Note 4 - Real Estate Inventories

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Real Estate Disclosure [Text Block]

4.    Real Estate Inventories

Real estate inventories are summarized as follows:

	December 31,
	2019		2018
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	17,865	$	20,726
Land held and land under development		180,823		210,527
Homes completed or under construction		183,711		286,416
Model homes		51,539		48,621
	$	433,938	$	566,290

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.1 million and $0.9 million as of December 31, 2019 and 2018, respectively.

Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).

In accordance with ASC 360, inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level on a quarterly basis or whenever indicators of impairment exist. For the years ended December 31, 2019, 2018 and 2017, the Company recognized real estate-related impairments of $10.2 million, $10.0 million and $2.2 million, respectively, in cost of sales.  For 2019, these charges resulted in a decrease of $3.6 million and $6.6 million to pretax income (loss) for our California and Arizona homebuilding segments, respectively, and decreases of $10.0 million and $2.2 million to pretax income (loss) for our California homebuilding segment for the years ended December 31, 2018 and 2017, respectively.  Fair value for the homebuilding projects impaired during 2019, 2018 and 2017 was calculated under discounted cash flow models using a discount rate or discount rate range of 17%-19%, 9%-16%, and 8%, respectively.  Fair value for the land sales project impaired during 2019 was determined using the land purchase price included in the executed sales agreement, including commissions, less the Company's cost to sell.  The following table summarizes inventory impairments recorded during the years ended December 31, 2019, 2018 and 2017:

	Year Ended December 31,
	2019		2018		2017
	(Dollars in Thousands)
Inventory impairments:
Home sales	$	8,300	$	10,000	$	2,200
Land sales		1,900		—		—
Total inventory impairments	$	10,200	$	10,000	$	2,200
Remaining carrying value of inventory impaired at year end	$	81,622	$	57,845	$	5,921
Number of projects impaired during the year		3		2		1
Total number of projects subject to periodic impairment review during the year (1)		27		26		26

(1) Represents the peak number of real estate projects that we had during each respective year. The number of projects outstanding at the end of each year may be less than the number of projects listed herein.

The $8.3 million home sales impairment recorded during 2019 related to two homebuilding communities.  $1.7 million of the impairment charges related to a higher-priced community in Southern California and $6.6 million were recorded against the Company's luxury condominium project in Scottsdale, AZ.  In both instances, these communities were experiencing slower monthly sales absorption rates and the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value. The $1.9 million land sales impairment recorded in 2019 related to land the Company had under contract in Northern California that closed during the year.  The impairment charges represented the loss expected from the sale of the contracted land for less than its carrying value.

The home sales impairments of $10.0 million recorded during 2018 related to homes completed or under construction for two, higher-priced active homebuilding communities located in Southern California. These communities were experiencing slower monthly sales absorption rates, and the Company determined additional incentives and pricing adjustments were required to sell the remaining homes and lots at lower estimated aggregate sales prices than the previous carrying value for each project.

The home sales impairments of $2.2 million recorded during 2017 related to homes completed or under construction for one active homebuilding community located in Southern California that closed out during 2018. This community was experiencing a slow monthly sales absorption rate, and the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value.

For more information on fair value measurements, please refer to Note 10.