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Inventory Impairments and Land Option Contract Abandonments | 12 Months Ended
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Nov. 30, 2011
Inventory Impairments and Land Option Contract Abandonments [Abstract] |
Inventory Impairments and Land Option Contract Abandonments | Note 6. Inventory Impairments and Land Option Contract Abandonments Each land parcel or community in the Company’s owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each land parcel or community on a quarterly basis and include, but are not limited to: significant decreases in sales rates, average selling prices, volume of homes delivered, gross margins on homes delivered or projected margins on homes in backlog or future housing sales; significant increases in budgeted land development and construction costs or cancellation rates; or projected losses on expected future land sales. If indicators of potential impairment exist for a land parcel or community, the identified asset is evaluated for recoverability in accordance with ASC 360. The Company evaluated 138, 118 and 281 land parcels or communities for recoverability during the years ended November 30, 2011, 2010 and 2009, respectively. Some of the land parcels or communities evaluated during the years ended November 30, 2011, 2010 and 2009 may have been evaluated in more than one quarterly period. When an indicator of potential impairment is identified for a land parcel or community, the Company tests the asset for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which the asset is located as well as factors known to the Company at the time the cash flows are calculated. The undiscounted future net cash flows consider recent trends in the Company’s sales, backlog and cancellation rates. Also taken into account are the Company’s future expectations related to the following: market supply and demand, including estimates concerning average selling prices; sales and cancellation rates; and anticipated land development, construction and overhead costs to be incurred. With respect to the year ended November 30, 2011, these expectations reflected the Company’s experience that market conditions for its assets in inventory where impairment indicators were identified have been generally stable in 2010 and 2011, with no significant deterioration or improvement identified as to revenue and cost drivers, excluding the temporary, though significant impact of the expiration of the Tax Credit. In its inventory assessments during 2011 and 2010, the Company determined that the declines in its sales and backlog levels that it experienced in the latter half of 2010 and in the first half of 2011 did not reflect a sustained change in market conditions preventing recoverability. Rather, the Company considered that they reflected the after effects of the Tax Credit. Strategic community count reductions the Company made in select markets in prior periods to align its operations with market activity levels also contributed to the declines in sales and backlog levels. Based on this experience, and taking into account the year-over-year increase in net orders in the latter half of 2011 and the number of new home communities open for sales, and signs of stability in certain markets for new home sales, the Company’s inventory assessments as of November 30, 2011 considered an expected overall improved sales pace for 2012. Given the inherent challenges and uncertainties in forecasting future results, the Company’s inventory assessments at the time they are made generally assume the continuation of then-current market conditions, subject to identifying information suggesting a sustained deterioration or improvement in such conditions or other significant changes. Therefore, the Company’s inventory assessments, at the time made, anticipate sales rates, average selling prices and costs to generally continue at or near then-current levels through the affected asset’s estimated remaining life. For the Company’s land held for future development, its inventory assessments also incorporate highly subjective forecasts for future performance, including the timing of development, the product to be offered, the sales rates and selling prices of the product when the community is anticipated to open for sales, and the projected costs to develop and construct the community. The Company evaluates various factors to develop its forecasts, including the availability of and demand for homes and finished lots within the marketplace; historical, current and future sales trends; and third-party data, if available. Based on these factors, the Company formulates reasonable assumptions for future performance based on its judgment. These estimates, trends and expectations used in the Company’s inventory assessments are specific to each land parcel or community and may vary among land parcels or communities. A real estate asset is considered impaired when its carrying value is greater than the undiscounted future net cash flows the asset is expected to generate. Impaired real estate assets are written down to fair value, which is primarily based on the estimated future cash flows discounted for inherent risk associated with each asset. The discount rates used in the Company’s estimated discounted cash flows ranged from 17% to 20% during 2011 and 2010 and ranged from 12% to 21% during 2009. These discount rates and related discounted cash flows are impacted by the following: the risk-free rate of return; expected risk premium based on estimated land development, construction and delivery timelines; market risk from potential future price erosion; cost uncertainty due to development or construction cost increases; and other risks specific to the asset or conditions in the market in which the asset is located at the time the assessment is made. These factors are specific to each land parcel or community and may vary among land parcels or communities. Based on the results of its evaluations, the Company recognized pretax, noncash inventory impairment charges of $22.7 million in 2011 associated with 12 land parcels or communities with a post-impairment fair value of $34.0 million. These charges included an $18.1 million adjustment to the fair value of real estate collateral in the Company’s Southwest homebuilding reporting segment that the Company recorded upon the foreclosure of a note receivable in 2011. In 2010, the Company recognized $9.8 million of pretax, noncash inventory impairment charges associated with eight land parcels or communities with a post-impairment fair value of $11.6 million. In 2009, the Company recognized pretax, noncash inventory impairment charges of $120.8 million associated with 61 land parcels or communities with a post-impairment fair value of $129.0 million. The inventory impairments the Company recorded during 2011, 2010 and 2009 reflected declining asset values in certain markets due to unfavorable economic and competitive conditions. In some cases, the Company has recognized impairment charges for particular land parcels or communities in multiple years. As of November 30, 2011, the aggregate carrying value of the Company’s inventory that had been impacted by pretax, noncash inventory impairment charges was $338.5 million, representing 53 land parcels or communities. As of November 30, 2010, the aggregate carrying value of the Company’s inventory that had been impacted by pretax, noncash inventory impairment charges was $418.5 million, representing 72 land parcels or communities. The Company’s inventory controlled under land option contracts and other similar contracts is assessed to determine whether it continues to meet the Company’s internal investment and marketing standards. Assessments are made separately for each optioned land parcel on a quarterly basis and are affected by the following, among other factors: current and/or anticipated sales rates, average selling prices and home delivery volume; estimated land development and construction costs; and projected profitability on expected future housing or land sales. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in its marketing strategy, the Company writes off the related inventory costs, including non-refundable deposits and pre-acquisition costs. Based on the results of its assessments, the Company recognized pretax, noncash land option contract abandonment charges of $3.1 million corresponding to 830 lots in 2011, $10.1 million corresponding to 1,007 lots in 2010, and $47.3 million corresponding to 1,362 lots in 2009. Inventory impairment and land option contract abandonment charges are included in construction and land costs in the Company’s consolidated statements of operations. The estimated remaining life of each land parcel or community in the Company’s inventory depends on various factors, such as the total number of lots remaining; the expected timeline to acquire and entitle land and develop lots to build homes; the anticipated future sales and cancellation rates; and the expected timeline to build and deliver homes sold. While it is difficult to determine a precise timeframe for any particular inventory asset, the Company estimates its inventory assets’ remaining operating lives under current and expected future market conditions to range generally from one year to in excess of 10 years. Based on current market conditions and expected delivery timelines, the Company expects to realize, on an overall basis, the majority of its current inventory balance in three to five years. Due to the judgment and assumptions applied in the estimation process with respect to inventory impairments, land option contract abandonments, the remaining operating lives of the Company’s inventory assets and the realization of its inventory balances, it is possible that actual results could differ substantially from those estimated.

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