Inventory



(In thousands)	March 31, 2014		September 30, 2013
Homes under construction	$	319,758	$	262,476
Development projects in progress	681,665		578,453
Land held for future development	306,119		341,986
Land held for sale	57,537		31,331
Capitalized interest	72,256		52,562
Model homes	43,025		37,886
Total owned inventory	$	1,480,360	$	1,304,694

Homes under construction includes homes substantially finished and ready for delivery and homes in various stages of construction. We had 116 ($31.0 million) and 113 ($30.7 million) substantially completed homes that were not subject to a sales contract (spec homes at March 31, 2014 and September 30, 2013, 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. During the current quarter, we began development on a large project in California that was previously included in land held for future development. Land held for sale in Unallocated and Other as of March 31, 2014 includes land held for sale in the markets we have decided to exit including 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, 2014
West Segment	$	411,823	$	262,399	$	14,470	$	688,692
East Segment	359,553		25,496		30,453		415,502
Southeast Segment	236,496		18,224		10,319		265,039
Unallocated and Other	108,832		—		2,295		111,127
Total	$	1,116,704	$	306,119	$	57,537	$	1,480,360
September 30, 2013
West Segment	$	339,319	$	292,875	$	16,572	$	648,766
East Segment	331,894		25,491		3,833		361,218
Southeast Segment	178,624		23,620		8,208		210,452
Unallocated and Other	81,540		—		2,718		84,258
Total	$	931,377	$	341,986	$	31,331	$	1,304,694

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 to sell 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, 2014, four communities were on our quarterly watch list. As of March 31, 2013, one community 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 for a number of these communities were temporary in nature and therefore those communities were not subjected to further analysis.



($ 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, 2014
West	1	—	$	—	n/a
East	1	—	—		n/a
Southeast	2	1	7,478		107.9	%
Unallocated	—	—	—		n/a
Total	4	1	$	7,478	107.9	%
Quarter Ended March 31, 2013
West	—	—	$	—	n/a
East	1	—	—		n/a
Southeast	—	—	—		n/a
Unallocated	—	—	—		n/a
Total	1	—	$	—	n/a

There were no impairments recorded during the three and six months ended March 31, 2014 or 2013 related to our discounted cash flow analyses. The impairments on development projects and homes in process below for the six months ended March 31, 2013 related to 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 analysis.

Our assumptions about future home sales prices and absorption rates require significant judgment because the residential home building industry is cyclical and is highly sensitive to changes in economic conditions. Market deterioration that exceeds our estimates may lead us to incur 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 at the applicable period end. 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, 2014 and 2013, as applicable:



	Three Months Ended March 31,					Six Months Ended March 31,
(In thousands)	2014		2013			2014		2013
Development projects and homes in process (Held for Development)
West	$	—	$	—		$	—	$	46
East	—		—			—		13
Southeast	—		—			—		—
Unallocated	—		—			—		—
Subtotal	$	—	$	—		$	—	$	59
Land Held for Sale
West	$	—	$	—		$	—	$	—
East	—		—			31		—
Southeast	28		1,778			28		1,778
Subtotal	$	28	$	1,778		$	59	$	1,778
Lot Option Abandonments
West	$	—	$	30		$	—	$	104
East	—		(2		)	—		20
Southeast	852		219			852		268
Unallocated	—		—			—		—
Subtotal	$	852	$	247		$	852	$	392
Continuing Operations	$	880	$	2,025		$	911	$	2,229
Discontinued Operations
Held for Development	$	—	$	—		$	—	$	—
Land Held for Sale	—		—			—		17
Lot Option Abandonments	—		—			—		—
Subtotal	$	—	$	—		$	—	$	17
Total Company	$	880	$	2,025		$	911	$	2,246

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, 2014 and September 30, 2013:



(In thousands)	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned Under Option Agreements
As of March 31, 2014
Consolidated VIEs	$	4,604	$	3,147	$	7,751
Unconsolidated lot option agreements	42,463		375,348		—
Total lot option agreements	$	47,067	$	378,495	$	7,751
As of September 30, 2013
Consolidated VIEs	$	4,491	$	4,633	$	9,124
Unconsolidated lot option agreements	32,822		284,005		—
Total lot option agreements	$	37,313	$	288,638	$	9,124