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Note 4 - Reduction of Inventory to Fair Value

9 Months Ended

Jul. 31, 2020

Inventory Impairments and Land Option Cost Write-offs [Text Block]

4.	Reduction of Inventory to Fair Value

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of the estimated future cash flows at a discount rate commensurate with the risk of the respective community. In the first three quarters of fiscal 2020, we did not record any impairment losses. For the nine months ended July 31, 2019, our discount rate used for the impairments recorded ranged from 18.0% to 18.3%. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may need to recognize additional impairments.

During the nine months ended July 31, 2020 and 2019, we evaluated inventories of all 354 and 398 communities under development and held for future development or sale, respectively, for impairment indicators through preparation and review of detailed budgets or other market indicators of impairment. We performed undiscounted future cash flow analyses during the nine months ended July 31, 2020 for one of those communities (i.e., it had a projected operating loss or other impairment indicators), with an aggregate carrying value of $0.6 million. As a result of our undiscounted future cash flow analyses, the community did not require a discounted cash flow analysis to be performed, and therefore, no impairment loss was recorded for the nine months ended July 31, 2020. We performed undiscounted future cash flow analyses during the nine months ended July 31, 2019 for seven of the 398 communities (i.e., those which had a projected operating loss or other impairment indicators) with an aggregate carrying value of $52.8 million. As a result of our undiscounted future cash flow analyses, we performed discounted cash flow analysis and recorded aggregate impairment losses of $0.1 million in one community (which had an aggregate pre-impairment value of $1.2 million) for the three months ended July 31, 2019, and $1.1 million in four communities (which had an aggregate pre-impairment value of $11.4 million) for the nine months ended July 31, 2019, which is included in the Condensed Consolidated Statement of Operations on the line entitled “Homebuilding: Inventory impairment loss and land option write-offs” and deducted from inventory. The pre-impairment value represents the carrying value, net of prior period impairments, if any, at the time of recording the impairments. The one community for which we performed undiscounted future cash flow analyses during the nine months ended July 31, 2020, with an aggregate carrying value of $0.6 million, did not have undiscounted future cash flows that exceeded the carrying amount by less than 20%. Of those communities for which we performed undiscounted future cash flow analyses during the nine months ended July 31, 2019, three communities, with an aggregate carrying value of $41.3 million, had undiscounted future cash flows that exceeded the carrying amount by less than 20%.

The Condensed Consolidated Statement of Operations line entitled “Homebuilding: Inventory impairment loss and land option write-offs” also includes write-offs of options and approval, engineering and capitalized interest costs that we record when we redesign communities and/or abandon certain engineering costs and we do not exercise options in various locations because the communities' pro forma profitability is not projected to produce adequate returns on investment commensurate with the risk. Total aggregate write-offs related to these items were $2.4 million and $1.3 million for the three months ended July 31, 2020 and 2019, respectively, and $6.2 million and $2.5 million for the nine months ended July 31, 2020 and 2019, respectively. Occasionally, these write-offs are offset by recovered deposits (sometimes through legal action) that had been written off in a prior period as walk-away costs. Historically, these recoveries have not been significant in comparison to the total costs written off. The number of lots walked away from during the three months ended July 31, 2020 and 2019 were 1,131 and 1,852, respectively, and 3,495 and 4,022 during the nine months ended July 31, 2020 and 2019, respectively. The walk-aways were located in all segments in the first three quarters of fiscal 2020 and 2019.

We decide to mothball (or stop development on) certain communities when we determine that the current performance does not justify further investment at the time. When we decide to mothball a community, the inventory is reclassified on our Condensed Consolidated Balance Sheets from “Sold and unsold homes and lots under development” to “Land and land options held for future development or sale.” During the first three quarters of fiscal 2020, we did not mothball any additional communities, or sell any previously mothballed communities, but we re-activated one previously mothballed community and also re-activated a portion of one previously mothballed community. As of July 31, 2020 and October 31, 2019, the net book value associated with our 12 and 13 total mothballed communities was $13.1 million and $13.8 million, respectively, which was net of impairment charges recorded in prior periods of $120.4 million and $138.1 million, respectively.

We sell and lease back certain of our model homes with the right to participate in the potential profit when each home is sold to a third party at the end of the respective lease. As a result of our continued involvement, for accounting purposes in accordance with ASC 606-10-55-68, these sale and leaseback transactions are considered a financing rather than a sale. Therefore, for purposes of our Condensed Consolidated Balance Sheets, at July 31, 2020 and October 31, 2019, inventory of $54.9 million and $54.2 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $53.0 million and $51.2 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.

We have land banking arrangements, whereby we sell our land parcels to the land bankers and they provide us an option to purchase back finished lots on a predetermined schedule. Because of our options to repurchase these parcels, for accounting purposes, in accordance with ASC 606-10-55-70, these transactions are considered a financing rather than a sale. For purposes of our Condensed Consolidated Balance Sheets, at July 31, 2020 and October 31, 2019, inventory of $139.9 million and $136.1 million, respectively, was recorded to “Consolidated inventory not owned,” with a corresponding amount of $91.9 million and $89.8 million (net of debt issuance costs), respectively, recorded to “Liabilities from inventory not owned” for the amount of net cash received from the transactions.