Inventory

9 Months Ended

Jun. 30, 2020

The components of our owned inventory are as follows as of June 30, 2020 and September 30, 2019:


in thousands	June 30, 2020		September 30, 2019
Homes under construction	$	607,731	$	507,542
Development projects in progress	647,583		738,201
Land held for future development	28,531		28,531
Land held for sale	16,863		12,662
Capitalized interest	132,096		136,565
Model homes	78,756		80,747
Total owned inventory	$	1,511,560	$	1,504,248

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 183 (with a cost of $61.7 million) and 238 (with a cost of $82.2 million) substantially completed homes that were not subject to a sales contract (spec homes) as of June 30, 2020 and September 30, 2019, respectively.

Development projects in progress consist principally of land acquisition, land development and other common costs. These land related costs are allocated to individual lots on a pro-rata basis, and the lot costs are transferred to homes under construction when home construction begins for the respective lots. 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 (refer to Note 2 to the audited consolidated financial statements within our 2019 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 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 June 30, 2020 and September 30, 2019:


in thousands	Projects in Progress ^(a)		Land Held for Future Development		Land Held for Sale		Total Owned Inventory
June 30, 2020
West Segment	$	687,707	$	3,483	$	6,048	$	697,238
East Segment	284,821		14,077		3,377		302,275
Southeast Segment	301,670		10,971		7,438		320,079
Corporate and unallocated ^(b)	191,968		—		—		191,968
Total	$	1,466,166	$	28,531	$	16,863	$	1,511,560
September 30, 2019
West Segment	$	723,094	$	3,483	$	5,160	$	731,737
East Segment	228,937		14,077		4,104		247,118
Southeast Segment	318,737		10,971		3,398		333,106
Corporate and unallocated ^(b)	192,287		—		—		192,287
Total	$	1,463,055	$	28,531	$	12,662	$	1,504,248

^(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.

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 or in our forecast that are below a minimum threshold of profitability, as well as recent closings that have gross margins less than a specified 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 additional financial and operational 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.

For the quarter ended June 30, 2020 and taking into consideration the factors discussed above, we identified five communities on our quarterly watch list: two in the West segment and three in the Southeast segment. None of these communities required further analysis to be performed after considering certain quantitative and qualitative factors. However, because the full magnitude and duration of the COVID-19 pandemic is uncertain and difficult to predict, changes in our cash flow projections may change our conclusions on the recoverability of inventory in the future.

For the quarter ended June 30, 2019, there were five communities on our quarterly watch list: three in the West segment, one in the East, and one in the Southeast segment. However, none of these communities required further analysis to be performed after considering certain quantitative and qualitative factors.

During the quarter ended June 30, 2020, we decided to sell two communities under development in the West and Southeast segments representing a total of 88 lots. As a result of the change in strategy with respect to the future use of these assets, we reclassified these assets from development projects in progress to land held for sale, and recognized a $1.3 million impairment charge. Impairments on land held for sale generally represent write downs of these properties to net realizable value based on sales contracts, letters of intent, current market conditions, and recent comparable land sale transactions, as applicable. Absent an executed sales contract, 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 may determine 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. 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 seller non-performance, or 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 an abandonment charge to earnings for the deposit amount and any related capitalized costs in the period such decision is made. During the quarter ended June 30, 2020, we recognized $1.0 million abandonment charges related to four under contract land acquisition deals that we decided to terminate.

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


	Three Months Ended June 30,						Nine Months Ended June 30,
in thousands	2020		2019		2020		2019
Projects in Progress:
West	$	—	$	—	$	—	$	92,912

Southeast	—		—		—		858
Corporate and unallocated ^(a)	—		—		—		16,260
Total impairment charges on projects in progress	$	—	$	—	$	—	$	110,030
Land Held for Sale:
West	$	89	$	—	$	89	$	37,963

Southeast	8		—		8		—
Corporate and unallocated ^(a)	1,160		—		1,160		625
Total impairment charges on land held for sale	$	1,257	$	—	$	1,257	$	38,588
Abandonments:
West	$	452	$	—	$	452	$	—
East	32		—		32		—
Southeast	525		—		525		—

Total abandonments charges	$	1,009	$	—	$	1,009	$	—






Total impairment and abandonment charges	$	2,266	$	—	$	2,266	$	148,618

^(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 June 30, 2020 and September 30, 2019:


in thousands	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation
As of June 30, 2020


Unconsolidated lot option agreements	$	69,341	$	384,892

As of September 30, 2019


Unconsolidated lot option agreements	$	78,202	$	389,705