Inventory



(In thousands)	June 30, 2012		September 30, 2011
Homes under construction	$	316,117	$	277,331
Development projects in progress	384,991		424,055
Land held for future development	386,353		384,761
Land held for sale	10,852		12,837
Capitalized interest	45,373		45,973
Model homes	43,131		47,423
Total owned inventory	$	1,186,817	$	1,192,380

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 137 ($28.5 million) and 334 ($59.3 million) substantially completed homes that were not subject to a sales contract (spec homes) at June 30, 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 June 30, 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
June 30, 2012
West Segment	$	284,805	$	318,349	$	2,592	$	605,746
East Segment	295,985		44,692		3,505		344,182
Southeast Segment	136,965		23,312		1,675		161,952
Unallocated & Other	71,857		—		3,080		74,937
Total	$	789,612	$	386,353	$	10,852	$	1,186,817
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 June 30, 2012, we have assumed limited market improvements in some communities beginning in fiscal 2014 and continuing improvement in these communities in subsequent years. For any communities scheduled to close out in fiscal 2013, we did not assume any market improvements. The discount rate used may be different for each community and ranged from 11.8% to 16.1% for the communities analyzed in the quarter ended June 30, 2012 and 14.6% to 16.3% for the quarter ended June 30, 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 June 30, 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 June 30, 2012
West	5	1	$	6,196	81.3	%
East	4	1	7,144		57.1	%
Southeast	3	1	3,087		79.0	%
Unallocated	—	—	1,228		n/a
Total	12	3	$	17,655	72.4	%
Quarter Ended June 30, 2011
West	8	4	5,079		86.5	%
East	4	2	9,731		96.5	%
Southeast	1	1	5,259		44.0	%
Unallocated	—	—	1,564		n/a
Total	13	7	$	21,633	81.6	%

The table below summarizes the results of our discounted cash flow analysis for the three and nine months ended June 30, 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 June 30, 2012							Nine Months Ended June 30, 2012
West	1	65	$	1,590	$	4,680	2	116	$	3,788	$	11,058
East	1	68	3,122		4,050		2	93	3,809		7,342
Southeast	1	37	630		2,457		1	37	794		2,457
Unallocated	—	—	389		—		—	—	473		—
Continuing Operations	3	170	5,731		11,187		5	246	8,864		20,857
Discontinued Operations	—	—	42		—		—	—	60		—
Total	3	170	$	5,773	$	11,187	5	246	$	8,924	$	20,857

Quarter Ended June 30, 2011							Nine Months Ended June 30, 2011
West	4	153	$	1,571	$	4,223	9	831	$	17,556	$	31,924
East	1	41	759		5,637		1	41	988		5,637
Southeast	1	176	3,435		1,812		1	176	3,557		1,812
Unallocated	—	—	531		—		—	—	2,139		—
Continuing Operations	6	370	6,296		11,672		11	1,048	24,240		39,373
Discontinued Operations	—	—	—		—		—	—	215		—
Total	6	370	$	6,296	$	11,672	11	1,048	$	24,455	$	39,373

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 impairments in three communities during the quarter ended June 30, 2012. During the quarter ended June 30, 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 six communities. 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 nine months ended June 30, 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 nine months ended June 30, 2012 and 2011 (in thousands) :



	Quarter Ended June 30,				Nine Months Ended June 30,
	2012		2011		2012		2011
Development projects and homes in process (Held for Development)
West	$	1,590	$	1,571	$	3,788	$	17,556
East	3,122		759		3,809		988
Southeast	630		3,435		794		3,557
Unallocated	389		531		473		2,139
Subtotal	$	5,731	$	6,296	$	8,864	$	24,240
Land Held for Sale
West	$	—	$	—	$	—	$	(51	)
East	—		—		—		—
Southeast	—		—		208		169
Subtotal	$	—	$	—	$	208	$	118
Lot Option Abandonments
West	$	19	$	32	$	191	$	116
East	10		462		574		595
Southeast	59		80		653		262
Unallocated	—		—		2		—
Subtotal	$	88	$	574	$	1,420	$	973
Continuing Operations	$	5,819	$	6,870	$	10,492	$	25,331
Discontinued Operations
Held for Development	$	42	$	—	$	60	$	215
Land Held for Sale	503		17		503		74
Lot Option Abandonments	—		2,477		16		2,525
Subtotal	$	545	$	2,494	$	579	$	2,814
Total Company	$	6,364	$	9,364	$	11,071	$	28,145

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 $24.7 million at June 30, 2012. The total remaining purchase price, net of cash deposits, committed under all options was $197.3 million as of June 30, 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 June 30, 2012 and September 30, 2011 (in thousands):



	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned - Under Option Agreements
As of June 30, 2012
Consolidated VIEs	$	7,191	$	3,347	$	10,537
Other consolidated lot option agreements (a)	859		2,682		$	3,541
Unconsolidated lot option agreements	16,601		191,272		—
Total lot option agreements	$	24,651	$	197,301	$	14,078
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.