROVISION We recognized a $53.9 million income tax provision in the six-month period ended April 30, 2014. Based upon the federal statutory rate of 35%, our federal tax provision would have been $57.7 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was due primarily to the recognition of a $6.6 million 49 -------------------------------------------------------------------------------- provision for state income taxes, net of a reversal of $1.2 million of state valuation allowance; the recognition of a $5.4 million provision for uncertain tax positions taken in a prior period; and $1.1 million of accrued interest and penalties (net of federal tax provision) for previously accrued taxes on uncertain tax positions, offset, in part, by the reversal of $9.1 million of previously accrued tax provisions on uncertain tax positions that were no longer necessary due to the expiration of the statute of limitations and the settlement of a state income tax audit, a $4.3 million tax benefit from our utilization of domestic production activities deductions, and $2.3 million related to other miscellaneous permanent deductions. We recognized a $20.2 million tax provision in the six-month period ended April 30, 2013. Based upon the federal statutory rate of 35%, our federal tax provision would have been $17.3 million. The difference between the tax benefit recognized and the tax provision based on the federal statutory rate was due primarily to the recognition of $2.0 million of accrued interest and penalties (net of federal tax provision) for previously accrued taxes on uncertain tax positions and a $0.8 million provision for state income taxes, net of a reversal of $1.3 million of state valuation allowance. We recognized a $28.3 million income tax provision in the three-month period ended April 30, 2014. Based upon the federal statutory rate of 35%, our federal tax provision would have been $32.7 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was due primarily to the recognition of a $4.1 million provision for state income taxes, net of a reversal of $0.8 million of state valuation allowance; the recognition of a $5.4 million provision for uncertain tax positions taken in a prior period; and $0.3 million of accrued interest and penalties (net of federal tax provision) for previously accrued taxes on uncertain tax positions, offset, in part, by the reversal of $9.1 million of previously accrued tax provision on uncertain tax positions that were no longer needed due to the expiration of the statute of limitations and the settlement of a state income tax audit, a $2.4 million tax benefit from our utilization of domestic production activities deductions, and $1.3 million related to other miscellaneous permanent deductions. We recognized a $16.3 million tax provision in the three-month period ended April 30, 2013. Based upon the federal statutory rate of 35%, our tax benefit would have been $14.3 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was due primarily to the recognition of $0.8 million of accrued interest and penalties (net of federal tax provision) for previously accrued taxes on uncertain tax positions and a $0.6 million provision for state income taxes, net of a reversal of $1.1 million of state valuation allowance. CAPITAL RESOURCES AND LIQUIDITY Funding for our business has been provided principally by cash flow from operating activities before inventory additions, unsecured bank borrowings, and the public debt and equity markets. At April 30, 2014, we had $351.8 million of cash and cash equivalents and $13.0 million of marketable securities. At October 31, 2013, we had $773.0 million of cash and cash equivalents and $52.5 million of marketable securities. Cash used in operating activities during the six-month period ended April 30, 2014 was $66.2 million. Cash used in operating activities during the fiscal 2014 period was primarily used for the purchase of inventory and an increase in receivables, prepaid expenses and other assets, offset, in part, by cash generated from net income, stock-based compensation and depreciation and amortization, an increase in customer deposits, increases in accounts payable and accrued expenses, a reduction in restricted cash, and the sale of mortgage loans to outside investors in excess of mortgage loans originated. In the six-month period ended April 30, 2014, cash used in our investing activities was $1.48 billion. The cash used in investing activities was primarily related to the $1.49 billion used to acquire Shapell, $80.7 million used to fund joint venture investments, and $5.8 million for the purchase of property and equipment, offset, in part, by $39.2 million of net sales of marketable securities and $61.4 million of cash received as returns on our investments in unconsolidated entities, distressed loans and foreclosed real estate. We generated $1.12 billion of cash from financing activities in the six-month period ended April 30, 2014, primarily from: the issuance of 7.2 million shares of our common stock in November 2013 that raised $220.4 million; the issuance in November 2013 of $350.0 million of 4.0% Senior Notes due 2018 and $250.0 million of 5.625% Senior Notes due 2024; the borrowing of $485.0 million under a five-year term loan from ten banks; $95.0 million of borrowings under our $1.035 billion credit facility, net of repayments; and $23.3 million from the proceeds of our stock-based benefit plans, offset in part, by $18.2 million of repayments of borrowings under our mortgage company warehouse facility, net of new borrowings under it, and repayment of $268.0 million of our 4.95% senior notes in March 2014. At April 30, 2013, we had $703.1 million of cash and cash equivalents and $232.9 million of marketable securities. At October 31, 2012, we had $778.8 million of cash and cash equivalents and $439.1 million of marketable securities. Cash used in operating activities during the six-month period ended April 30, 2013 was $445.4 million. Cash used in operating activities during the fiscal 2013 period was primarily used to fund the purchase of inventory, offset, in part, by cash generated from net income before stock-based compensation and depreciation and amortization, the sale of mortgage loans to outside investors in excess of mortgage loans originated, a reduction in restricted cash, and an increase in customer deposits. 50 -------------------------------------------------------------------------------- In the six-month period ended April 30, 2013, cash provided by our investing activities was $165.7 million. The cash provided by investing activities was primarily generated from $203.3 million of net sales of marketable securities, $40.8 million of cash received as returns on our investments in unconsolidated entities, distressed loans and foreclosed real estate, offset, in part, by $32.0 million used to fund joint venture projects, $26.2 million for investments in distressed loans, and $20.3 million for the purchase of property and equipment. We generated $204.0 million of cash from financing activities in the six-month period ended April 30, 2013, primarily from the issuance of $300 million of 4.375% senior notes due 2023 and $8.4 million from the proceeds of our stock-based benefit plans, offset, in part, by the repayment of $59.1 million of our 6.875% senior notes in November 2012 and $14.1 million of repayments of borrowings under our mortgage company warehouse facility, net of new borrowings under it, and $29.2 million of repayments of other loans, net of new borrowings. On February 4, 2014, we completed our previously announced acquisition of Shapell for an aggregate purchase price of $1.60 billion in cash. At January 31, 2014, we had deposited $161.0 million of the purchase price with an escrow agent. As part of the purchase price, we acquired $106.2 million of cash. We financed the Acquisition with a combination of (a) $370.0 million of borrowings under its $1.035 billion unsecured revolving credit facility; (b) $485.0 million from the term loan facility; and (c) proceeds from debt and equity financings completed in November 2013. See Note 2, "Acquisition," Note 6, "Loans Payable, Senior Notes and Mortgage Company Loan Facility" and Note 12, "Stock Issuances and Stock Repurchase Program" of our condensed consolidated financial statements for more information on these transactions. We expect to selectively sell assets to reduce land concentration and outstanding borrowings; however, the timing and size of any asset sale transactions will be dependent on market and other factors, some of which are outside of our control. We make no assurance that we will be able to complete asset sale transactions on attractive terms or at all. In the six-month period ended April 30, 2014, we sold approximately $95 million of land, sold substantially all of the assets of Trust II, and completed the refinancing of one of the mature stabilized properties owned by the Trust. These activities have generated approximately $150 million of cash which has allowed us to repay a portion of our borrowings under our credit facility. At April 30, 2014, the aggregate purchase price of land parcels under option and purchase agreements was approximately $1.12 billion. Of the $1.12 billion of land purchase commitments, we paid or deposited $96.0 million, and, if we acquire all of these land parcels, we will be required to pay an additional $1.02 billion. In addition, we expect to acquire an additional 3,800 home sites from joint ventures in which we have a 50% interest. The purchase price of these home sites will be determined in the future. The purchases of these land parcels are scheduled over the next several years. We have additional land parcels under option that have been excluded from the aforementioned aggregate purchase amounts since we do not believe that we will complete the purchase of these land parcels and no additional funds will be required from us to terminate these contracts. At April 30, 2014, we also had purchase commitments to acquire land for apartment developments of approximately $56.0 million. In general, our cash flow from operating activities assumes that, as each home is delivered, we will purchase a home site to replace it. Because we owned approximately 37,700 home sites at April 30, 2014, of which approximately 13,800 are substantially improved, we do not need to buy home sites immediately to replace those that we deliver. In addition, we generally do not begin construction of our single-family detached homes until we have a signed contract with the home buyer. Should our business decline from present levels, we believe that our inventory levels would decrease as we complete and deliver the homes under construction but do not commence construction of as many new homes, or incur additional costs to improve land we already own, and as we sell and deliver any speculative homes that are then in inventory, all of which should result in additional cash flow from operations. In addition, we might curtail our acquisition of additional land which would further reduce our inventory levels and cash needs. During the six-month period ended April 30, 2014, we acquired control of approximately 3,900 home sites (net of lot options terminated and land sales), including approximately 4,350 home sites in the Shapell acquisition. At April 30, 2014, we owned or controlled through options approximately 50,400 home sites, as compared to 48,600 at October 31, 2013 and 45,200 at April 30, 2013. On August 1, 2013, we entered into an $1.035 billion unsecured, five-year credit facility with 15 banks which extends to August 1, 2018. Up to 75% of the credit facility is available for letters of credit. Under the terms of the credit facility, we are not permitted to allow our maximum leverage ratio (as defined in the credit agreement) to exceed 1.75 to 1.00, and we are required to maintain a minimum tangible net worth (as defined in the credit agreement) of approximately $2.45 billion at April 30, 2014. At April 30, 2014, our leverage ratio was approximately 0.81, and our tangible net worth was approximately $3.65 billion. Based upon the minimum tangible net worth requirement at April 30, 2014, our ability to repurchase our common stock was limited to approximately $1.71 billion. At April 30, 2014, we had $95.0 million outstanding borrowings under our credit facility and had outstanding letters of credit of approximately $90.8 million. As part of the Shapell acquisition, we borrowed $370.0 million under the credit facility on February 3, 2014, of which $275.0 million was repaid as of April 30, 2014. 51 -------------------------------------------------------------------------------- In addition, at April 30, 2014, we had $3.0 million of letters of credit outstanding which were not part of our credit facility; these letters of credit are collateralized by $3.0 million of restricted cash deposits. On February 4, 2014, we entered into a 364-day senior unsecured revolving credit facility (the "364-Day Facility") with five banks. The 364-Day Facility provides for an unsecured revolving credit facility to be made available to us prior to February 3, 2015, in the amount of $500.0 million. We intend for this facility to remain undrawn and its purpose is to provide us additional liquidity should unforeseen circumstances arise. On February 3, 2014, we entered into a five-year senior, $485.0 million, unsecured term loan facility (the "Term Loan Facility") with ten banks. We borrowed the full amount of the Term Loan Facility on February 3, 2014. The initial interest rate on the Term Loan was 1.56% per annum. See Note 2, "Acquisition," Note 6, "Loans Payable, Senior Notes and Mortgage Company Loan Facility" and Note 12, "Stock Issuances and Stock Repurchase Program" of our condensed consolidated financial statements for more information on these transactions. We believe that we will be able to continue to fund our current operations and meet our contractual obligations through a combination of existing cash resources and other sources of capital and credit. Due to the tight credit markets and the uncertainties that exist in the economy and for home builders in general, we cannot be certain that we will be able to replace existing financing or find sources of additional financing in the future; moreover, if we are able to replace all or some of such facilities, we may be subjected to more restrictive borrowing terms and conditions. At April 30, 2014, we had $849.2 million available under our five-year credit facility through August 1, 2018 and $500.0 million available under the 364-Day Facility through February 3, 2015. OPERATING SEGMENTS We operate in two segments: Traditional Home Building and Urban Infill ("City Living"). We operate our Traditional Home Building operations in four geographic segments around the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania, Virginia; the South, consisting of Florida, North Carolina, South Carolina, and Texas; and the West, consisting of Arizona, California, Colorado, Nevada and Washington. The tables below summarize information related to units delivered and revenues and net contracts signed by segment for the six-month and three-month periods ended April 30, 2014 and 2013, and information related to backlog by segment at April 30, 2014 and 2013, and at October 31, 2013 and 2012. Units Delivered and Revenues ($ amounts in millions): Six months ended April 30, Three months ended April 30, 2014 2013 2014 2013 2014 2013 2014 2013 Units Units $ $ Units Units $ $ Traditional Home Building: North 448 321 $ 264.9$ 174.6 239 170 $ 137.3$ 92.2 Mid-Atlantic 546 495 349.6 270.1 273 259 180.5 140.5 South 510 367 336.7 222.7 285 224 186.1 135.6 West 581 407 507.8 241.2 377 207 321.6 128.6



Traditional Home Building 2,085 1,590 1,459.0 908.6

1,174 860 825.5 496.9 City Living 61 50 45.1 32.0 44 34 34.9 19.1 Total 2,146 1,640 $ 1,504.1$ 940.6 1,218 894 $ 860.4$ 516.0 52

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Net Contracts Signed ($ amounts in millions):

Six months ended April 30, Three months ended April 30, 2014 2013 2014 2013 2014 2013 2014 2013 Units Units $ $ Units Units $ $ Traditional Home Building: North 484 558 $ 317.8$ 309.8 303 323 $ 199.6$ 179.3 Mid-Atlantic 630 740 390.5 428.6 367 478 226.6 281.7 South 596 580 424.6 390.5 374 377 256.3 253.0 West 836 660 707.2 517.7 637 419 519.4 339.8 Traditional Home Building 2,546 2,538 1,840.1 1,646.6 1,681 1,597 1,201.9 1,053.8 City Living 119 188 136.5 155.8 68 156 73.0 134.1 Total 2,665 2,726 $ 1,976.6$ 1,802.4 1,749 1,753 $ 1,274.9$ 1,187.9



Backlog ($ amounts in millions):

At April 30, At October 31, 2014 2013 2014 2013 2013 2012 2013 2012 Units Units $ $ Units Units $ $ Traditional Home Building: North 984 862 $ 615.5$ 485.2 948 625 $ 562.5$ 350.0 Mid-Atlantic 986 879 613.9 532.9 902 634 573.0 374.5 South 1,042 962 761.4 651.3 956 749 673.5 483.5 West 1,056 760 897.9 627.5 675 507 593.2 351.0 Traditional Home Building 4,068 3,463 2,888.7 2,296.9 3,481 2,515 2,402.2 1,559.0 City Living 256 192 318.7 234.7 198 54 227.3 110.9 Total 4,324 3,655 $ 3,207.4$ 2,531.6 3,679 2,569 $ 2,629.5$ 1,669.9 Revenues and Income (Loss) Before Income Taxes: The following table summarizes by segment total revenues and income (loss) before income taxes for the six-month and three-month periods ended April 30, 2014 and 2013 (amounts in millions): Six months ended April Three months ended 30, April 30, 2014 2013 2014 2013 Revenue: Traditional Home Building: North $ 264.9$ 174.6$ 137.3$ 92.2 Mid-Atlantic 349.6 270.1 180.5 140.5 South 336.7 222.7 186.1 135.6 West 507.8 241.2 321.6 128.6 Traditional Home Building 1,459.0 908.6 825.5 496.9 City Living 45.1 32.0 34.9 19.1 Total $ 1,504.1$ 940.6$ 860.4$ 516.0 53

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Six months ended April 30, Three months ended April 30, 2014 2013 2014 2013 Income (loss) before income taxes: Traditional Home Building: North $ 17.1$ 7.9 $ 8.8 $ 3.2 Mid-Atlantic 45.9 32.0 24.4 17.2 South 41.0 17.0 23.6 14.2 West 78.7 21.1 44.8 13.0 Traditional Home Building 182.7 78.0 101.6 47.6 City Living 9.0 8.3 10.0 5.6 Corporate and other (a) (27.0 ) (37.0 ) (18.1 ) (12.2 ) Total $ 164.7$ 49.3$ 93.5$ 41.0



(a) "Corporate and other" is comprised principally of general corporate

expenses such as the offices of the Executive Officers of the Company; the

corporate finance, accounting, audit, tax, human resources, risk management, marketing and legal groups; interest income and income from the our ancillary businesses, including Gibraltar; and income from a number of our unconsolidated entities. North Revenues in the six-month period ended April 30, 2014 were higher than those for the comparable period of fiscal 2013 by $90.3 million, or 51.7%. The increase in revenues was primarily attributable to increases of 39.6% and 8.7% in the number and average selling price of homes delivered, respectively. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average selling price of the homes delivered in the fiscal 2014 period was primarily due to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2014. The value of net contracts signed in the six-month period ended April 30, 2014 was $317.8 million, a 2.6% increase from the $309.8 million of net contracts signed during the six-month period ended April 30, 2013. This increase was primarily due to an 18.3% increase in the average value of each net contract, offset, in part, by a decrease of 13.3% in the number of net contracts signed. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products, in the fiscal 2014 period, as compared to the fiscal 2013 period, and increases in base selling prices. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand, as well as the negative impact on our business due to the severe weather we have seen in this region in the fiscal 2014 period. For the six-month period ended April 30, 2014, we reported income before income taxes of $17.1 million, as compared to $7.9 million for the six-month period ended April 30, 2013. This increase in income before income taxes was primarily attributable to higher earnings from the increased revenues, offset, in part, by higher SG&A and higher inventory impairment charges, in the fiscal 2014 period, as compared to the fiscal 2013 period. Inventory impairment charges, in the fiscal 2014 and 2013 periods, were $3.1 million and $1.6 million, respectively. Revenues in the three-month period ended April 30, 2014 were higher than those for the comparable period of fiscal 2013 by $45.1 million, or 48.9%. The increase in revenues was primarily attributable to increases of 40.6% and 5.8% in the number and average selling price of homes delivered, respectively. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average selling price of the homes delivered in the fiscal 2014 period was primarily due to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2014. The value of net contracts signed in the three-month period ended April 30, 2014 was $199.6 million, a 11.3% increase from the $179.3 million of net contracts signed during the three-month period ended April 30, 2013. This increase was primarily due to an 18.7% increase in the average value of each net contract, offset, in part, by a decrease of 6.2% in the number of net contracts signed. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products, in the fiscal 2014 period, as compared to the fiscal 2013 period, and increases in base selling prices. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand, as well as the negative impact on our business due to the severe weather we have seen in this region in the fiscal 2014 period. 54 -------------------------------------------------------------------------------- For the three-month period ended April 30, 2014, we reported income before income taxes of $8.8 million, as compared to $3.2 million for the three-month period ended April 30, 2013. This increase in income before income taxes was primarily attributable to higher earnings from the increased revenues, offset, in part, by higher SG&A and higher inventory impairment charges, in the fiscal 2014 period, as compared to the fiscal 2013 period. Inventory impairment charges, in the three-month periods ended April 30, 2014 and 2013, were $1.7 million and $1.1 million, respectively. Mid-Atlantic For the six-month period ended April 30, 2014, revenues were higher than those for the six-month period ended April 30, 2013, by $79.5 million, or 29.4%. The increase in revenues was primarily attributable to a 10.3% increase in the number of homes delivered and a 17.3% increase in the average selling price of the homes delivered. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average price of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in the fiscal 2014 period. The value of net contracts signed during the six-month period ended April 30, 2014 decreased by $38.1 million, or 8.9%, from the six-month period ended April 30, 2013. The decrease was due to a 14.9% decrease in the number of net contracts signed partially offset by a 7.0% increase in the average value of each net contract signed. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand, as well as the negative impact on our business due to the severe weather we have seen in this region in the fiscal 2014 period. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in the fiscal 2014 period, as compared to the fiscal 2013 period and increases in selling prices. We reported income before income taxes for the six-month periods ended April 30, 2014 and 2013, of $45.9 million and $32.0 million, respectively. The increase in income before income taxes was primarily due to higher earnings from the increased revenues and $2.9 million of earnings from land sales in the fiscal 2014 period, offset, in part, by higher SG&A costs, in the fiscal 2014 period, as compared to the fiscal 2013 period. The earnings from land sales in six months ended April 30, 2014 represents previously deferred gains on our initial sales of properties to Trust II. For the three-month period ended April 30, 2014, revenues were higher than those for the three-month period ended April 30, 2013, by $40.0 million, or 28.5%. The increase in revenues was primarily attributable to a 5.4% increase in the number of homes delivered and a 21.8% increase in the average selling price of the homes delivered. The increase in the average price of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices the fiscal 2014 period. The increase in the number of homes delivered in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The value of net contracts signed during the three-month period ended April 30, 2014 decreased by $55.1 million, or 19.6%, from the three-month period ended April 30, 2013. The decrease was due to a 23.2% decrease in the number of net contracts signed, offset, in part, by a 4.8% increase in the average value of each net contract signed. The decrease in the number of net contracts signed was primarily due to the previously discussed leveling in demand in the fiscal 2014 period. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in the fiscal 2014 period, as compared to the fiscal 2013 period and increases in selling prices. We reported income before income taxes for the three-month periods ended April 30, 2014 and 2013, of $24.4 million and $17.2 million, respectively. The increase in income before income taxes was primarily due to higher earnings from the increased revenues, offset, in part, by higher SG&A costs, in the fiscal 2014 period, as compared to the fiscal 2013 period. South Revenues in the six-month period ended April 30, 2014 were higher than those for the six-month period ended April 30, 2013 by $114.0 million, or 51.2%. This increase was attributable to a 39.0% increase in the number of homes delivered and an 8.8% increase in the average price of the homes delivered. The increase in the number of homes delivered in the fiscal 2014 period was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in Florida and Texas. The increase in the average price of the homes delivered was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in the fiscal 2014 period and increases in in selling prices in fiscal 2014. For the six-month period ended April 30, 2014, the value of net contracts signed increased by $34.1 million, or 8.7%, as compared to the six-month period ended April 30, 2013. The increase was attributable to increases of 2.8% and 5.8% in the number and average value of net contracts signed, respectively. The increase in the number of net contracts signed in the six-month period ended April 30, 2014 was primarily due to increased demand in Florida and Texas in the fiscal 2014 period, as 55 -------------------------------------------------------------------------------- compared to the fiscal 2013 period. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in base selling prices in the fiscal 2014 period. For the six-month periods ended April 30, 2014 and 2013, we reported income before income taxes of $41.0 million and $17.0 million, respectively. The increase in income before income taxes was primarily due to higher earnings from the increased revenues in the fiscal 2014 period, as compared to the fiscal 2013 period, and earnings from land sales of $3.4 million in the fiscal 2014 period, partially offset by higher SG&A costs. Revenues in the three-month period ended April 30, 2014 were higher than those for the three-month period ended April 30, 2013 by $50.5 million, or 37.2%. This increase was attributable to a 27.2% increase in the number of homes delivered and a 7.9% increase in the average price of the homes delivered. The increase in the number of homes delivered in the fiscal 2014 period was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in Texas and Florida. The increase in the average price of the homes delivered was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in the fiscal 2014 period and increases in selling prices in fiscal 2014. For the three-month period ended April 30, 2014, the value of net contracts signed increased by $3.3 million, or 1.3%, as compared to the three-month period ended April 30, 2013. The increase was attributable to an increase of 2.1% in the average value of net contracts signed. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in base selling prices in the fiscal 2014 period. For the three-month periods ended April 30, 2014 and 2013, we reported income before income taxes of $23.6 million and $14.2 million, respectively. The increase in income before income taxes was primarily due to higher earnings from the increased revenues in the fiscal 2014 period, as compared to the fiscal 2013 period, partially offset by higher SG&A costs. West Revenues in the six-month period ended April 30, 2014 were higher than those in the six-month period ended April 30, 2013 by $266.6 million, or 110.5%. The increase in revenues was attributable to a 47.5% increase in the average sales price of the homes delivered and a 42.8% increase in the number of homes delivered. The increase in the average price of the homes delivered was primarily due to a shift in the number of homes delivered to more expensive products, including newly acquired Shapell communities, and/or locations and an increase in selling prices. The increase in the number of homes delivered was primarily attributable to the delivery of 119 Shapell homes in California in the period from February 2, 2014 to April 30, 2014. Excluding these deliveries, the number of homes delivered increased by 13.5% which was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in California and Nevada. The value of net contracts signed during the six-month period ended April 30, 2014 increased $189.5 million, or 36.6%, as compared to the six-month period ended April 30, 2013. This increase was due to an increase of 26.7% in the number of net contracts signed and a 7.9% increase in the average value of each net contract. During the six-month period ended April 30, 2014, we signed 186 contracts with a value of $172.5 million at communities we acquired from Shapell. Excluding these Shapell net contracts signed, the value of net contracts signed during the six-month period ended April 30, 2014 increased by $17.0 million, or 3.3%, as compared to the six-month period ended April 30, 2013. The increase in the value of net contracts signed, excluding Shapell, was due to a 4.9% increase in the average value of each net contract signed, offset, in part, by a decrease of 1.5% in the number of net contracts signed. The increase in the average sales price of net contracts signed, excluding Shapell, was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in base selling prices. The decrease in the number of net contracts signed, excluding Shapell, was primarily due to a reduction of available inventory in the fiscal 2014 period, as compared to the fiscal 2013 period, in California. For the six-month period ended April 30, 2014 and 2013, we reported income before income taxes of $78.7 million and $21.1 million, respectively. The increase in income before income taxes was primarily due to higher earnings from increased revenues, lower cost of revenues as a percentage of revenues, and $4.8 million of earnings from land sales in the fiscal 2014 period, offset, in part, by higher SG&A costs in the fiscal 2014 period, which includes $5.9 million of expenses incurred in the Shapell acquisition. Cost of revenues as a percentage of revenues was 77.6% in the six-month period ended April 30, 2014, as compared to 82.8% in the fiscal 2013 period. The decrease in cost of revenues as a percentage of revenues in the fiscal 2014 period was primarily due to a shift in the number of homes delivered to better margin products and/or locations and increases in selling prices, offset, in part, by the impact of purchase accounting on the homes delivered in the fiscal 2014 period from our acquisition of Shapell. Excluding Shapell's deliveries, cost of revenues as a percentage of revenues in the fiscal 2014 period was 74.3%. Revenues in the three-month period ended April 30, 2014 were higher than those in the three-month period ended April 30, 2013 by $193.0 million, or 150.1%. The increase in revenues was attributable to an 82.1% increase in the number of homes 56 -------------------------------------------------------------------------------- delivered and a 37.3% increase in the average sales price of the homes delivered. The increase in the number of home delivered was primarily attributable to the delivery of 119 Shapell homes in the period from February 2, 2014 to April 30, 2014. Excluding these deliveries, the number of homes delivered increased by 24.6% which was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in California and Nevada. The increase in the average price of the homes delivered was primarily due to a shift in the number of homes delivered to more expensive products and/or locations and an increase in selling prices. The value of net contracts signed during the three-month period ended April 30, 2014 increased $179.6 million, or 52.9%, as compared to the three-month period ended April 30, 2013. This increase was due to an increase of 52.0% in the number of net contracts signed. During the three-month period ended April 30, 2014, we signed 186 contracts with a value of $172.5 million at communities we acquired from Shapell. Excluding these Shapell net contracts signed, the value of net contracts signed during the three-month period ended April 30, 2014 increased by $7.1 million, or 2.1%, as compared to the three-month period ended April 30, 2013. The increase in the value of net contracts signed, excluding Shapell, was due to an increase of 7.6% in the number of net contracts signed, offset, in part, by a 5.1% decrease in the average value of each net contract signed. The increase in the number of net contracts signed was primarily due to an increase in selling communities in Colorado and Nevada, partially offset by a reduction of available inventory in California. The decrease in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to less expensive areas and/or products. For the three-month period ended April 30, 2014 and 2013, we reported income before income taxes of $44.8 million and $13.0 million, respectively. The increase in income before income taxes was primarily due to higher earnings from the increased revenues, lower cost of revenues as a percentage of revenues, and $4.8 million of earnings from land sales in the fiscal 2014 period, offset, in part, by higher SG&A costs in the fiscal 2014 period, which includes $5.1 million of expenses incurred in the Shapell acquisition. Cost of revenues as a percentage of revenues was 79.8% in the three-month period ended April 30, 2014, as compared to 82.4% in the fiscal 2013 period. The decrease in cost of revenues as a percentage of revenues in the fiscal 2014 period was primarily due to a shift in the number of homes delivered to better margin products and/or locations and increases in selling prices, offset, in part, by the impact of purchase accounting on the homes delivered in the fiscal 2014 period from our acquisition of Shapell. Excluding Shapell's deliveries, cost of revenues as a percentage of revenues in the fiscal 2014 period was 74.9%. City Living For the six-months ended April 30, 2014, revenues were higher than those for the six-months ended April 30, 2013, by $13.1 million, or 40.9%. The increase in revenues was primarily attributable to a 22.0% increase in the number of homes delivered and an increase of 15.6% in the average selling price of the homes delivered. The increase in the number of homes delivered was primarily due to an increase in homes delivered in the Pennsylvania City Living communities, which was primarily attributable to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average sales price of homes delivered was primarily due to a shift in the number of homes delivered to more expensive areas and/or products. For the six-month period ended April 30, 2014, the value of net contracts signed decreased by $19.3 million, or 12.4%, as compared to the six-month period ended April 30, 2013. The decrease was attributable to a decrease of 36.7% in the number of net contracts signed, partially offset by a 38.4% increase in the average value of net contracts signed. The decrease in the number of net contracts signed in the six-month period ended April 30, 2014 was primarily due to the commencement of sales at two of our buildings in the second quarter of fiscal 2013 where sales were high during the initial opening. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in the fiscal 2014 period. We reported income before income taxes of $9.0 million in the six-months ended April 30, 2014, as compared to $8.3 million in the six-months ended April 30, 2013. The increase in income before income taxes was primarily attributable to higher earnings from the increased revenues and higher management fee income, partially offset by higher SG&A costs, in the six months ended April 30, 2014, as compared to the six months ended April 30, 2013. For the three months ended April 30, 2014, revenues were higher than those for the three-months ended April 30, 2013, by $15.8 million, or 82.7%. The increase in revenues was primarily attributable to increases of 41.6% and 29.4% in the average selling price of the homes delivered and the number of homes delivered, respectively. The increase in the average sales price of homes delivered was primarily due to a shift in the number of homes delivered to more expensive areas and/or products. The increase in the number of homes delivered was primarily due to an increase in homes delivered in the New Jersey urban market, which was primarily attributable to a higher backlog at October 31, 2013, as compared to October 31, 2012. For the three-month period ended April 30, 2014, the value of net contracts signed decreased by $61.1 million, or 45.6%, as compared to the three-month period ended April 30, 2013. The decrease was attributable to a 56.4% decrease in the number of net contracts signed, offset, in part, by a 24.8% increase in the average value of net contracts signed. The decrease in the 57



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number of net contracts signed in the three-month period ended April 30, 2014 was primarily due to the commencement of sales at two of our buildings in the second quarter of fiscal 2013 where sales were high during the initial opening. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in the fiscal 2014 period. We reported income before income taxes of $10.0 million in the three-months ended April 30, 2014, as compared to $5.6 million in the three-months ended April 30, 2013. The increase in income before income taxes was primarily attributable to higher earnings from the increased revenues, lower cost of revenues as a percentage of revenues and higher management fee income, partially offset by higher SG&A costs, in the three months ended April 30, 2014, as compared to three-months ended April 30, 2013. Cost of revenues as a percentage of revenues was 65.0% and 68.2% in the three months ended April 30, 2014 and 2013, respectively. This decrease in cost of revenues as a percentage of revenues was primarily due to a shift in the number of homes delivered to better margin products and/or locations. Corporate and Other For the six-month period ended April 30, 2014 and 2013, corporate and other loss before income taxes was $27.0 million and $37.0 million, respectively. This decrease in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to an increase in income from unconsolidated entities from $4.2 million in the fiscal 2013 period to $36.8 million in the fiscal 2014 period, and increased income from our Gibraltar operations in the fiscal 2014 period, as compared to the fiscal 2013 period, offset, in part, by $13.2 million of income in the fiscal 2013 period from the settlement of litigation and higher unallocated SG&A in the fiscal 2014 period, as compared to the fiscal 2013 period. The increase in income from unconsolidated entities was due primarily to our recognition of a $23.5 million gain representing our share of the gain on the sale by Trust II of substantially all of its assets to an unrelated party in December 2013 and a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust's apartment properties. The increase attributable to the Trust and Trust II gains was partially offset by lower income realized from Gibraltar's Structured Asset Joint Venture. The increase in unallocated SG&A costs was due primarily to increased compensation costs due to our increased number of employees. For the three-month period ended April 30, 2014 and 2013, corporate and other loss before income taxes was $18.1 million and $12.2 million, respectively. The increase in the loss in the fiscal 2014 period, as compared to the fiscal 2013 period, was primarily due to higher unallocated SG&A and $13.2 million of income in the fiscal 2013 period from the settlement of litigation, offset, in part, by an increase in income from unconsolidated entities from $2.5 million in the fiscal 2013 period to $14.0 million in the fiscal 2014 period, and increased income from our Gibraltar operations in the fiscal 2014 period, as compared to the fiscal 2013 period. The increase in income from unconsolidated entities was due primarily from our recognition of a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust's apartment properties. The increase in unallocated SG&A costs was due primarily to increased compensation costs due to our increased number of employees.


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Source: Edgar Glimpses


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