Note 4 - Real Estate Inventories

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Real Estate Disclosure [Text Block]

4. Real Estate Inventories

Real estate inventories are summarized as follows:

	June 30,		December 31,
	2020		2019
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	14,142	$	17,865
Land held and land under development		146,859		180,823
Homes completed or under construction		154,547		183,711
Model homes		55,401		51,539
	$	370,949	$	433,938

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0 and $0.1 million as of  June 30, 2020 and December 31, 2019, 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 allocated 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 three and six months ended June 30, 2020, the Company recognized inventory impairments of $19.0 million in cost of sales resulting in an increase of $17.8 million and $1.2 million in pretax loss for our California and Arizona homebuilding segments, respectively. The fair values for the homebuilding projects impaired were calculated under discounted cash flow models using discount rates ranging from 14%-26%. The following table summarizes inventory impairments recorded during the three and six months ended June 30, 2020 and 2019:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Inventory impairments:
Home sales	$	19,000	$	—	$	19,000	$	—
Total inventory impairments	$	19,000	$	—	$	19,000	$	—
Remaining carrying value of inventory impaired at period end	$	79,033	$	—	$	79,033	$	—
Number of projects impaired during the period		5		—		5		—
Total number of projects subject to periodic impairment review during period (1)		27		25		27		27

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

The $17.8 million in California home sales impairments recorded in the 2020 second quarter related to four homebuilding communities. Of this total, $6.5 million in charges related to a condominium community in the Sacramento Area, $6.2 million in charges related to a townhome community within Southern California's Inland Empire, $4.5 million in charges related to a townhome community in San Diego, and $0.6 million in charges related to a condominium community in Los Angeles.  The $1.2 million in Arizona home sales impairments related to the Company's luxury condominium project in Scottsdale, Arizona.  Each of these projects experienced slower absorptions which resulted in increased sales incentives and holding costs for these projects for which the aggregate sales prices for remaining units at each community would be lower than their previous carrying values.  In addition, some of these communities experienced higher direct construction costs than originally underwritten and budgeted.

During the 2020 first quarter, the Company terminated its option agreement for a luxury condominium project in Scottsdale, Arizona. Due to the lower demand levels experienced at this community coupled with the substantial investment required to build out the remainder of the project, the Company decided to abandon the future acquisition, development, construction and sale of future phases of the project that were under option. In accordance with ASC 970-360-40-1, the capitalized costs related to the project are expensed and not allocated to other components of the project that the Company did develop. For the six months ended June 30, 2020, the Company recorded an abandonment charge of $14.0 million representing the capitalized costs that have accumulated related to the portion of the project that is being abandoned.  This charge is included within project abandonment costs in the accompanying condensed consolidated statement of operations.