Inventory Impairments and Land Option Contract Abandonments

6 Months Ended

May 31, 2020

Inventory Impairments and Land Option Contract Abandonments [Abstract]

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.

When an indicator of potential impairment is identified for a community or land parcel, we test the asset for recoverability by comparing the carrying value of the asset to the undiscounted future net cash flows expected to be generated by the asset. The undiscounted future net cash flows are impacted by then-current conditions and trends in the market in which the asset is located as well as factors known to us at the time the cash flows are calculated. These factors may include recent trends in our orders, backlog, cancellation rates and volume of homes delivered, as well as our expectations related to the following: product offerings; market supply and demand, including estimated average selling prices and related price appreciation; and land development, home construction and overhead costs to be incurred and related cost inflation. With respect to the three months ended May 31, 2020, these expectations considered that beginning in mid-March and throughout the remainder of the 2020 second quarter, the COVID-19 pandemic and related COVID-19 control responses in our served markets caused a significant contraction in economic activity and adversely affected our ability to conduct normal operations, as described in Note 1 – Basis of Presentation and Significant Accounting Policies, as well as reductions in our net orders, backlog levels and homes delivered in the quarter. Our impairment assessments also considered that our average selling price of homes delivered in the 2020 second quarter was nearly even with the year-earlier quarter, and our housing gross profit margin for the period improved significantly, with sales incentives as a percentage of housing revenues remaining flat year over year. Moreover, the average selling price of our net orders generated during the 2020 second quarter increased modestly from the year-earlier period, and in conjunction with our ability to begin to effectively resume nearly all of our operations, our net orders rose steadily in May from the low levels in April, although below year-earlier levels. Taken together, and notwithstanding the significant disruptions associated with the COVID-19 pandemic during the 2020 second quarter, our inventory assessments as of May 31, 2020 determined that market conditions for each of our assets in inventory where impairment indicators were identified were expected to be sufficiently stable, with a tempered overall net order pace and a steady average selling price for the remainder of 2020 and into 2021 relative to the performance in recent quarters, to support such assets’ recoverability. Our inventory is assessed for potential impairment on a quarterly basis, and the assumptions used are reviewed and adjusted, as necessary, to reflect the market conditions and trends and our expectations at the time each assessment is performed.

We evaluated 18 and 24 communities or land parcels for recoverability during the six months ended May 31, 2020 and 2019, respectively, including certain communities or land parcels previously held for future development that were reactivated as part of our ongoing efforts to improve asset efficiency. The carrying values of the communities or land parcels evaluated were $148.3 million at May 31, 2020 and $164.0 million at May 31, 2019. Some of the communities or land parcels evaluated

during the six months ended May 31, 2020 and 2019 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 six-month period.

Based on the results of our evaluations, we recognized no inventory impairment charges for the three months ended May 31, 2020 and $5.1 million of inventory impairment charges for the six months ended May 31, 2020. For the three months and six months ended May 31, 2019, we recognized inventory impairment charges of $3.4 million and $6.6 million, respectively. The impairment charges for the six-month period ended May 31, 2020 and the three-month and six-month periods ended May 31, 2019 reflected our decisions to make changes in our operational strategies aimed at more quickly monetizing our investment in certain communities by accelerating the overall pace for selling, building and delivering homes therein, including communities on land previously held for future development.

The following table summarizes 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 May 31,		Six Months Ended May 31,
Unobservable Input (a)	2020	2019	2020	2019
Average selling price	$-	$315,000 - $398,500	$302,700 - $915,500	$315,000 - $1,045,400
Deliveries per month	-	4	1 - 4	1 - 4
Discount rate	-	17%	17% - 18%	17%


(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 May 31, 2020, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $89.7 million, representing 16 communities and various other land parcels. As of November 30, 2019, the aggregate carrying value of our inventory that had been impacted by inventory impairment charges was $115.6 million, representing 19 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 $4.4 million for the three months ended May 31, 2020 and $4.9 million for the six months ended May 31, 2020. For the three-month and six-month periods ended May 31, 2019, we recognized land option contract abandonment charges of $.9 million and $1.3 million, respectively.

If conditions in our served markets are or are expected to be adversely affected for a prolonged period due to the COVID-19 control responses or otherwise, we may determine through our community and land parcel evaluations in future quarters that we need to take impairment charges, and such charges could be material. In addition, 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, it is possible that actual results could differ substantially from those estimated.