Real Estate Inventories and Capitalized Interest

Real estate inventories are summarized as follows:



	June 30,		December 31,
	2017		2016
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	45,480	$	38,723
Land held and land under development	107,998		98,596
Homes completed or under construction	179,885		93,628
Model homes	32,037		55,981
	$	365,400	$	286,928

All of our deposits and pre-acquisition costs are non-refundable, except for refundable deposits of $0.2 million and $4.1 million as of June 30, 2017 and December 31, 2016, respectively.

Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes (except for capitalized selling and marketing costs, which are classified in other assets) include all costs associated with home construction, including land, development, indirects, permits, materials and labor.

In accordance with Accounting Standards Codification ("ASC") 360, Property, Plant and Equipment (“ASC 360”), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community-level, on a quarterly basis or whenever indicators of impairment exist. For the three and six months ended June 30, 2017, the Company recognized real estate-related impairments of $1.3 million in cost of sales resulting in a decrease of the same amount to income before income taxes for our homebuilding segment. Fair value for the homebuilding project impaired during the quarter was calculated under a discounted cash flow model. The following table summarizes inventory impairments recorded during the three and six months ended June 30, 2017 and 2016:



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(Dollars in Thousands)
Inventory impairments:
Home sales	$	1,300	$	—	$	1,300	$	—
Total inventory impairments	$	1,300	$	—	$	1,300	$	—

Remaining carrying value of inventory impaired at period end	$	12,550	$	—	$	12,550	$	—
Number of projects impaired during the period	1		—		1		—
Total number of projects subject to periodic impairment review during the year ⁽¹⁾	25		23		26		23

⁽¹⁾ Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period

may be less than the number of projects listed herein.

The home sales impairments of $1.3 million related to homes completed or under construction for one active homebuilding community located in Southern California. This community was experiencing a slow monthly sales absorption rate, and the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value.

Interest is capitalized to inventory during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income of unconsolidated joint ventures as related joint venture homes or lots close. For the three and six months ended June 30, 2017 and 2016 interest incurred, capitalized and expensed was as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Interest incurred	$	6,401		$	1,689		$	8,437		$	2,970
Interest capitalized to inventory	(5,878		)	(1,689		)	(7,750		)	(2,970		)
Interest capitalized to investments in unconsolidated joint ventures	(523		)	—			(687		)	—
Interest expensed	$	—		$	—		$	—		$	—

Capitalized interest in beginning inventory	$	6,663		$	4,823		$	6,342		$	4,190
Interest capitalized as a cost of inventory	5,878			1,689			7,750			2,970
Previously capitalized interest included in cost of sales	(1,720		)	(1,063		)	(3,271		)	(1,711		)
Capitalized interest in ending inventory	$	10,821		$	5,449		10,821			5,449

Capitalized interest in beginning investment in unconsolidated joint ventures	164			—			—			—
Interest capitalized to investments in unconsolidated joint ventures	523			—			687			—
Previously capitalized interest included in equity in net income of unconsolidated joint ventures	—			—			—			—
Capitalized interest in ending investments in unconsolidated joint ventures	687			—			687			—
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures	$	11,508		$	5,449		$	11,508		$	5,449

Capitalized interest as a percentage of inventory	3.0		%	1.4		%	3.0		%	1.4		%
Interest included in cost of sales as a percentage of home sales revenue	1.8		%	1.3		%	2.0		%	1.4		%

Capitalized interest as a percentage of investments in and advances to unconsolidated joint ventures	1.2		%	—		%	1.2		%	—		%