Inventory Impairments and Land Option Contract Abandonments

Each community or land parcel in our owned inventory is assessed on a quarterly basis to determine if indicators of potential impairment exist. We record an inventory impairment charge on a community or land parcel that is active or held for future development when indicators of potential impairment exist and the carrying value of the 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 determined based on the estimated future net cash flows discounted for inherent risk associated with each such asset, or other valuation techniques. We record an inventory impairment charge on land held for sale when the carrying value of a land parcel is greater than its fair value. These real estate assets are written down to fair value, less associated costs to sell. The estimated fair values of such assets are generally based on bona fide letters of intent from outside parties, executed sales contracts, broker quotes or similar information.

We evaluated 49 and 43 communities or land parcels for recoverability during the nine months ended August 31, 2017 and 2016, respectively. The carrying value of the communities or land parcels evaluated during the nine months ended August 31, 2017 and 2016 was $436.7 million and $350.0 million, respectively. Some of the communities or land parcels evaluated during the nine months ended August 31, 2017 and 2016 were evaluated in more than one quarterly period. Communities or land parcels evaluated for recoverability in more than one quarterly period were counted only once for each nine-month period. The communities or land parcels evaluated during the nine months ended August 31, 2017 included certain communities or land parcels previously held for future development that were reactivated during 2016 or 2017 as part of our efforts to improve our asset efficiency under our returns-focused growth plan.

Based on the results of our evaluations, we recognized inventory impairment charges of $7.1 million for the three months ended August 31, 2017 and $14.6 million for the nine months ended August 31, 2017. For the three months and nine months ended August 31, 2016, we recognized inventory impairment charges of $2.6 million and $13.9 million, respectively. The inventory impairment charges for the three months and nine months ended August 31, 2017 and 2016 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in those communities or land parcels. The inventory impairment charges for the three months and nine months ended August 31, 2017 included one community in California where we decided to accelerate the overall pace for selling and delivering homes, primarily through lowering selling prices. In addition, the inventory impairment charges for these three-month and nine-month periods included two communities and six communities, respectively, where we decided to accelerate the overall pace for selling, building and delivering homes on land previously held for future development. The inventory impairment charges for the three months and nine months ended August 31, 2016 included two communities in California where we decided to accelerate the overall pace for selling, building and delivering homes, primarily through lowering selling prices. The inventory impairment charges for the nine months ended August 31, 2016 also included $5.4 million associated with the sales of two land parcels in the Metro Washington, D.C. market as part of the wind down of our operations in that market, and $5.2 million associated with one community in California and one in Florida where we decided to accelerate the overall timing for selling, building and delivering homes on land that was previously held for future development. The charges for the nine months ended August 31, 2016 also reflected the sales of our last remaining land parcels in the Rio Grande Valley area of Texas, which closed in the 2016 second quarter.

The following table summarizes ranges for significant quantitative unobservable inputs we utilized in our fair value measurements with respect to the impaired communities written down to fair value during the periods presented:



	Three Months Ended August 31,		Nine Months Ended August 31,
Unobservable Input (a)	2017	2016	2017	2016
Average selling price	$207,100 - $1,576,500	$351,600 - $486,000	$207,100 - $1,576,500	$280,100 - $486,000
Deliveries per month	2 - 4	2 - 3	2 - 4	1 - 4
Discount rate	17% - 18%	17%	17% - 18%	17% - 20%


(a)	The ranges of inputs used in each period primarily reflect differences between the housing markets where each impacted community is located, rather than fluctuations in prevailing market conditions.

As of August 31, 2017, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $209.1 million, representing 26 communities and various other land parcels. As of November 30, 2016, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $215.3 million, representing 28 communities and various other land parcels.

Our inventory controlled under land option contracts and other similar contracts is assessed on a quarterly basis to determine whether it continues to meet our investment return standards. When a decision is made not to exercise certain land option contracts and other similar contracts due to market conditions and/or changes in our marketing strategy, we write off the related inventory costs, including non-refundable deposits and unrecoverable pre-acquisition costs. Based on the results of our assessments, we recognized land option contract abandonment charges of $1.0 million corresponding to 119 lots for the three months ended August 31, 2017, and $3.5 million of such charges corresponding to 639 lots for the nine months ended August 31, 2017. We recognized land option contract abandonment charges of $.5 million corresponding to 50 lots for the three months ended August 31, 2016, and $2.9 million of such charges corresponding to 542 lots for the nine months ended August 31, 2016. Of the land option contract abandonment charges recognized for the three months and nine months ended August 31, 2016, $1.4 million related to the wind down of our Metro Washington, D.C. operations.

Due to the judgment and assumptions applied in our inventory impairment and land option contract abandonment assessment processes, particularly as to land held for future development or sale, it is possible that actual results could differ substantially from those estimated.