Inventory



(In thousands)	March 31, 2013		September 30, 2012
Homes under construction	$	271,882	$	251,828
Development projects in progress	420,914		391,019
Land held for future development	355,613		367,102
Land held for sale	10,413		10,149
Capitalized interest	45,501		38,190
Model homes	39,414		40,844
Total owned inventory	$	1,143,737	$	1,099,132

Homes under construction includes homes finished and ready for delivery and homes in various stages of construction. We had 111 ($26.9 million) and 174 ($39.7 million) substantially completed homes that were not subject to a sales contract (spec homes) at March 31, 2013 and September 30, 2012, 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 includes land held for sale in the markets we have decided to exit including Jacksonville, Florida, Charlotte, North Carolina and Detroit, Michigan. 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, 2013
West Segment	$	289,932	$	306,496	$	2,478	$	598,906
East Segment	261,501		25,496		3,130		290,127
Southeast Segment	155,370		23,621		2,087		181,078
Unallocated & Other	70,908		—		2,718		73,626
Total	$	777,711	$	355,613	$	10,413	$	1,143,737
September 30, 2012
West Segment	$	261,239	$	318,351	$	2,553	$	582,143
East Segment	279,954		25,130		3,204		308,288
Southeast Segment	118,853		23,621		1,675		144,149
Unallocated & Other	61,835		—		2,717		64,552
Total	$	721,881	$	367,102	$	10,149	$	1,099,132

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 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.

As of March 31, 2013, one community in our East Segment was on our quarterly watch list. However, after additional financial and operational review, we determined that the factors contributing to profit margins below our threshold were temporary in nature and, therefore, the community was not subjected to our impairment analyses.

In our impairment analyses for the quarter ended March 31, 2012, we 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 quarter ended March 31, 2012. 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, 2013, and 2012. 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.



($ in thousands)		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, 2013
West	—	—	$	—	—	%
East	1	—	—		—	%
Southeast	—	—	—		—	%
Unallocated	—	—	—		—	%
Total	1	—	$	—	—	%
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	%

There were no impairments recorded during the three and six months ended March 31, 2013 related to our discounted cash flow analyses. The table below summarizes the results of our discounted cash flow analysis for the three and six months ended March 31, 2012. The impairment charges below include impairments taken as a result of these discounted cash flow analyses and 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

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 the quarter ended March 31, 2012, 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 for the quarter ended March 31, 2012. There were no comparable impairments in the quarter ended March 31, 2013. 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 markets deteriorate.

The impairments on land held for sale generally represent further write downs of these properties to net realizable value, less estimated costs to sell and are based on current market conditions and our review of recent comparable transactions. For the quarter ended March 31, 2013, the land held for sale impairment in the Southeast Segment related to our decision to reposition one community in South Carolina to address consumer demand, including the decision to sell a portion of the lots in this community. 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 deteriorate.

Also, we have determined the proper course of action with respect to a number of communities within each homebuilding segment was to not exercise certain options and to write-off the deposits securing the option takedowns and pre-acquisition costs, as applicable. 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. Abandonment charges relate to our decision to abandon or not exercise certain option contracts that are not projected to produce adequate results or 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 months ended March 31, 2013 and 2012:



	Three Months Ended March 31,					Six Months Ended March 31,
(In thousands)	2013			2012		2013		2012
Development projects and homes in process (Held for Development)
West	$	—		$	202	$	46	$	2,198
East	—			565		13		687
Southeast	—			46		—		164
Unallocated	—			36		—		84
Subtotal	$	—		$	849	$	59	$	3,133
Land Held for Sale
West	$	—		$	—	$	—	$	—
East	—			—		—		—
Southeast	1,778			—		1,778		208
Subtotal	$	1,778		$	—	$	1,778	$	208
Lot Option Abandonments
West	$	30		$	170	$	104	$	172
East	(2		)	90		20		564
Southeast	219			60		268		594
Unallocated	—			1		—		2
Subtotal	$	247		$	321	$	392	$	1,332
Continuing Operations	$	2,025		$	1,170	$	2,229	$	4,673
Discontinued Operations
Held for Development	$	—		$	2	$	—	$	18
Land Held for Sale	—			—		17		—
Lot Option Abandonments	—			—		—		16
Subtotal	$	—		$	2	$	17	$	34
Total Company	$	2,025		$	1,172	$	2,246	$	4,707

Lot Option Agreements and Variable Interest Entities (VIEs). 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. 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, 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 present the related option deposits as 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, 2013 and September 30, 2012:



(In thousands)	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned - Under Option Agreements
As of March 31, 2013
Consolidated VIEs	$	4,899	$	2,650	$	7,549
Other consolidated lot option agreements (a)	190		636		826
Unconsolidated lot option agreements	19,933		203,618		—
Total lot option agreements	$	25,022	$	206,904	$	8,375
As of September 30, 2012
Consolidated VIEs	$	7,203	$	3,346	$	10,549
Other consolidated lot option agreements (a)	430		1,441		1,871
Unconsolidated lot option agreements	17,290		193,711		—
Total lot option agreements	$	24,923	$	198,498	$	12,420


(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.