Inventory



(In thousands)	September 30, 2014		September 30, 2013
Homes under construction	$	282,095	$	262,476
Development projects in progress	786,768		578,453
Land held for future development	301,048		341,986
Land held for sale	51,672		31,331
Capitalized interest	87,619		52,562
Model homes	48,294		37,886
Total owned inventory	$	1,557,496	$	1,304,694

Homes under construction includes homes substantially finished and ready for delivery and homes in various stages of construction. We had 205 ($48.0 million) and 113 ($30.7 million) substantially completed homes that were not subject to a sales contract (spec homes) at September 30, 2014 and 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. The decrease in land held for future development relates to our activation of certain projects during fiscal 2014. Land held for sale in Unallocated and Other as of September 30, 2014 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. Inventory located in California, the state with our largest concentration of inventory, was $426.1 million and $388.1 million at September 30, 2014 and 2013, respectively.



(In thousands)	Projects in Progress		Held for Future Development		Land Held for Sale		Total Owned Inventory
September 30, 2014
West Segment	$	462,508	$	260,898	$	10,026	$	733,432
East Segment	353,859		29,239		34,530		417,628
Southeast Segment	264,843		10,911		4,821		280,575
Unallocated & Other	123,566		—		2,295		125,861
Total	$	1,204,776	$	301,048	$	51,672	$	1,557,496
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 & 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 generally 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. 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. 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 undiscounted cash flow impairment analyses for the year ended September 30, 2014, we did not assume any market improvements. 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 September 30, 2014, 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
Year Ended September 30, 2014
West	5	3	$	25,191	90.9	%
East (a)	1	—	—		—	%
Southeast	2	1	7,479		120.2	%
Unallocated	—	—	2,558		100.0	%
Total	8	4	$	35,228	97.8	%

Year Ended September 30, 2013
West	1	1	$	11,080	117.6	%
East	3	3	9,588		107.0	%
Southeast	1	1	5,257		128.6	%
Unallocated	—	—	1,755		100.0	%
Total	5	5	$	27,680	114.9	%

Year Ended September 30, 2012
West	14	8	$	28,467	94.7	%
East	12	8	30,052		91.8	%
Southeast	5	3	9,247		116.5	%
Unallocated	—	—	5,193		100.0	%
Total	31	19	$	72,959	96.7	%

(a) During the year ended September 30, 2014, we recorded an impairment charge of $0.1 million in our East segment. The community had less than 10 lots remaining to close at the time of the analysis and therefore, consistent with our policy, we did not prepare an undiscounted or discounted cash flow analysis related to this community.

The table below summarizes the results of our discounted cash flow analysis for the fiscal years 2014 and 2012. There were no impairments recorded during the fiscal year ended September 30, 2013 related to our impairment analyses. The discount rate in our discounted cash flow analyses may be different for each community and ranged from 13.0% to 15.0% for the communities analyzed in the fiscal year ended September 30, 2014 and 11.2% to 17.0% for the fiscal year ended September 30, 2012. The projected cash flows used to evaluate the fair value of inventory are significantly impacted by changes in market conditions including the changes in sales prices and absorption estimates and management’s assumptions relative to future results. Impairment charges in two communities during the fiscal year ended September 30, 2014 and five communities during the fiscal year ended September 30, 2012 were taken as a result of these discounted cash flow analyses. The estimated fair value of the impaired inventory is determined immediately after a community’s impairment.



($ in thousands)	Results of Discounted Cash Flow Analyses Prepared
Segment	# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at Period End
Year Ended September 30, 2014
West	2	180	$	4,948	$	14,379
East (a)	—	—	—		—
Southeast	—	—	—		—
Unallocated	—	—	373		—
Continuing Operations (a)	2	180	5,321		14,379
Discontinued Operations	—	—	—		—
Total (a)	2	180	$	5,321	$	14,379

Year Ended September 30, 2012
West	2	116	$	3,902	$	11,058
East	2	93	4,316		7,342
Southeast	1	37	796		2,457
Unallocated	—	—	473		—
Continuing Operations	5	246	9,487		20,857
Discontinued Operations	—	—	60		—
Total	5	246	$	9,547	$	20,857

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 based on current market conditions and our review of recent comparable transactions at the applicable period end. The fiscal 2013 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 a 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 fiscal year ended September 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 fiscal years ended September 30, 2014, 2013 and 2012:



	Fiscal Year Ended September 30,
(In thousands)	2014		2013		2012
Development projects and homes in process (Held for Development)
West	$	4,948	$	46	$	3,902
East	100		13		4,316
Southeast	—		—		796
Unallocated	373		—		473
Subtotal	$	5,421	$	59	$	9,487
Land Held for Sale
West	$	—	$	228	$	—
East	232		123		100
Southeast	28		1,778		208
Subtotal	$	260	$	2,129	$	308
Lot Option Abandonments
West	$	—	$	104	$	301
East	131		20		1,320
Southeast	2,495		321		792
Unallocated	—		—		2
Subtotal	$	2,626	$	445	$	2,415
Continuing Operations	$	8,307	$	2,633	$	12,210
Discontinued Operations
Held for Development	$	—	$	—	$	60
Land Held for Sale	—		17		503
Lot Option Abandonments	—		—		16
Subtotal	$	—	$	17	$	579
Total Company	$	8,307	$	2,650	$	12,789

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 $43.5 million at September 30, 2014. The total remaining purchase price, net of cash deposits, committed under all options was $420.5 million as of September 30, 2014. We expect to exercise, subject to market conditions and seller satisfaction of contract terms, all 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 present the related option deposits as land not owned under option agreement in the accompanying 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 September 30, 2014 and September 30, 2013:



(In thousands)	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned - Under Option Agreements
As of September 30, 2014
Consolidated VIEs	$	941	$	2,916	$	3,857
Unconsolidated lot option agreements	42,588		417,618		—
Total lot option agreements	$	43,529	$	420,534	$	3,857
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