Inventory



(In thousands)	June 30, 2014		September 30, 2013
Homes under construction	$	384,795	$	262,476
Development projects in progress	690,557		578,453
Land held for future development	309,516		341,986
Land held for sale	74,365		31,331
Capitalized interest	84,083		52,562
Model homes	44,638		37,886
Total owned inventory	$	1,587,954	$	1,304,694

Homes under construction includes homes substantially finished and ready for delivery and homes in various stages of construction. We had 137 ($30.0 million) and 113 ($30.7 million) substantially completed homes that were not subject to a sales contract (spec homes) at June 30, 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 nine months ended June 30, 2014, we began development on a large project in California that was previously included in land held for future development. The increase in land held for sale relates to recent purchases of large land positions, a portion of which we have committed to sell. A majority of this land held for sale is currently under contract. Land held for sale in Unallocated and Other as of June 30, 2014 includes land held for sale in the markets we have decided to exit including Charlotte, North Carolina, Denver, Colorado 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
June 30, 2014
West Segment	$	442,694	$	262,481	$	19,192	$	724,367
East Segment	382,234		28,787		34,608		445,629
Southeast Segment	259,530		18,248		13,205		290,983
Unallocated and Other	119,615		—		7,360		126,975
Total	$	1,204,073	$	309,516	$	74,365	$	1,587,954
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 June 30, 2014, four communities were on our quarterly watch list. After additional financial and operational review, we determined that the factors contributing to profit margins below our threshold for certain of these communities were temporary in nature and therefore those communities were not subjected to further analysis. As of June 30, 2013, there were no communities on our quarterly watch list and therefore we did not perform any impairment analyses for the quarter ended June 30, 2013. 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, 2014. 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 June 30, 2014
West	3	2	$	12,215	103.7	%
East	—	—	—		n/a
Southeast	1	—	—		n/a
Unallocated	—	—	—		n/a
Total	4	2	$	12,215	103.7	%

There were no impairments recorded during the three and nine months ended June 30, 2014 or 2013 related to our analyses. The impairments on development projects and homes in process below for the nine months ended June 30, 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. For the nine months ended June 30, 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 lots or lot option contracts, our evaluation is primarily based upon the expected cash flows from the property. If we intend to abandon or walk-away from the property, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results or no longer fit in our long-term strategic plan. Included in the abandonments below for the three and nine months ended June 30, 2014 is a $1.7 million abandonment of certain lots related to wetlands permitting issues in the Southeast segment.

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, 2014 and 2013, as applicable:



	Three Months Ended June 30,				Nine Months Ended June 30,
(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	201		—		232		—
Southeast	—		—		28		1,778
Subtotal	$	201	$	—	$	260	$	1,778
Lot Option Abandonments
West	$	—	$	—	$	—	$	104
East	156		—		156		20
Southeast	1,653		—		2,505		268
Unallocated	—		—		—		—
Subtotal	$	1,809	$	—	$	2,661	$	392
Continuing Operations	$	2,010	$	—	$	2,921	$	2,229
Discontinued Operations
Held for Development	$	—	$	—	$	—	$	—
Land Held for Sale	—		—		—		17
Lot Option Abandonments	—		—		—		—
Subtotal	$	—	$	—	$	—	$	17
Total Company	$	2,010	$	—	$	2,921	$	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 June 30, 2014 and September 30, 2013:



(In thousands)	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned Under Option Agreements
As of June 30, 2014
Consolidated VIEs	$	4,572	$	3,016	$	7,588
Unconsolidated lot option agreements	38,055		414,217		—
Total lot option agreements	$	42,627	$	417,233	$	7,588
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