Note 4 - Real Estate Inventories

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Real Estate Disclosure [Text Block]

4.    Real Estate Inventories

Real estate inventories are summarized as follows:

	December 31,
	2020		2019
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	12,202	$	17,865
Land held and land under development		127,807		180,823
Homes completed or under construction		133,567		183,711
Model homes		41,381		51,539
	$	314,957	$	433,938

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of $0.1 million and $0.1 million as of December 31, 2020 and 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 years ended December 31, 2020, 2019 and 2018, the Company recognized real estate-related impairments of $19.0 million, $10.2 million and $10.0 million, respectively, in cost of sales.  For 2020, these charges resulted in an increase of $17.8 million and $1.2 million to pretax loss for our California and Arizona homebuilding segments, respectively.  For 2019, these charges resulted in an increase of $3.6 million and $6.6 million to pretax loss for our California and Arizona homebuilding segments, respectively.  For 2018, the $10.0 million in impairment charges resulted in an increase of the same amount to pretax loss for our California homebuilding segment.  Fair value for the homebuilding projects impaired during 2020, 2019 and 2018 was calculated under discounted cash flow models using discount rate ranges of 14%-26%, 17%-19%, and 9%-16%, 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, 2020, 2019 and 2018:

	Year Ended December 31,
	2020		2019		2018
	(Dollars in Thousands)
Inventory impairments:
Home sales	$	19,000	$	8,300	$	10,000
Land sales		—		1,900		—
Total inventory impairments	$	19,000	$	10,200	$	10,000
Remaining carrying value of inventory impaired at year end	$	47,178	$	81,622	$	57,845
Number of projects impaired during the year		5		3		2
Total number of projects subject to periodic impairment review during the year (1)		31		27		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 $17.8 million in California home sales impairments recorded in 2020 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.

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 the Inland Empire of 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 the 2019 third quarter 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.

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

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 year ended December 31, 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 consolidated statement of operations.