Inventory

The components of our owned inventory are as follows as of March 31, 2016 and September 30, 2015:



(In thousands)	March 31, 2016		September 30, 2015
Homes under construction	$	446,698	$	377,281
Development projects in progress	777,369		809,900
Land held for future development	260,222		270,990
Land held for sale	49,500		44,555
Capitalized interest	140,139		123,457
Model homes	76,724		71,407
Total owned inventory	$	1,750,652	$	1,697,590

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction. We had 117 (with a cost of $33.1 million) and 128 (with a cost of $40.1 million) substantially completed homes that were not subject to a sales contract (spec homes) as of March 31, 2016 and September 30, 2015, 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 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 by category in the table below as of March 31, 2016 and September 30, 2015:



(In thousands)	Projects in Progress ^(a)			Land Held for Future Development		Land Held for Sale		Total Owned Inventory
March 31, 2016
West Segment	$	618,115		$	219,323	$	4,816	$	842,254
East Segment	340,842			29,908		27,100		397,850
Southeast Segment	290,311			10,991		16,484		317,786
Corporate and unallocated	191,662		^(b)	—		1,100		192,762
Total	$	1,440,930		$	260,222	$	49,500	$	1,750,652
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

^(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 determine that it is 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 location 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 quarter ended March 31, 2016, there were two communities on our watch list, both in the West segment, that required further analysis to be performed after considering the number of lots remaining in each community and certain other qualitative factors. This additional analysis was conducted for the two communities, leading to an impairment charge for one of these communities. For the quarter ended March 31, 2015, one community in our West segment was on our quarterly watch list that required additional consideration. After additional financial and operational review on the one community in our prior fiscal year, we determined that the factors contributing to profit margins below our threshold were temporary in nature, and therefore the community was not subjected to further analysis, including any undiscounted cash flow analysis, and no impairment for that asset was recorded during the quarter ended March 31, 2015.

The table below summarizes the results of our undiscounted cash flow analysis by reportable segment, where applicable, for the quarters ended March 31, 2016 and March 31, 2015:




($ in thousands)		Undiscounted Cash Flow Analyses Prepared
Segment ^(a)	# of Communities on Watch List^(b)	# of Communities	Pre-analysis Book Value (BV)		Aggregate Undiscounted Cash Flow as a % of BV ^(c)
Quarter Ended March 31, 2016
West	2	2	$	20,809	108.0	%
Corporate and unallocated ^(d)	—	—	1,105		N/A^(e)
Total	2	2	$	21,914
Quarter Ended March 31, 2015
West	1	—	$	—	—	%

^(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) Totals in this column exclude communities that are closing out (and have less than 10 closings remaining), as well as communities that are excluded due to certain qualitative considerations that would imply that low profitability levels are temporary in nature.

^(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. While this metric was above 100% for the current quarter in total, the community that we ultimately impaired was below 100%, while the community we did not impair was above 100%.

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

^(e) N/A - not applicable.

The following table presents, by reportable segment, details around the impairment charges taken on projects in progress for the three and six months ended March 31, 2016:



($ in thousands)
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, 2016							Six Months Ended March 31, 2016
West	1	34	$	1,513	$	5,518	1	34	$	1,513	$	5,518
Corporate and unallocated ^(a)	—	—	312		—		—	—	312		—
Total	1	34	$	1,825	$	5,518	1	34	$	1,825	$	5,518

^(a) Amount represents capitalized interest and indirects balance that was impaired. Capitalized interest and indirects are 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 calculate the estimated fair value 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. Additionally, in certain limited instances, we are forced to abandon lots due to permitting or other regulatory issues that do not allow us to build on that lot. If we intend to abandon or walk away from a property, we record a charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results, no longer fit with our long-term strategic plan or, in limited circumstances, are not suitable for building due to regulatory or environmental restrictions that are enacted.

The following table presents, by reportable segment, our total impairment and abandonment charges for the periods presented:




	Three Months Ended March 31,				Six Months Ended March 31,
(In thousands)	2016		2015		2016		2015
Projects in Progress:
West	$	1,513	$	—	$	1,513	$	—
Corporate and unallocated	312		—		312		—
Total impairment charges on projects in progress	$	1,825	$	—	$	1,825	$	—
Land Held for Sale:
East	$	—	$	—	$	197	$	—
Southeast	—		—		371		—
Total impairment charges on land held for sale	$	—	$	—	$	568	$	—
Abandonments:
Southeast	$	—	$	—	$	788	$	—
Total impairment and abandonment charges	$	1,825	$	—	$	3,181	$	—

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. The 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 March 31, 2016 and September 30, 2015:



(In thousands)	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of March 31, 2016
Unconsolidated lot option agreements	$	72,032	$	430,057
As of September 30, 2015
Unconsolidated lot option agreements	$	51,475	$	420,070