Meritage Homes Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Real Estate and Capitalized Interest

Real Estate and Capitalized Interest

12 Months Ended

Dec. 31, 2011

Real Estate and Capitalized Interest [Abstract]

REAL ESTATE AND CAPITALIZED INTEREST

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate at December 31 consists of the following (in thousands):

		September 30,		September 30,
	2011		2010
Homes under contract under construction (1)	$	101,445	$	97,002
Unsold homes, completed and under construction (1)		97,246		87,011
Model homes (1)		49,892		37,027
Finished home sites and home sites under development (2)		467,867		435,473
Land held for development (2) (3)		69,067		59,692
Land held for sale		29,908		22,723

	$	815,425	$	738,928

(1)	Also includes the allocated land and land development costs associated with each lot for these homes.

(2)

Includes communities where we have decided to cease operations (mothball) as we have determined that their economic performance would be maximized by deferring development. In the future, some of these communities may be re-opened while others may be sold to third parties. If we deem our carrying value to not be fully recoverable, we adjust our carrying value for these assets to fair value at the time they are placed into mothball. We do not capitalize interest for such mothballed assets, and all ongoing costs of land ownership (i.e., property taxes, homeowner association dues, etc.) are expensed as incurred.

(3)

Land held for development primarily reflects land and land development costs related for land where development activity is not currently underway but is expected to begin or resume in the future. We may cease development activity on certain land holdings, as they represent a portion of a large land parcel that we plan to build out over several years.

As previously noted, in accordance with ASC 360-10, each of our land inventory and related real estate assets is reviewed for recoverability when impairment indicators are present, as our inventory is considered “long-lived” in accordance with GAAP. Due to the current environment, we evaluate all of our real estate assets for impairment on a quarterly basis. ASC 360-10 requires impairment charges to be recorded if the asset is not deemed recoverable and the fair value of such assets is less than their carrying amounts. Our determination of fair value is based on projections and estimates. We also evaluate alternative product offerings in communities where impairment indicators are present and other strategies for the land exist, such as selling or holding the land for sale. Based on these reviews of all our communities, we recorded the following real-estate and joint-venture impairment charges during the years ended December 31, 2011, 2010 and 2009 (in thousands):

		September 30,		September 30,		September 30,
	Years Ended December 31,
	2011		2010		2009
Terminated option/purchase contracts:
West	$	863	$	0	$	7,038
Central		1,904		1,030		60,645
East		0		0		3,270

Total	$	2,767	$	1,030	$	70,953


Real estate inventory impairments (1):
West	$	3,797	$	274	$	18,459
Central		1,610		4,809		16,744
East		696		321		5,334

Total	$	6,103	$	5,404	$	40,537


Impairments of joint venture investments:
West	$	0	$	295	$	274
Central		0		0		2,558
East		0		0		0

Total	$	0	$	295	$	2,832


Impairments of land held for sale:
West	$	5,928	$	0	$	7,815
Central		127		17		6,911
East		399		0		0

Total	$	6,454	$	17	$	14,726


Total impairments:
West	$	10,588	$	569	$	33,586
Central		3,641		5,856		86,858
East		1,095		321		8,604

Total	$	15,324	$	6,746	$	129,048

(1)	Included in the real estate inventory impairments are impairments of individual homes in a community where the underlying community was not also impaired, as follows (in thousands):

		September 30,		September 30,		September 30,
	Years Ended December 31,
	2011		2010		2009
Individual home impairments:
West	$	700	$	274	$	7,969
Central		1,149		2,912		6,136
East		341		321		3,208

Total	$	2,190	$	3,507	$	17,313

The tables below reflect the number of communities with real estate inventory impairments for the years ended December 31, 2011, 2010 and 2009, excluding home-specific impairments (as noted above) and the fair value of these communities (dollars in thousands):

		September 30,		September 30,		September 30,
	Number of Communities Impaired		Impairment Charges		Fair Value of Communities Impaired (Carrying Value less Impairments)
	Year Ended December 31, 2011

West		5	$	3,097	$	19,963
Central		8		461		17,104
East		1		355		2,006

Total		14	$	3,913	$	39,073


	Year Ended December 31, 2010
West		0	$	0	$	N/A
Central		7		1,897		13,073
East		0		0		N/A

Total		7	$	1,897	$	13,073


	Year Ended December 31, 2009
West		12	$	10,490	$	43,542
Central		17		10,608		28,845
East		6		2,126		7,476

Total		35	$	23,224	$	79,863

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred in connection with the development and construction of real estate. Capitalized interest is allocated to real estate when incurred and charged to cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):

		September 30,			September 30,
	Years Ended December 31,
	2011			2010
Capitalized interest, beginning of year	$	11,679		$	14,187
Interest incurred		43,393			43,442
Interest expensed		(30,399	)		(33,722	)
Interest amortized to cost of home, land closings and impairments		(9,863	)		(12,228	)

Capitalized interest, end of year (1)	$	14,810		$	11,679

(1)	Approximately $750,000 of the capitalized interest is related to our joint venture investments and is a component of “Investments in unconsolidated entities” in our consolidated balance sheet as of December 31, 2011 and 2010.

- Definition

The entire disclosure for inventory. This may include, but is not limited to, the basis of stating inventory, the method of determining inventory cost, the major classes of inventory, and the nature of the cost elements included in inventory. If inventory is stated above cost, accrued net losses on firm purchase commitments for inventory and losses resulting from valuing inventory at the lower-of-cost-or-market may also be included. For LIFO inventory, may disclose the amount and basis for determining the excess of replacement or current cost over stated LIFO value and the effects of a LIFO quantities liquidation that impacts net income.

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