Meritage Homes Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Real Estate and Capitalized Interest

Real Estate and Capitalized Interest

9 Months Ended

Sep. 30, 2011

Real Estate and Capitalized Interest [Abstract]

REAL ESTATE AND CAPITALIZED INTEREST

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate consists of the following (in thousands):


	At		At
	September 30, 2011		December 31, 2010
Homes under contract under construction (1)	$	123,347	$	96,844
Unsold homes, completed and under construction (1)		85,346		86,869
Model homes (1)		46,472		36,966
Finished home sites and home sites under development		473,807		454,718
Land held for development or sale (2)		69,085		63,531

	$	798,057	$	738,928


(1)		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. We adjust our carrying value for these assets to fair value at the time they are placed into mothball based on their designation as held for development or held for sale. 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.

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 economic 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 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 three- and nine-month periods ended September 30, 2011 and 2010 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Terminated option/purchase contracts and related pre-acquisition costs:
West	$	0	$	0	$	0	$	0
Central		98		0		100		0
East		0		0		0		0

Total	$	98	$	0	$	100	$	0


Real estate inventory impairments (1):
West	$	295	$	38	$	552	$	131
Central		468		597		1,235		1,350
East		59		45		287		45

Total	$	822	$	680	$	2,074	$	1,526


Impairments of joint venture investments:
West	$	0	$	112	$	0	$	112
Central		0		0		0		0
East		0		0		0		0

Total	$	0	$	112	$	0	$	112


Impairments of land held for sale:
West	$	0	$	0	$	0	$	0
Central		127		0		127		0
East		0		0		0		0

Total	$	127	$	0	$	127	$	0


Total impairments:
West	$	295	$	150	$	552	$	243
Central		693		597		1,462		1,350
East		59		45		287		45

Total	$	1,047	$	792	$	2,301	$	1,638


(1)		Included in the real estate inventory impairments are impairments of individual homes, both completed and under construction, in a community where the underlying lots in the community were not also impaired, as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Individual home impairments (in thousands):
West	$	166	$	38	$	423	$	131
Central		239		597		695		1,300
East		59		45		287		45

Total	$	464	$	680	$	1,405	$	1,476

The tables below reflect the number of communities with real estate inventory impairments for the three- and nine-month periods ended September 30, 2011 and 2010 (excluding home-specific impairments and associated charges as noted above) and the fair value of these communities as of September 30, 2011 (dollars in thousands).


	Three Months Ended September 30, 2011
	Number of
	Communities				Fair Value of Communities Impaired
	Impaired		Impairment Charges		(Carrying Value less Impairments)
West		1	$	129	$	2,501
Central		4		229		6,894
East		0		0		N/A

Total		5	$	358	$	9,395


	Nine Months Ended September 30, 2011
	Number of
	Communities				Fair Value of Communities Impaired
	Impaired		Impairment Charges		(Carrying Value less Impairments)
West		1	$	129	$	2,501
Central		6		540		13,721
East		0		0		N/A

Total		7	$	669	$	16,222


	Three Months Ended September 30, 2010
	Number of
	Communities				Fair Value of Communities Impaired
	Impaired		Impairment Charges		(Carrying Value less Impairments)
West		0	$	0	$	N/A
Central		0		0		N/A
East		0		0		N/A

Total		0	$	0	$	N/A


	Nine Months Ended September 30, 2010
	Number of
	Communities				Fair Value of Communities Impaired
	Impaired		Impairment Charges		(Carrying Value less Impairments)
West		0	$	0	$	N/A
Central		1		50		88
East		0		0		N/A

Total		1	$	50	$	88

Subject to sufficient qualifying assets, we capitalize interest incurred in connection with the development and construction of real estate. Completed homes and land not actively under development do not qualify for interest capitalization. Capitalized interest is allocated to real estate when incurred and charged to cost of closings when the related property is delivered. To the extent our debt exceeds our qualified assets base, we expense a proportionate share of the interest incurred. A summary of our capitalized interest is as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Capitalized interest, beginning of period	$	13,205		$	12,437		$	11,679		$	14,187
Interest incurred		10,848			10,848			32,545			32,593
Interest expensed		(7,517	)		(8,425	)		(23,036	)		(25,273	)
Interest amortized to cost of home, land closings and impairments		(2,421	)		(3,183	)		(7,073	)		(9,830	)

Capitalized interest, end of period (1)	$	14,115		$	11,677		$	14,115		$	11,677


(1)		Approximately $750,000 of the capitalized interest is related to our joint venture investments and is a component of “Investments in unconsolidated entities” on our consolidated balance sheets as of September 30, 2011 and December 31, 2010.