Inventory

The components of our owned inventory are as follows as of December 31, 2018 and September 30, 2018:



in thousands	December 31, 2018		September 30, 2018
Homes under construction	$	478,539	$	476,752
Development projects in progress	925,728		907,793
Land held for future development	83,177		83,173
Land held for sale	6,997		7,781
Capitalized interest	151,886		144,645
Model homes	75,793		72,140
Total owned inventory	$	1,722,120	$	1,692,284

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 223 (with a cost of $83.9 million) and 240 (with a cost of $84.8 million) substantially completed homes that were not subject to a sales contract (spec homes) as of December 31, 2018 and September 30, 2018, 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 land is classified as held for sale once certain criteria are met. 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 depends on 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 in the table below as of December 31, 2018 and September 30, 2018:



in thousands	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
December 31, 2018
West Segment	$	785,702	$	58,129	$	—	$	843,831
East Segment	277,300		14,077		3,906		295,283
Southeast Segment	357,172		10,971		3,091		371,234
Corporate and unallocated ^(b)	211,772		—		—		211,772
Total	$	1,631,946	$	83,177	$	6,997	$	1,722,120
September 30, 2018
West Segment	$	763,453	$	58,125	$	—	$	821,578
East Segment	280,761		14,077		4,580		299,418
Southeast Segment	358,126		10,971		3,177		372,274
Corporate and unallocated ^(b)	198,990		—		24		199,014
Total	$	1,601,330	$	83,173	$	7,781	$	1,692,284

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

^(b)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 inventory related to projects in progress, we establish a quarterly “watch list” comprised of communities that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability. We also include in our watch list communities with 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 analysis and review that considers 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, 2018, there were four communities that were included in our watch list 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 led to a $1.0 million impairment charge for one of these communities, principally due to a reduction in price that is other than temporary based on current competitive and market dynamics. For the quarter ended December 31, 2017, there were two communities on our quarterly watch list. However, none of these communities required further impairment analysis to be performed after considering certain qualitative factors.

The table below summarizes the results of our undiscounted cash flow analyses by reportable segment, where applicable, for the quarter ended December 31, 2018 (the period that such analyses were required):



$ in thousands		Undiscounted Cash Flow Analyses Prepared
Segment ^(a)	# of Communities on Watch List^(b)	# of Communities ^(c)	Pre-analysis Book Value (BV)		Aggregate Undiscounted Cash Flow as a % of BV ^(d)
Quarter Ended December 31, 2018
West	3	—	$	—	—	%
Southeast	1	1	2,225		71.3	%
Corporate and unallocated ^(e)	—	—	387		N/A ^(f)
Total	4	1	$	2,612

^(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)Number of communities in this column excludes communities that are closing out and have less than ten closings remaining.

^(c)Number of communities in this column is lower than the number of communities on our watch list because it excludes communities due to certain qualitative considerations that would imply that the low profitability levels are temporary in nature.

^(d)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. The book value of each project assessed for recoverability on an undiscounted cash flow basis includes all inventory costs applicable to the project as of the date of the analysis, including capitalized interest and indirects.

^(e) 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.

^(f) N/A - not applicable.

The following table presents, by reportable segment, details of the impairment charges taken on projects in progress for the periods presented:



$ 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 time of Impairment
Quarter Ended December 31, 2018
Southeast	1	15	$	858	$	1,367
Corporate and unallocated ^(a)	—	—	149		238
Total	1	15	$	1,007	$	1,605

(a) Amount represents capitalized interest and indirects balance that was impaired. Capitalized interest and indirects are maintained within our Corporate and unallocated segment.

The following table presents the ranges or values of significant quantitative unobservable inputs we used in determining the fair value of the communities we impaired during the periods presented:



$ in thousands	Three Months Ended
Unobservable Inputs	December 31, 2018
Average selling price	$	412
Closings per community per month	1 - 2
Discount rate	16.8		%

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 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 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 December 31,
in thousands	2018		2017
Projects in Progress:
Southeast	$	858	$	—
Corporate and unallocated ^(a)	149		—
Total impairment charges on projects in progress	$	1,007	$	—
Discontinued Operations:
Land Held for Sale	—		450
Total impairment and abandonment charges	$	1,007	$	450

^(a) Amount represents capitalized interest and indirects balance that was impaired. Capitalized interest and indirects are maintained within our Corporate and unallocated segment.

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. 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, 2018 and September 30, 2018:



in thousands	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of December 31, 2018
Unconsolidated lot option agreements	$	71,644	$	367,026
As of September 30, 2018
Unconsolidated lot option agreements	$	72,191	$	383,150