Inventory

The components of our owned inventory are as follows as of March 31, 2019 and September 30, 2018:



in thousands	March 31, 2019		September 30, 2018
Homes under construction	$	536,039	$	476,752
Development projects in progress	836,829		907,793
Land held for future development	28,531		83,173
Land held for sale	12,926		7,781
Capitalized interest	144,756		144,645
Model homes	75,318		72,140
Total owned inventory	$	1,634,399	$	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 159 (with a cost of $60.0 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 March 31, 2019 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 March 31, 2019 and September 30, 2018:



in thousands	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
March 31, 2019
West Segment	$	736,249	$	3,483	$	5,077	$	744,809
East Segment	286,404		14,077		4,758		305,239
Southeast Segment	364,900		10,971		3,091		378,962
Corporate and unallocated ^(b)	205,389		—		—		205,389
Total	$	1,592,942	$	28,531	$	12,926	$	1,634,399
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. Our watch list also includes 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, it may be 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 assets may not be recoverable, a formal impairment analysis is performed. The formal impairment analysis consists of both qualitative considerations and quantitative analyses reflecting market and asset specific information.

We recognized impairment charges of $147.6 million related to 15 communities during the current quarter, all of which were previously land held for future development assets. As of the beginning of the quarter, 9 of these communities were included in projects in progress due to their activation for development in prior periods, while the remaining 6 communities were classified as land held for future development. The impairments were determined as described below.

We identified 12 communities on our current quarter watch list that required further analysis after considering certain quantitative and qualitative factors in accordance with our watch list procedures. This additional analysis led to impairment charges of $109.0 million for 9 of these communities representing 839 lots in our Southern California market. The impairments were primarily driven by a reduction in average selling prices based on current competitive dynamics in the market.

Concurrently, we performed a strategic review of our remaining land held for future development assets in California and determined to sell all of these parcels. As a consequence of the change in strategy with respect to the future use of these assets, we recognized land held for sale impairments totaling $38.6 million for 6 communities representing 732 lots in our Northern and Southern California markets. While steps to initiate planned sales of land held for sale assets have been taken, the timing of completion of such asset dispositions is unknown.

For the quarter ended March 31, 2018, there were two communities on our quarterly watch list. However, neither of these communities required impairment after considering certain quantitative and qualitative factors.

The table below summarizes the results of our recoverability tests by reportable segment, where applicable, for the quarter ended March 31, 2019:



$ in thousands		Recoverability 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 March 31, 2019
West	12	9	$	162,362	79.4	%
Corporate and unallocated ^(e)	—	—	30,037		N/A ^(f)
Total	12	9	$	192,399

^(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 fewer than ten closings remaining.

^(c)Some of the communities on the watch list were not tested for recoverability on an undiscounted cash flow basis due to certain quantitative and qualitative considerations that indicated that their carrying values are recoverable.

^(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 a recoverability 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:



	Results of Impairment Analyses
$ in thousands	Three Months Ended						Six Months Ended
Segment	# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at time of Impairment		# of Communities Impaired	# of Lots Impaired	Impairment Charge		Estimated Fair Value of Impaired Inventory at time of Impairment
March 31, 2019
West	9	839	$	92,912	$	69,449	9	839	$	92,912	$	69,449
Southeast	—	—	—		—		1	15	858		1,367
Corporate and unallocated ^(a)	—	—	16,111		13,928		—	—	16,260		14,166
Total	9	839	$	109,023	$	83,377	10	854	$	110,030	$	84,982

^(a) Amount represents the capitalized interest and indirects balances that were 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 and are based on current market conditions and our review of recent comparable transactions. Our assumptions related to land sales prices require significant judgment because the real estate market is highly sensitive to changes in economic conditions, and our estimates of sale prices could differ significantly from actual results.

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 March 31,				Six Months Ended March 31,
in thousands	2019		2018		2019		2018
Projects in Progress:
West	$	92,912	$	—	$	92,912	$	—
Southeast	—		—		858		—
Corporate and unallocated ^(a)	16,111		—		16,260		—
Total impairment charges on projects in progress	$	109,023	$	—	$	110,030	$	—
Land Held for Sale:
West	$	37,963	$	—	$	37,963	$	—
Corporate and unallocated ^(a)	625		—		625		—
Total impairment charges on land held for sale	$	38,588	$	—	$	38,588	$	—
Discontinued Operations:
Land Held for Sale	$	—	$	—	$	—	$	450
Total impairment and abandonment charges	$	147,611	$	—	$	148,618	$	450

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

Valuation assumptions for communities tested for impairment are specific to each community. For projects in progress impaired during the periods presented, we determined the fair value of each community by discounting its estimated future cash flows at a rate commensurate with the risks inherent in the project. The discount rate used depends on the development stage and expected duration of the project, local market conditions, and other specific factors. The estimated future cash flows for each community were determined based on the expected pace of closings and average sales price of the community less expected costs for land acquisition and land development, direct construction, overhead, and interest. We determined the fair value of land held for sale assets impaired during the periods presented based on sales contracts, letters of intent, and recent comparable land sale transactions, as applicable. The assumptions used in the determination of fair value of both projects in progress and land held for sale communities are based on factors known to us at the time such estimates are made and our expectations of future operations and market conditions. Should the estimates or expectations used in determining estimated fair values deteriorate in the future, we may be required to recognize additional impairment charges and write-offs related to these assets, and such amounts could be material.

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



$ in thousands	Three Months Ended	Six Months Ended
Unobservable Inputs	March 31, 2019	March 31, 2019
Average selling price	$350 to $615	$350 to $615
Closings per community per month	2 - 4	1 - 4
Discount rate	14.7% - 16.4%	14.7% - 16.8%

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 March 31, 2019 and September 30, 2018:



in thousands	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of March 31, 2019
Unconsolidated lot option agreements	$	78,047	$	386,913
As of September 30, 2018
Unconsolidated lot option agreements	$	72,191	$	383,150