Inventory

The components of our owned inventory are as follows as of December 31, 2017 and September 30, 2017:



(In thousands)	December 31, 2017		September 30, 2017
Homes under construction	$	461,185	$	419,312
Development projects in progress	830,827		785,777
Land held for future development	97,166		112,565
Land held for sale	19,258		17,759
Capitalized interest	144,847		139,203
Model homes	73,438		68,191
Total owned inventory	$	1,626,721	$	1,542,807

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction, including the cost of the underlying lot. We had 167 (with a cost of $54.3 million) and 171 (with a cost of $52.6 million) substantially completed homes that were not subject to a sales contract (spec homes) as of December 31, 2017 and September 30, 2017, 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 includes land and lots that do not fit within our homebuilding programs and strategic plans in certain markets, and is classified as such once certain criteria is met (refer to Note 2 to the audited consolidated financial statements within our 2017 Annual Report). These assets are 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 (see Note 6 for additional information on capitalized interest).

Total owned inventory, by reportable segment, is presented by category in the table below as of December 31, 2017 and September 30, 2017:



(In thousands)	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
December 31, 2017
West Segment	$	712,742	$	71,647	$	7,445	$	791,834
East Segment	271,224		14,561		10,679		296,464
Southeast Segment ^(b)	329,589		10,958		1,110		341,657
Corporate and unallocated ^(c)	196,742		—		24		196,766
Total	$	1,510,297	$	97,166	$	19,258	$	1,626,721
September 30, 2017
West Segment	$	673,828	$	87,231	$	3,848	$	764,907
East Segment	250,002		14,391		11,578		275,971
Southeast Segment	301,268		10,943		1,233		313,444
Corporate and unallocated ^(c)	187,385		—		1,100		188,485
Total	$	1,412,483	$	112,565	$	17,759	$	1,542,807

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

^(b)In December 2017, we acquired more than 450 lots spread across four new home communities in Raleigh and three in Myrtle Beach in the Southeast segment from Bill Clark Homes. The transaction value was approximately $29.0 million and the assets were reported in the Southeast segment.

^(c)Projects in progress amount includes capitalized interest and indirect costs that are maintained within our Corporate and unallocated segment. Land held for sale amount includes parcels held by our discontinued operations.

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 gross 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 ten 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 gross 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 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 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 quarter ended December 31, 2017, there were two communities on our quarterly watch list, one in the West segment and the other in the Southeast segment. However, none of these communities required further analysis to be performed after considering certain qualitative factors. For the quarter ended December 31, 2016, there were eight communities on our quarterly watch list, seven in our West segment and one in our East segment. However, none of these communities required further impairment analysis to be performed after considering the number of lots remaining in each community and certain other qualitative factors.

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 environmental, permitting or other regulatory issues that do not allow us to build on those lots. 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 environmental or regulatory restrictions that are enacted.

The following table presents our total impairment and abandonment charges for the period presented:



	Three Months Ended December 31,
(In thousands)	2017
Discontinued Operations:
Land Held for Sale	$	450
Total impairment and abandonment charges	$	450

We did not have any land held for sale inventory impairments, nor did we have any abandonment charges, during the three months ended December 31, 2016.

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 December 31, 2017 and September 30, 2017:



(In thousands)	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of December 31, 2017
Unconsolidated lot option agreements	$	92,864	$	380,378
As of September 30, 2017
Unconsolidated lot option agreements	$	91,854	$	408,300