Inventory And Land Held For Sale

12 Months Ended

Dec. 31, 2019

Major components of inventory at December 31, 2019 and 2018 were ($000’s omitted):



	2019		2018
Homes under construction	$	2,899,016	$	2,630,158
Land under development	4,347,107		4,129,225
Raw land	434,491		493,970
	$	7,680,614	$	7,253,353

In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Activity related to interest capitalized into inventory is as follows ($000’s omitted):



	Years Ended December 31,
	2019			2018			2017
Interest in inventory, beginning of period	$	227,495		$	226,611		$	186,097
Interest capitalized	164,114			172,809			181,719
Interest expensed	(181,226		)	(171,925		)	(141,205		)
Interest in inventory, end of period	$	210,383		$	227,495		$	226,611

Land-related charges

We recorded the following land-related charges ($000's omitted):



	Statement of Operations Classification	2019		2018		2017
Net realizable value adjustments ("NRV") - land held for sale	Land sale cost of revenues	$	5,368	$	11,489	$	83,576
Land impairments	Home sale cost of revenues	8,617		70,965		88,952
Impairments of unconsolidated entities	Other expense, net	—		—		8,018
Write-offs of deposits and pre-acquisition costs	Other expense, net	13,116		16,992		11,367
Total land-related charges		$	27,101	$	99,446	$	191,913

Land-related charges have not been a significant broad-based issue since the U.S. housing recovery began in 2012. However, we experienced changes to facts and circumstances related to specific individual communities in 2018 and 2017 that elevated such charges.

As explained in Note 1, we periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. The higher level of NRVs in 2017 were primarily the result of a plan we announced in May 2017 to sell select non-core and underutilized land parcels following a strategic review of our land portfolio. As part of that review, we determined that we would sell certain inactive land parcels, representing approximately 17 communities and 4,600 lots. These land parcels were located in diverse geographic areas and no longer fit into our strategic plans. The land parcels identified for sale included: land requiring significant additional development spend that would not yield suitable returns; land in excess of near-term need; and land entitled for certain product types inconsistent with our primary offerings. As a consequence of the change in strategy with respect to the future use of these land parcels, we recorded NRVs totaling $81.0 million in the three months ended June 30, 2017, related to inventory with a pre-NRV carrying value of $151.0 million. An additional $2.6 million of NRVs were recorded throughout 2017 as the result of adjustments to the aforementioned valuations as the sale process progressed or related to other land parcels we chose to sell. The estimated fair values of these inactive land parcels that were held for sale were generally based on comparisons to market comparable transactions, letters of intent, active negotiations with market participants, or similar market-based information

supplemented in certain instances by estimated future net cash flows discounted for inherent risk associated with each underlying asset. The majority of these parcels were sold to third parties in either 2017 or 2018; such transactions are classified as land sale revenues.

Land impairments relate to communities that are either active or that we intend to eventually open and build out. On a quarterly basis, we review each of our land positions for potential indicators of impairment and perform detailed impairment calculations for communities that display indicators of potential impairment.


•	In 2019, we recorded impairment charges of $8.6 million relating to a number of communities where we experienced slower sales paces and lower average selling prices.

•

In 2018, we received an unfavorable determination related to one of our communities that had been idle while pursuing entitlements for over 10 years. This unfavorable determination caused a significant reduction in the number of lots and necessitated certain changes to the expected product offering and land development that, combined with rising costs and a softening in demand in the applicable local market, resulted in an impairment of $59.2 million. Impairments for all other communities in 2018 totaled $11.8 million.


•	In 2017, our impairments resulted from:


–	As part of the May 2017 strategic review, we decided to accelerate the monetization of two communities through a combination of changing the product offerings and lowering the sales prices within the communities. This decision resulted in land impairments of $31.5 million in the three months ended June 30, 2017.

–

Separately, we recorded an impairment charge of $53.0 million related to one large project. This impairment resulted from increases in our estimates for future land development and house construction costs combined with lower pricing and slower sales paces for this project, which is located in an area where competitive conditions limit our ability to offset our cost increases through higher sales prices. Impairments for all other communities in 2017 totaled $4.5 million.

We determine the fair value of a community's inventory using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the cash flow models are specific to each community and typically do not assume improvements in market conditions in the near term. The discount rate used in determining each community's fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community's cash flow streams. Accordingly, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated. The table below summarizes certain quantitative unobservable inputs utilized in determining the fair value of impaired communities ($000's omitted):



	Communities Impaired	Fair Value of Communities Impaired, Net of Impairment Charges		Impairment Charges		Average Selling Price	Quarterly Sales Pace (homes)	Discount Rate
2019	5	$	12,589	$	8,617	$284 to $550	1 to 6	12% to 14%
2018	8	$	24,062	$	70,965	$287 to $586	2 to 11	12% to 22%
2017	9	$	19,252	$	88,952	$207 to $818	1 to 11	12% to 25%

Our evaluations for impairments are based on our best estimates of the future cash flows for our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of certain of our communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.