Inventory

The components of owned inventory are as follows as of March 31, 2015 and September 30, 2014:



(In thousands)	March 31, 2015		September 30, 2014
Homes under construction	$	395,726	$	282,095
Development projects in progress	849,644		786,768
Land held for future development	270,518		301,048
Land held for sale	64,929		51,672
Capitalized interest	112,476		87,619
Model homes	63,743		48,294
Total owned inventory	$	1,757,036	$	1,557,496

Homes under construction include homes substantially finished and ready for delivery and homes in various stages of construction. We had 115 (with a cost of $29.3 million) and 205 (with a cost of $48.0 million) substantially completed homes that were not subject to a sales contract (spec homes) at March 31, 2015 and September 30, 2014, 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. 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 (refer to Note 6 for additional information on capitalized interest). Land held for sale is recorded at the lower of the carrying value or fair value less costs to sell. Total owned inventory, by reportable segment, is presented in the table below as of March 31, 2015 and September 30, 2014:



(In thousands)	Projects in Progress			Held for Future Development		Land Held for Sale		Total Owned Inventory
March 31, 2015
West Segment	$	576,985		$	230,362	$	10,088	$	817,435
East Segment	392,952			29,215		33,048		455,215
Southeast Segment	292,380			10,941		19,931		323,252
Unallocated and Other	159,272		^(a)	—		1,862		161,134
Total	$	1,421,589		$	270,518	$	64,929	$	1,757,036
September 30, 2014
West Segment	$	462,508		$	260,898	$	10,026	$	733,432
East Segment	353,859			29,239		34,530		417,628
Southeast Segment	264,843			10,911		4,821		280,575
Unallocated and Other	123,566		^(a)	—		2,295		125,861
Total	$	1,204,776		$	301,048	$	51,672	$	1,557,496

^(a) Includes capitalized interest and indirect costs that are maintained within our Corporate Segment.

Inventory Impairments. When conducting our community level review for the recoverability of our homebuilding held for development inventories, we establish a quarterly “watch list” of communities with generally more than 10 homes remaining that carry profit margins in backlog and in our forecast that are below a minimum threshold of profitability. Assets on the quarterly watch list are subject to substantial additional financial and operational analyses and review that consider the competitive environment and other factors contributing to profit 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 was prudent to reduce sales prices or further increase sales incentives in response to 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 March 31, 2015, one community in our West segment was on our quarterly watch list as compared to four communities for the quarter ended March 31, 2014. After additional financial and operational review, we determined that the factors contributing to profit margins below our threshold were temporary in nature, and therefore all but one of the communities for the quarters ended March 31, 2015 and 2014 were not subjected to further analysis. For all communities on our watch list, there were no impairments recorded during the three and six months ended March 31, 2015 or 2014 related to our analyses. A summary of our community level review for the recoverability of our homebuilding held for development inventories is as follows for the periods presented:



(In thousands)		Undiscounted Cash Flow Analyses Prepared
Segment	# of Communities on Watch List	# of Communities	Pre-analysis Book Value (BV)		Aggregate Undiscounted Cash Flow as a % of BV
Quarter Ended March 31, 2015
West	1	—	$	—	—	%
Total	1	—
Quarter Ended March 31, 2014
West	1	—	$	—	—	%
East	1	—	—		—	%
Southeast	2	1	7,478		107.9	%
Total	4	1

Impairments on land held for sale generally represent further 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 current market is highly sensitive to changes in economic conditions. We calculated the estimated fair values 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 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. If we intend to abandon or walk-away from the property, we record a charge to earnings in the period such decision is made for the deposit amount and any related capitalized costs. Abandonment charges generally relate to our decision to abandon lots or not exercise certain option contracts that are not projected to produce adequate results or no longer fit in our long-term strategic plan.

The following table presents, by reportable homebuilding segment, our land held for sale inventory impairments and lot option abandonment charges for the periods presented:




	Three Months Ended March 31,				Six Months Ended March 31,
(In thousands)	2015		2014		2015		2014
Continuing Operations:
Land Held for Sale
East	$	—	$	—	$	—	$	31
Southeast	—		28		—		28
Subtotal	$	—	$	28	$	—	$	59
Lot Option Abandonments
Southeast	$	—	$	852	$	—	$	852
Total Continuing Operations	$	—	$	880	$	—	$	911

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. A 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 paid. 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.

We have consolidated all VIEs for which we are the primary beneficiary. For those we consolidate, we record the remaining contractual purchase price under the applicable lot option agreement to land not owned under option agreements with an offsetting increase to obligations related to land not owned under option agreements. Also, to reflect the purchase price of this inventory consolidated, we present the related option deposits as land not owned under option agreement in the accompanying unaudited consolidated balance sheets. Consolidation of these VIEs has no impact on the Company’s statements of income or cash flows.

The following provides a summary of our interests in lot option agreements as of March 31, 2015 and September 30, 2014:



(In thousands)	Deposits & Non-refundable Pre-acquisition Costs Incurred		Remaining Obligation		Land Not Owned Under Option Agreements
As of March 31, 2015
Unconsolidated lot option agreements	$	54,778	$	438,441	$	—
Total lot option agreements	$	54,778	$	438,441	$	—
As of September 30, 2014
Consolidated VIEs	$	941	$	2,916	$	3,857
Unconsolidated lot option agreements	42,588		417,618		—
Total lot option agreements	$	43,529	$	420,534	$	3,857