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Inventory Impairments and Land Option Contract Abandonments | 9 Months Ended
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Aug. 31, 2012
Inventory Impairments and Land Option Contract Abandonments [Abstract] |
Inventory Impairments and Land Option Contract Abandonments | Inventory Impairments and Land Option Contract Abandonments Each community or land parcel in the Company’s owned inventory is assessed to determine if indicators of potential impairment exist. Impairment indicators are assessed separately for each community or land parcel on a quarterly basis and include, but are not limited to: significant decreases in sales rates, average selling prices, volume of homes delivered, gross profit margins on homes delivered or projected gross profit 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 community or land parcel, the identified asset is evaluated for recoverability in accordance with Accounting Standards Codification Topic No. 360, “Property, Plant, and Equipment” (“ASC 360”). The Company evaluated 33 communities or land parcels for recoverability during each of the three-month periods ended August 31, 2012 and 2011. The Company evaluated 109 and 97 communities or land parcels for recoverability during the nine months ended August 31, 2012 and 2011, respectively. Some of the communities or land parcels evaluated during the nine months ended August 31, 2012 and 2011 were evaluated in more than one quarterly period. When an indicator of potential impairment is identified for a community or land parcel, the Company tests the asset for recoverability by comparing the carrying value 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. With the undiscounted future net cash flows, the Company also considers recent trends in its sales, backlog and cancellation rates, as well as expectations related to the following: product offerings; market supply and demand, including estimated average selling prices and related price appreciation; and land development, construction and overhead costs to be incurred and related cost inflation. With respect to the three months and nine months ended August 31, 2012 and 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 2011 and 2012, with no significant deterioration or improvement identified as to revenue and cost drivers. In the Company’s assessments during the first three quarters of 2012, the Company determined that the year-over-year decrease in net orders in the first quarter of 2012 and the modest year-over-year increases in net orders in each of the second and third quarters of 2012 did not reflect a sustained change in market conditions that could prevent recoverability. Rather, the Company considered that the changes reflected residential consumer mortgage loan funding issues arising from a change in the nature of the Company’s relationships with mortgage lenders during the period, mostly in the first half of 2012, when the Company's preferred mortgage lender ceased its forward mortgage banking operations. These issues have been mitigated since the Company began the transition to its new (and present) preferred mortgage lender, who began accepting new mortgage loan applications from the Company's homebuyers on May 1, 2012, which has resulted in more consistent execution and completion of residential consumer mortgage loan originations for the Company's homebuyers who choose to use the lender. Compared to the period in the first half of 2012 before May 1, this has improved the quality and stability of the Company's backlog and contributed to a more predictable business flow of converting net orders into home deliveries and revenues. The Company’s year-over-year net order comparison for the first nine months of 2012 was also impacted by a lower number of new home communities open for sales since the beginning of the year from which the Company could generate net orders, rather than an overall decline in market conditions. On a per community basis, the Company's 2012 third quarter net orders increased from the year-earlier quarter. Additionally, the Company's ability to improve its average selling prices for its homes delivered each quarter since the beginning of 2012 has helped the Company maintain and slightly improve its profitability on homes closed. Based on the Company's experience, and taking into account the signs of stability in many markets for new home sales, the Company’s inventory assessments as of August 31, 2012 considered an expected steady, if slightly improved, overall sales pace and average selling price performance for the remainder of 2012 and 2013 relative to the pace and performance in recent quarters. Given the inherent challenges and uncertainties in forecasting future results, the Company’s inventory assessments at the time they are made take into consideration whether a community or land parcel is active, meaning it is open for sales and/or undergoing development, or whether it is being held for future development. For active communities and land parcels, due to their short-term nature as compared to land held for future development, the Company's inventory assessments generally assume the continuation of then-current market conditions, subject to identifying information suggesting a significant sustained deterioration or improvement, or other changes, in such conditions. These assessments, at the time made, generally anticipate sales rates, average selling prices and costs to continue at or near then-current levels through the affected asset’s estimated remaining life. Land held for future development consists of communities or land parcels where development activity has been suspended or has not yet begun, but is expected to occur in the future. These assets held for future development are located in various submarkets where conditions do not presently support further investment or development, or are subject to a building permit moratorium or regulatory restrictions, or are portions of larger land parcels that the Company plans to build out over several years and/or that have not yet been entitled. Inventory assessments for the Company’s land held for future development consider then-current market conditions as well as subjective forecasts regarding the timing and costs of development and construction and related cost inflation; the product(s) to be offered; and the sales rates and selling prices and related price appreciation of the offered product(s) when an associated community is anticipated to open for sales. The Company evaluates various factors to develop these forecasts, including the availability of and demand for homes and finished lots within the relevant marketplace; historical, current and expected future sales trends for the marketplace; and third-party data, if available. These various estimates, trends, expectations and assumptions used in each of the Company’s inventory assessments are specific to each community or land parcel based on what the Company believes are reasonable forecasts for performance and may vary among communities or land parcels and may vary over time. The Company records an inventory impairment charge when the carrying value of a real estate asset is greater than the undiscounted future net cash flows the asset is expected to generate. These real estate assets are written down to fair value, which is primarily based on the estimated future net cash flows discounted for inherent risk associated with each such asset. Inputs used in the estimated discounted future net cash flows are specific to each affected community or land parcel and are based on expectations of the Company’s management for each such asset as of the applicable measurement date, including, among others, expectations related to average selling prices and delivery rates. The discount rates used 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. The following table summarizes ranges for significant quantitative unobservable inputs the Company utilized in its fair value measurements with respect to the impaired communities or land parcels written down to fair value during the periods presented:
|  | Nine Months Ended |  | Three Months Ended
Unobservable Input (a) |  | August 31, 2012 |  | August 31, 2012
Average selling price |  | $115,200 - $497,900 |  | $152,000 - $246,200
Deliveries per month |  | 1 - 6 |  | 2 - 4
Discount rate |  | 17% - 20% |  | 17% - 20%
(a) | The ranges of inputs used primarily reflect the underlying variability among the various housing markets where each of the impacted communities or land parcels are located, rather than changes in prevailing market conditions.
Based on the results of its evaluations, the Company recognized inventory impairment charges of $6.4 million in the three months ended August 31, 2012 associated with four communities with a post-impairment fair value of $3.2 million. In the three months ended August 31, 2011, the Company recognized $.3 million of such charges associated with one community with a post-impairment fair value of $1.1 million. In the nine months ended August 31, 2012, the Company recognized inventory impairment charges of $22.9 million associated with 11 communities with a post-impairment fair value of $30.6 million. In the nine months ended August 31, 2011, the Company recognized $21.4 million of such charges associated with nine communities or land parcels with a post-impairment fair value of $29.9 million. These charges in the 2011 period 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 took back on a note receivable. As of August 31, 2012, the aggregate carrying value of the Company’s inventory that had been impacted by inventory impairment charges was $334.4 million, representing 48 communities and various other land parcels. As of November 30, 2011, the aggregate carrying value of the Company’s inventory that had been impacted by inventory impairment charges was $338.5 million, representing 53 communities and various other land parcels. 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 factors relative to the market in which the asset is located, among others: 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 no land option contract abandonment charges in the three months or nine months ended August 31, 2012. In the three months ended August 31, 2011, the Company recognized $.8 million of land option contract abandonment charges corresponding to 209 lots. In the nine months ended August 31, 2011, the Company recognized $2.1 million of such charges corresponding to 467 lots. 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 community or land parcel 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 anticipated delivery timelines, the Company expects to realize, on an overall basis, the majority of its current inventory balance within 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, actual results could differ substantially from those estimated.

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