Inventory



(In thousands)	March 31, 2012		September 30, 2011
Homes under construction	$	277,984	$	277,331
Development projects in progress	421,892		424,055
Land held for future development	386,280		384,761
Land held for sale	13,224		12,837
Capitalized interest	47,242		45,973
Model homes	44,950		47,423
Total owned inventory	$	1,191,572	$	1,192,380

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 210 ($43.7 million) and 334 ($59.3 million) substantially completed homes that were not subject to a sales contract (spec homes) at March 31, 2012 and September 30, 2011, respectively. Development projects in progress consist principally of land and land improvement costs. Certain of the fully developed lots in this category are reserved by a deposit or sales contract. Land held for future development consists of communities for which construction and development activities are expected to occur in the future or have been idled and are stated at cost unless facts and circumstances indicate that the carrying value of the assets may not be recoverable. All applicable interest and real estate taxes on land held for future development are expensed as incurred. Land held for sale in Unallocated and Other as of March 31, 2012 included land held for sale in the markets we have decided to exit including Jacksonville, Florida and Charlotte, North Carolina. Total owned inventory, by reportable segment, is set forth in the table below:



(In thousands)	Projects in Progress		Held for Future Development		Land Held for Sale		Total Owned Inventory
March 31, 2012
West Segment	$	287,899	$	318,331	$	2,972	$	609,202
East Segment	296,506		44,637		3,591		344,734
Southeast Segment	134,487		23,312		1,676		159,475
Unallocated & Other	73,176		—		4,985		78,161
Total	$	792,068	$	386,280	$	13,224	$	1,191,572
September 30, 2011
West Segment	$	294,208	$	318,732	$	2,681	$	615,621
East Segment	304,648		41,993		5,056		351,697
Southeast Segment	122,126		24,036		75		146,237
Unallocated & Other	73,800		—		5,025		78,825
Total	$	794,782	$	384,761	$	12,837	$	1,192,380

Inventory Impairments. When conducting our community level review for the recoverability of our homebuilding inventories held for development, we establish a quarterly “watch list” of communities with more than 10 homes remaining that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability. Assets on the quarterly watch list are subject to substantial additional financial and operational analyses and review that consider the competitive environment and other factors contributing to profit margins below our watch list threshold. For communities where the current competitive and market dynamics indicate that these factors may be other than temporary, which may call into question the recoverability of our investment, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative competitive market analyses and a quantitative analysis reflecting market and asset specific information.

In our impairment analyses for the quarter ended March 31, 2012, we have assumed limited market improvements in some communities beginning in fiscal 2013 and continuing improvement in these communities in subsequent years. For any communities scheduled to close out in fiscal 2012, we did not assume any market improvements. The discount rate used may be different for each community and ranged from 13.4% to 15.2% for the communities analyzed in the quarter ended March 31, 2012 and 12.6% to 15.4% for the quarter ended March 31, 2011. The following tables represent the results, by reportable segment of our community level review of the recoverability of our inventory assets held for development as of March 31, 2012, and 2011 ($ in thousands). We have elected to aggregate our disclosure at the reportable segment level because we believe this level of disclosure is most meaningful to the readers of our financial statements. The aggregate undiscounted cash flow fair value as a percentage of book value for the communities represented below is consistent with our expectations given our “watch list” methodology.



		Undiscounted Cash Flow Analyses Prepared
Segment	# of Communities on Watch List	# of Communities	Pre-analysis Book Value (BV)		Aggregate Undiscounted Cash Flow as a % of BV
Quarter Ended March 31, 2012
West	6	4	$	8,550	103.7	%
East	12	4	12,920		101.2	%
Southeast	2	1	1,027		132.4	%
Unallocated	—	—	1,178		n/a
Total	20	9	$	23,675	103.4	%
Quarter Ended March 31, 2011
West	12	9	50,327		82.8	%
East	3	1	2,870		102.7	%
Southeast	—	—	—		n/a
Unallocated	—	—	4,776		n/a
Total	15	10	$	57,973	85.2	%

The table below summarizes the results of our discounted cash flow analysis for the three and six months ended March 31, 2012 and 2011. The impairment charges below include impairments taken as a result of these discounted cash flow analyses and also impairment charges recorded for individual homes sold and in backlog with net contribution margins below a minimum threshold of profitability in communities that were not otherwise impaired through our discounted cash flow analyses. The estimated fair value of the impaired inventory is determined immediately after a community’s impairment.



($ in thousands)	Communities Impaired As a Result of Discounted Cash Flow Analyses Prepared
Segment	# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at Period End		# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at Period End
Quarter Ended March 31, 2012							Six Months Ended March 31, 2012
West	—	—	$	202	$	—	1	51	$	2,198	$	6,377
East	1	25	565		3,292		1	25	687		3,292
Southeast	—	—	46		—		—	—	164		—
Unallocated	—	—	36		—		—	—	84		—
Continuing Operations	1	25	849		3,292		2	76	3,133		9,669
Discontinued Operations	—	—	2		—		—	—	18		—
Total	1	25	$	851	$	3,292	2	76	$	3,151	$	9,669

Quarter Ended March 31, 2011							Six Months Ended March 31, 2011
West	7	730	$	15,884	$	29,244	7	730	$	15,985	$	29,244
East	—	—	120		—		—	—	229		—
Southeast	—	—	74		—		—	—	122		—
Unallocated	—	—	1,608		—		—	—	1,608		—
Continuing Operations	7	730	17,686		29,244		7	730	17,944		29,244
Discontinued Operations	—	—	37		—		—	—	215		—
Total	7	730	$	17,723	$	29,244	7	730	$	18,159	$	29,244

Our assumptions about future home sales prices and absorption rates require significant judgment because the residential homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. During these periods, for certain communities we determined that it was prudent to reduce sales prices or further increase sales incentives in response to factors including competitive market conditions in those specific submarkets for the product and locations of these communities. Because the projected cash flows used to evaluate the fair value of inventory are significantly impacted by changes in market conditions including decreased sales prices, the change in sales prices and changes in absorption estimates based on current market conditions and management’s assumptions relative to future results led to an impairment in one community in our East segment during the quarter ended March 31, 2012. During the quarter ended March 31, 2011, discrete changes in our revenue and absorption estimates for certain communities due to pricing reductions in response to competitor actions and local market conditions led to impairments in seven communities in our West segment. Market deterioration that exceeds our estimates may lead us to incur additional impairment charges on previously impaired homebuilding assets in addition to homebuilding assets not currently impaired but for which indicators of impairment may arise if the market continues to deteriorate.

The year-to-date impairments on land held for sale below represent further write downs of these properties to net realizable value, less estimated costs to sell and are as a result of challenging market conditions and our review of recent comparable transactions. The negative impairments indicated below are due to adjustments to accruals for estimated selling costs related to either our strategic decision to develop a previously held-for-sale land position or revised estimates based on pending sales transactions. Our assumptions about land sales prices require significant judgment because the current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values of land held for sale based on current market conditions and assumptions made by management, which may differ materially from actual results and may result in additional impairments if market conditions continue to deteriorate.

Also, we have determined the proper course of action with respect to a number of communities within each homebuilding segment was to abandon the remaining lots under option and to write-off the deposits securing the option takedowns, as well as pre-acquisition costs. In determining whether to abandon a lot option contract, we evaluate the lot option primarily based upon the expected cash flows from the property that is the subject of the option. If we intend to abandon or walk-away from a lot option contract, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs associated with the lot option contract. We recorded lot option abandonment charges during the three and six ended March 31, 2012 and 2011 as indicated in the table below. The abandonment charges relate to our decision to abandon certain option contracts that no longer fit in our long-term strategic plan.

The following table sets forth, by reportable homebuilding segment, the inventory impairments and lot option abandonment charges recorded for the three and six ended March 31, 2012 and 2011 (in thousands) :



	Quarter Ended March 31,					Six Months Ended March 31,
	2012		2011			2012		2011
Development projects and homes in process (Held for Development)
West	$	202	$	15,884		$	2,198	$	15,985
East	565		120			687		229
Southeast	46		74			164		122
Unallocated	36		1,608			84		1,608
Subtotal	$	849	$	17,686		$	3,133	$	17,944
Land Held for Sale
West	$	—	$	—		$	—	$	(51	)
East	—		—			—		—
Southeast	—		(42		)	208		169
Subtotal	$	—	$	(42	)	$	208	$	118
Lot Option Abandonments
West	$	170	$	41		$	172	$	84
East	90		43			564		133
Southeast	60		94			594		182
Unallocated	1		—			2		—
Subtotal	$	321	$	178		$	1,332	$	399
Continuing Operations	$	1,170	$	17,822		$	4,673	$	18,461
Discontinued Operations
Held for Development	$	2	$	37		$	18	$	215
Land Held for Sale	—		—			—		57
Lot Option Abandonments	—		1			16		48
Subtotal	$	2	$	38		$	34	$	320
Total Company	$	1,172	$	17,860		$	4,707	$	18,781

Lot Option Agreements and Variable Interest Entities (VIE). As previously discussed, we also have access to land inventory through lot option contracts, which generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our lot option. A majority of our lot option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land for the right to acquire lots during a specified period of time at a certain price. Under lot option contracts, purchase of the properties is contingent upon satisfaction of certain requirements by us and the sellers. Our liability under option contracts is generally limited to forfeiture of the non-refundable deposits, letters of credit and other non-refundable amounts incurred, which aggregated approximately $25.3 million at March 31, 2012. The total remaining purchase price, net of cash deposits, committed under all options was $205.7 million as of March 31, 2012. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, most of our remaining option contracts. Various factors, some of which are beyond our control, such as market conditions, weather conditions and the timing of the completion of development activities, will have a significant impact on the timing of option exercises or whether lot options will be exercised.

For the VIEs in which we are the primary beneficiary of the VIE, we have consolidated the VIE and reflected such assets and liabilities as land not owned under option agreements in our balance sheets. For VIEs we were required to consolidate, we recorded the remaining contractual purchase price under the applicable lot option agreement to land not owned under option agreements with an offsetting increase to obligations related to land not owned under option agreements. Also, to reflect the purchase price of this inventory consolidated, we reclassified the related option deposits from land under development to land not owned under option agreement in the accompanying unaudited condensed consolidated balance sheets. Consolidation of these VIEs has no impact on the Company’s results of operations or cash flows.

The following provides a summary of our interests in lot option agreements as of March 31, 2012 and September 30, 2011 (in thousands):



	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned - Under Option Agreements
As of March 31, 2012
Consolidated VIEs	$	7,183	$	3,347	$	10,530
Other consolidated lot option agreements (a)	962		2,913		$	3,875
Unconsolidated lot option agreements	17,139		199,445		—
Total lot option agreements	$	25,284	$	205,705	$	14,405
As of September 30, 2011
Consolidated VIEs	$	6,201	$	1,214	$	7,415
Other consolidated lot option agreements (a)	164		4,175		4,338
Unconsolidated lot option agreements	13,732		219,841		—
Total lot option agreements	$	20,097	$	225,230	$	11,753


(a)	Represents lot option agreements with non-VIE entities that we have deemed to be “financing arrangements” pursuant to ASC 470-40, Product Financing Arrangements.