Inventory

The components of our owned inventory are as follows as of September 30, 2015 and September 30, 2014:



(In thousands)	September 30, 2015		September 30, 2014
Homes under construction	$	377,281	$	282,095
Development projects in progress	809,900		786,768
Land held for future development	270,990		301,048
Land held for sale	44,555		51,672
Capitalized interest	123,457		87,619
Model homes	71,407		48,294
Total owned inventory	$	1,697,590	$	1,557,496

Homes under construction includes homes substantially finished and ready for delivery and homes in various stages of construction. We had 128 (with a cost of $40.1 million) and 205 (with a cost of $48.0 million) substantially completed homes that were not subject to a sales contract (spec homes) as of September 30, 2015 and 2014, 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 customer 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 is recorded at the lower of the asset's carrying value or fair value less costs to sell. The amount of interest we are able to capitalize is dependent upon our qualified inventory balance, which considers the status of our inventory holdings. Our qualified inventory balance includes the majority of our homes under construction and development projects in progress, but excludes land held for future development and land held for sale (refer to Note 6 for additional information on capitalized interest).

Total owned inventory, by reportable segment, is presented in the table below as of September 30, 2015 and September 30, 2014:



(In thousands)	Projects in Progress ^(a)			Land Held for Future Development		Land Held for Sale		Total Owned Inventory
September 30, 2015
West Segment	$	583,210		$	230,778	$	6,941	$	820,929
East Segment	353,054			29,280		30,927		413,261
Southeast Segment	277,351			10,932		5,587		293,870
Corporate and unallocated	168,430		^(b)	—		1,100		169,530
Total	$	1,382,045		$	270,990	$	44,555	$	1,697,590
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
Corporate and unallocated	123,566		^(b)	—		2,295		125,861
Total	$	1,204,776		$	301,048	$	51,672	$	1,557,496

^(a) Projects in progress include homes under construction, development projects in progress, capitalized interest and model home categories from the preceding table.

^(b)Includes capitalized interest and indirect costs that are maintained within Corporate and unallocated.

Inventory Impairments. When conducting our community level review for the recoverability of our inventory related to projects in progress, we establish a quarterly “watch list” of communities that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specific threshold. Each community is first evaluated qualitatively to determine if there are temporary factors driving the low profitability levels. Following our qualitative evaluation, communities with more than 10 homes remaining to close are subjected 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. For certain communities, we determined that it was prudent to reduce sales prices or further increase sales incentives in response to a variety of 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. Market deterioration that exceeds our initial 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.

For the year ended September 30, 2015, there were no communities on our watch list that required further impairment analysis to be performed after considering the number of lots remaining in each community and certain other qualitative factors. However, certain communities required further review during our fiscal 2014 and 2013. In our undiscounted cash flow impairment analyses for the year ended September 30, 2014, we did not assume any market improvements.

The following table summarizes the number of communities on our watch list (excluding certain communities exempted due to qualitative factors) and the results, by reportable segment, of our community level review of the recoverability of our inventory assets related to projects in progress as of September 30, 2014 and 2013 that required at a minimum an undiscounted cash flow analysis to be performed:



($ in thousands)		Undiscounted Cash Flow Analyses Prepared
Segment ^(a)	Number of Communities on Watch List	Number of Communities	Pre-analysis Book Value (BV)		Aggregate Undiscounted Cash Flow as a % of BV ^(c)
Year Ended September 30, 2014
West	5	3	$	25,191	90.9	%
East ^(b)	1	—	—		—	%
Southeast	2	1	7,479		120.2	%
Corporate and unallocated ^(d)	—	—	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	%
Corporate and unallocated ^(d)	—	—	1,755		100.0	%
Total	5	5	$	27,680	114.9	%

^(a) 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.

^(b)During the year ended September 30, 2014, we recorded an impairment charge of $0.1 million in our East segment on a single community. 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. However, the community is shown here to list all communities for which an impairment was eventually recorded.

^(c)An aggregate undiscounted cash flow as a percentage of book value under 100% would indicate a possible impairment and is consistent with our "watch list" methodology. Accordingly, a discounted cash flow analysis was performed in fiscal 2014 on certain communities in our West segment, evidenced by this metric being below 100%.

^(d) Amount represents capitalized interest balance related to communities for which an undiscounted cash flow analysis was prepared. Capitalized interest is maintained within our Corporate and unallocated segment.

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 our fiscal year ended September 30, 2014. 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 were taken as a result of these discounted cash flow analyses.

The table below summarizes the results of our discounted cash flow analysis for our fiscal 2014 (the only year that such an analysis was required) that resulted in impairments on two communities. There were no impairments recorded during the fiscal years ended September 30, 2015 or September 30, 2013 related to our impairment analyses.



($ 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
Corporate and unallocated ^(a)	—	—	373		—
Total	2	180	$	5,321	$	14,379

^(a) Amount represents capitalized interest balance related to communities for which an discounted cash flow analysis was prepared. Capitalized interest is maintained within our Corporate and unallocated segment.

Impairments on land held for sale generally represent 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. Our assumptions about land sales prices require significant judgment because the real estate 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.

From time-to-time, we also determine that the proper course of action with respect to a community is to not exercise an option and to write-off the deposit securing the option takedown and the related 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 with our long-term strategic plan.

The following table presents, by reportable segment, our projects in progress impairments, land held for sale impairments and lot option abandonment charges for the periods presented:



	Fiscal Year Ended September 30,
(In thousands)	2015		2014		2013
Projects in Progress:
West	$	—	$	4,948	$	46
East	—		100		13
Corporate and unallocated	—		373		—
Total impairment charges on projects in progress	$	—	$	5,421	$	59
Land Held for Sale:
West	$	—	$	—	$	228
East	1,433		232		123
Southeast	—		28		1,778
Total impairment charges on land held for sale	$	1,433	$	260	$	2,129
Lot Option Abandonments:
West	$	—	$	—	$	104
East	1,676		131		20
Southeast	—		2,495		321
Total lot option abandonments charges	$	1,676	$	2,626	$	445
Total continuing operations	$	3,109	$	8,307	$	2,633
Discontinued Operations	—		—		17
Total company impairment and lot option abandonment charges	$	3,109	$	8,307	$	2,650

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 specified 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 at all.

The following table provides a summary of our interests in lot option agreements as of September 30, 2015 and September 30, 2014:



(In thousands)	Deposits & Non-refundable Preacquisition Costs Incurred		Remaining Obligation		Land Not Owned - Under Option Agreements
As of September 30, 2015
Unconsolidated lot option agreements	$	51,475	$	420,070	N/A^(a)
Total lot option agreements	$	51,475	$	420,070	$	—
As of September 30, 2014
Consolidated VIEs	$	941	$	2,916	$	3,857
Unconsolidated lot option agreements	42,588		417,618		N/A^(a)
Total lot option agreements	$	43,529	$	420,534	$	3,857

^(a) N/A - Not applicable