U.S. Markets closed

Edited Transcript of MTH earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Meritage Homes Corp Earnings Call

Scottsdale May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Meritage Homes Corp earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brent Anderson

Meritage Homes Corporation - VP of IR

* Hilla Sferruzza

Meritage Homes Corporation - CFO, CAO and EVP

* Phillippe Lord

Meritage Homes Corporation - COO and EVP

* Steven J. Hilton

Meritage Homes Corporation - Co-Founder, Chairman and CEO

================================================================================

Conference Call Participants

================================================================================

* Alan S. Ratner

Zelman & Associates LLC - Director

* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Carl Edwin Reichardt

BTIG, LLC, Research Division - MD

* Jason Aaron Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Michael Glaser Dahl

Barclays PLC, Research Division - Research Analyst

* Nishu Sood

Deutsche Bank AG, Research Division - Director

* Peter T. Galbo

BofA Merrill Lynch, Research Division - Research Analyst

* Ryan John Tomasello

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Stephen Kim

Evercore ISI, Research Division - Senior MD, Head of Housing Research Team and Fundamental Research Analyst

* Stephen F. East

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Will Randow

Citigroup Inc, Research Division - Director

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Meritage Homes First Quarter 2017 Analyst Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

Brent Anderson, Meritage Homes Corporation - VP of IR [2]

--------------------------------------------------------------------------------

Thank you, Kate. Good morning, and welcome to our analyst call to discuss our first quarter 2017 results. We issued the press release before the market opened today and you can find it along with the slides that we'll be referring to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage.

I'll refer you to Slide 2 and remind you that our statements during this call as well as the press release and slides contain forward-looking statements, including our projections for 2017 operating metrics such as community count, order trends, closings, revenue, margins and earnings. Those and other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain, and actual results may be materially different than our expectations. We have identified risk factors that may influence our actual results and listed them on this slide as well as in our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2016 annual report on Form 10-K, which contains a much more detailed discussion of those risks. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our press release or presentation as compared to their closest related GAAP measures.

With me today to discuss our results are Steve Hilton, Chairman and CEO; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes. We expect to conclude the call in about an hour, and a replay will be available on the website approximately an hour afterwards and remain active for approximately 2 weeks.

I'll now turn it over to Mr. Hilton to review our first quarter results. Steve?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [3]

--------------------------------------------------------------------------------

Good morning. Thank you, Brent, and welcome to everyone participating on our call today. I'll begin on Slide 4. We delivered solid results in the first quarter of 2017 and are well on our way to achieving our plans for the year. We produced year-over-year growth in key operating metrics, including a 7% increase in orders, a 6% increase in closings, 11% increases in both home closing revenue and in order value and a 27% increase in pretax earnings, which yield a 12% increase in our diluted EPS over last year's first quarter. In addition, we grew our community count and lot supply and made progress on expanding our communities for the entry-level and first-time homebuyer segment, which represent a tremendous growth opportunity.

Turning to Slide 5. I'm pleased with the progress we've made on our strategic initiatives, which we discussed on last quarter's call and reviewed in more detail during our Analyst Day meeting last month. If you weren't able to attend that event, you could find a replay of the presentations on our website.

We are focused on 3 strategic initiatives to drive long-term earnings expansion: community count growth, gross margin improvement, and managing our overhead expenses to leverage top line growth for greater earning power.

Slide 6. Regarding our first initiative. We delivered 5% community count growth as of the end of the first quarter, which was the increase we've projected to reach by year-end. We were able to open many communities in March that were expected to come online in the second quarter, so they will be active during more of the critical spring selling season. We also expanded our lot supply during the quarter, which will translate into additional community count growth over the next several years. Approximately 2/3 of the new lots of the communities we secured during the first quarter were for entry plus or LiVE. NOW communities homes.

Turning to Slide 7. Our strategic initiative is focused on improving our gross margin, which has been compressed over the last couple of years due to the rising costs and elective leverage in our newer divisions. As most of you know, the cost of lumber has increased by high single digit percentages at the beginning of the year in anticipation of the Canadian tariff announced early this week. While we have little control over the price of labor materials, we're able to raise prices enough to offset the cost of those increases. We've also been focused in our operational improvements such as simplifying our plan library in the east, reducing variations and starting homes on an even flow basis, which we expect will benefit our gross margins over the next several quarters. Our home closing gross margin for the first quarter of 2017 was in line with our internal plan and is expected to be the low watermark for the year, as we are projecting gross margins to move higher for the remainder of 2017. Hilla will discuss those and more details later.

Turning to Slide 8. Lastly, we're pleased with the 90 basis point improvement in our SG&A leverage compared to last year's first quarter and made good progress towards our long-term goal of 10% to 10.5%. We were able to better leverage first quarter revenue growth as a result of cost controls and productivity gains over last year.

Turning to Slide 9. We produced 7% order growth for the first quarter of 2017 over the first quarter of 2016, with a strong and steady improvement each month through the quarter. We expressed that March 2016 will be a difficult comparison since it was so strong last year, but we topped it with another strong March in 2017. Our sales pace also improved for the first quarter, with an 8% year-over-year increase in average community absorptions, which is impressive considering that about half of the new communities were opened during the first quarter of 2017 were only opened for a few weeks. So they had minimal impact on the first quarter orders.

We've seen significantly higher sales pace on our entry-level plus and LiVE. NOW communities than our traditional move-up communities. We expect that to continue as this customer segment becomes a larger part of our mix.

Turning to Slide 10. We have increased our investment in new lots and communities starting in first-time buyers. We spent $207 million on land and development in the first quarter of 2017, securing more than 3,600 additional lots. More than any other quarter since the beginning of this cycle, with the exception of the acquisition of 11 new [Legendary] communities in the third quarter of 2014. That increased our whole lot supply to more than 31,300 lots at quarter end.

Based on positive economic drivers for homebuilding as well as Meritage's position in many of the best markets under distinct product offerings, we're confident in our opportunities for continued growth, and we're continuing to invest in new communities to take advantage of those opportunities and deliver additional value for our shareholders.

I'll now turn it over to Phillippe to provide some additional color on the trends in our various markets. Philippe?

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [4]

--------------------------------------------------------------------------------

Thank you, Steve. I'll begin on Slide 11. Generally speaking, we continue to experience solid demand, which was evident across our Western and Texas markets, offsetting our slower performance in each region, which I'll explain shortly.

Slide 11. The West region had its strongest quarter [caused] in the first quarter of this year. Total orders for the region were up 25% over the prior year in the first quarter of 2017, led by a 56% increase in Arizona, which was almost entirely due to increased sales per community in the Phoenix marketplace. Phoenix has had a very strong spring selling season and we are well positioned there with many of our new communities targeted to our first-time buyers, including our new LiVE. NOW homes. Our average selling price in Phoenix has come down about 10% in the last year, while Arizona as a whole was 5% lower year-over-year. A greater percentage of orders were for our entry-level homes in those lower-priced communities. We expect those trends to continue as we have had a long -- as we had a long supply of lots in most of our new communities here to meet the current pace of demand.

California is also having a strong spring. The heavy rains there didn't seem to impact sales demand. They will increase our cycle times and delay some closings into later this year. We had a 6% increase in our ASP there, along with 21% order growth year-over-year in the first quarter of 2017. We have been acquiring additional lots in California, and we were able to open more communities during the first quarter, translating to a 19% increase in our average community count year-over-year. We're selling almost 1 home per week per community in California, which is the second highest sales pace in the company, following Colorado. Despite very strong demand, our Colorado orders were down 15% due to a lower community count. We had 1/3 fewer communities on average in Colorado during the first quarter of 2017 than we had in the first quarter of 2016.

However, our average sales pace was almost 5 per month during the first quarter of 2017, 27% higher than last year's first quarter and the highest in the company. Demand in Colorado has been so strong that we are selling out of communities faster than we can open new ones. We've been in the process of reloading and costs -- and we contracted for over 400 additional new lots in the first quarter of 2017. Combined with the [one town] lots contracted for in 2016, that represents 16 new communities expected to open in Colorado over the next year or 2. As a consequence of strong demand in the Western markets, labor shortages are elongating our cycle times. While that will not result in later closings -- while that will result in later closings, we do not expect to see increased cancellation rates due to those delays.

Slide 12. Demand in our Texas market continues to be solid, especially in Austin and Dallas-Forth Worth. We increased our first quarter orders in Texas by 17% in 2017 over 2016, primarily related to additional communities that we had to serve the Austin and Dallas markets. We will soon have 6 new bundled communities for the first-time buyers in the DFW area. And about half of our communities in Austin are already selling to that segment of buyers. Austin, like Phoenix, is another market where we've made a significant shift from high-end move-up communities to more affordable communities that are selling well.

Houston and San Antonio were consistent with last year's first quarter. Last year was a record year for San Antonio so we were pleased with similar performance there this year. Our order volumes in Houston has held steady as oil prices have stabilized and we believe there is an opportunity for growth there at lower price points. We have secured some great new communities to meet the demand and are excited about the opportunities they present for us.

Turning to the East region, Slide 13. Our first quarter orders were 19% lower than last year in the East region, where our average community count was down 9% and absorptions were down 10% for the region as a whole. While we opened 11 new communities in the East during the first quarter of 2017, almost half were opened in the last few weeks of the quarter. So they didn't contribute even a full month of orders. However, they increased our average community count, which artificially decreased our absorption pace in North and South Carolina, Georgia and Tennessee. Demand is strong in those markets, but as we mentioned last quarter, we are rolling out new products there, which slower community count growth in Georgia, the Carolinas and Tennessee. That trend will reverse over the remainder of this year as the product redesign is now behind us, and our new communities will be featuring the new products as they open. Florida was the only east region facing an increasing count in orders during the first quarter of 2017 by comparison to 2016. We are expanding our presence in some great and new A locations in Orlando, and are adding 6 new entry-level plus communities there this year. Overall, we are bullish on our new positions in the East and are projecting strong order growth as we open new communities with new products during the first half of this year.

I'll now turn it over to Hilla for some additional details on our financials.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [5]

--------------------------------------------------------------------------------

Thanks, Phillippe. I will review some additional details from our income statement, key land and balance sheet metrics and our second quarter outlook.

Starting on Slide 14. We generated a 12% increase in net earnings for the first quarter of 2017 over the first quarter of 2016, which was primarily driven by higher closing revenue and greater overhead leverage, but partially offset by lower home closing gross margin and a higher effective tax rate. On a pretax basis, earnings were up 27% year-over-year, which is a better indication of our earnings performance for the quarter.

First quarter home closing revenue increased 11% year-over-year on a 6% increase in volumes and a 4% increase in average closing price. We saw positive contributions from all regions, particularly Arizona, Texas and the Carolinas.

Our average closing price was $418,000 in the first quarter of '17, continuing its upward trend over the last several years. We did see our ASPs and backlog begin to trend down this quarter from $432,000 at year-end to $430,000 at March 31, 2017, something we expect to happen gradually, as we saw a greater percentage of homes in our lower-priced communities for entry-level and first-time buyers. We also had a $2.5 million gain on land on sales during the first quarter of '17, which was primarily generated by one parcel in Southern California.

Our first quarter home closing gross margin was 120 bps lower than the first quarter of '16, but was in line with our internal expectations. I'll come back to that in just a minute. We brought our SG&A expenses down to 11.8% of home closing revenue in the first quarter of '17, down from 12.7% in the first quarter of '16, and expect that trend to continue as we progress throughout the year with higher closing revenue. We are targeting 10.5% to 11% SG&A as a percentage of home closing revenue for the full year '17 with a longer-term goal of 10% to 10.5%.

Financial services profit increased 6% in the first quarter of '17 over '16, mainly driven by increased home closing volumes. We have less than $1 million of interest expense for the first quarter of '17, which was $2.5 million lower than the first quarter of '16, as we capitalized nearly all interest incurred through additional land and homes under development. We expect to increase our credit facility usage throughout the year to finance additional land and development expenditures, which we anticipate will result in higher interest expense for the remainder of the year.

This Congress hasn't yet reauthorized energy tax credits for 2017. Our effective tax rate was 36% this quarter compared to 27% in the first quarter of 2016. In all past years except for 2016, these credits weren't renewed until late in the year. If that happens this year, it will reduce our full year effective tax rate at that time. It may be helpful to review the short-term impact and longer-term opportunities to improve our gross margin.

Turning to Slide 15. Our 2017 margins included several components. First, we incurred approximately $2 million of real estate impairments in write-offs during the first quarter of '17, which reduced gross margin by 30 bps, consisting -- consistent with 2016 Q1. Second, the additional construction overhead expenses associated with the large number of new communities we opened in the first quarter or will be opening soon, increased our first quarter 2017 cost of sales without any corresponding revenue from those communities. We expect that revenue to come in the latter half of '17 to offset the overhead burden. Third, as you know, and as we've previously discussed, land costs have continued to increase, which together with labor and material pressures have been absorbing the price increases we've been able to capture, limiting our ability to grow our margins. And fourth, as we increase the mix of closings from entry-level plus communities, we are experiencing slightly lower gross margins from these closings, but higher absorption and IRRs than our move-up communities. This net positive trade-off is noted as our cost of sales increases are accompanied by improved SG&A leverages. These factors are limiting margin expansion in the short term, so we're projecting flat home closing margins for full year 2017, with increasing margins in the back half of the year.

We expect better margins next year as those headwinds ease and we see more benefit from our new communities due to simple products and greater closing volumes to leverage community level costs.

And finally, past 2017, the closing out of the communities impacted by the reduction in FHA loan limits will also help our margins once we eliminate that 30 bps drag projected for full year 2017.

Turning to Slide 16. We ended the quarter with $86 million of cash and $60 million drawn against our revolving credit facility. Our cash balance declined $46 million from last year, as we invested in lots to support organic growth and increase the inventory of homes under construction or completed for sale. Our total real estate inventory increased by $91 million during the first quarter of '17.

47% of our closings in the quarter were from spec inventory compared to 39% in the first quarter of 2016, reflecting more spec sales within our first-time buyer and LiVE. NOW communities. We ended the first quarter with 1,633 specs completed or under construction, which was approximately 6.4 specs per community compared to 11.55 a year ago, or an average of 4.8 per community in last year's first quarter. Approximately 32% of our specs were completed at the end of March '17 compared to 35% in March '16, indicating our ability to sell specs earlier in the construction process.

Net debt-to-cap ratio remained within our target range of low to mid-40%, ending at 42.8% at March 31, 2017, compared to 41.2% at year-end 2016. It may increase a little during the year to support the acquisition of more land but will remain within our comfort zone of low to mid-40s.

With a successful first quarter behind us, and a positive outlook for continued strong demand through the spring selling season, we remain comfortable with our full year projections for 2017, beginning on Slide 17. Since we push our open communities on an accelerated pace for the spring selling season, we reached our expected year-end community count for 2017 early. We are expecting to open dozens more communities this year, but they will replace communities that we project will be closing out. So our quarterly community count may move up or down a little for the remainder of the year, but we don't expect additional net growth in community count in 2017.

We are projecting deliveries of approximately 7,500 to 7,900 homes for estimated home closing revenue of $3.1 billion to $3.3 billion for the year, with the large ramp-up in the second half of the year, as we close homes in the new additional communities.

A large number of our closings came from spec inventory in the first quarter, resulting in a high backlog conversion rate. With the shortage of labor and expected delays in closings due to excessive rain in California, we're projecting a lower conversion rate for the second quarter, anticipating those closings will come in the latter half of the year. While we are mindful of labor and material cost pressures, we believe we can maintain gross margins consistent in 2016 while generating a 6% to 12% increase in pretax earnings through a combination of cost management and additional operating leverage with our anticipated revenue growth.

For the second quarter of 2017, we are projecting approximately 1,750 to 1,850 home closings with closing revenue of $735 million to $785 million for projected pretax earnings of $45 million to $50 million.

With that, I will turn it back over to Steve.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [6]

--------------------------------------------------------------------------------

Thank you, Hilla. In summary, we were pleased with our results for the first quarter of 2017 and the progress we've made on our strategic initiatives, which are designed to deliver long-term growth and shareholder value. The key drivers for the housing market remain positive, including job growth, consumer confidence, increasing household formations, low interest rates and good affordability in most areas. We are well positioned in our markets and develop new product that we can deliver at lower price points to meet the growing demand from first-time buyers and we are successfully executing on our strategy to increase the number of communities for that growing segment to 35% to 40% by the end of next year.

We are dedicated to delivering a life built better for all of our customers, as our brand promise says, and we do our best to provide that by continually innovating and selecting great locations for our communities.

Thank you for your interest in Meritage Homes and for supporting our growth and success. We'll now open it up for questions. And the operator will remind you of the instructions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Stephen East of Wells Fargo.

--------------------------------------------------------------------------------

Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Steve, maybe I'll ask you, you had some great order growth in the West and Central. The East is sort of playing out like you all thought. As you look at -- as you roll your new product introductions through the East and you cycle through the old communities into the new communities, are you expecting that these markets can perform like you're seeing in the Central and West, or would you expect some slower, faster, maybe some catch-up coming through these, just sort of how you all are thinking of it, not only in magnitude, but sort of in time line as well?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [3]

--------------------------------------------------------------------------------

Well, we're certainly going to perform a lot better when we get our new communities opened with our new products. And as we continue to work through some execution issues, we think that will have an impact on their performance as well. The West and a couple of markets in Texas are very, very strong right now. So I don't expect them to match the performance in those markets. But I do expect a much better performance, and I do expect the margins there to be more in line with many of the other markets in the rest of the company. So, I think that's a big story for us for later this year and into next year.

--------------------------------------------------------------------------------

Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

All right. Fair enough. Hilla, you gave several -- on Slide 15, several drivers of the gross margin. Could you help us out a little bit? Other than the impairment, could you rank order those and just give us some idea of how much they're pushing against your gross margin right now and maybe again sort of the same thing, a time line of how you think those will ease as we go through the year?

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [5]

--------------------------------------------------------------------------------

Yes. I can try to give some high-level quantification. So as you mentioned, those set of impairments is certainly not something we're forecasting on a go-forward basis. Those 30 bps should hopefully be a one-and-done in the first quarter. On the construction overhead, that was a little bit tougher to quantify. We've had a lot of overhead reduction. So all things being equal, Q1 over Q1, '17 over '16, we should have seen a decline, but we actually saw our overhead component, the variable piece based on employees and SWIP and community maintenance increase -- not to put too fine a point on it, tough to quantify when you have overhead count being different, but we would probably expect something maybe in the neighborhood of 20 to 50 bps range from that, as new communities come on and come off throughout the year, not including just the general leverage that you would get, improvement over the year with higher revenue volumes. On the land cost, that means the land and material, the labor costs, we've actually been able to keep steady with that. On the price increases, they were not seeing a margin deterioration, although some of the increases in margins that we should have been able to capture from the price -- pushing up the pricing haven't yet materialized to the degree that we've expected from knowing that we have this pricing power. And then the entry-level story, I think it's really just a shift in geography. On the P&L, the slight increases we're seeing on the margins are coming back on, maybe even more so in savings on the SG&A. So all in, it's a wash on a bad day and probably some pickup in the leverage on a good day.

--------------------------------------------------------------------------------

Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [6]

--------------------------------------------------------------------------------

Okay, got you. Steve, I forgot to ask on the East, are there any mileposts you're looking at for Atlanta, Nashville, Greenville, that you all are sort of using to judge this?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [7]

--------------------------------------------------------------------------------

I'm not sure. I'll point that over to Phillippe.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [8]

--------------------------------------------------------------------------------

Yes, I feel when you say milepost, you're in getting sort of what period of time we're looking for being still in flat.

--------------------------------------------------------------------------------

Stephen F. East, Wells Fargo Securities, LLC, Research Division - Senior Analyst [9]

--------------------------------------------------------------------------------

Exactly.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [10]

--------------------------------------------------------------------------------

A lot of that has to do with just the new communities opening up. So, I mean, we have, as we reported in our earnings -- our analysts, this meeting, we have a bunch of communities opening up in Raleigh this year, we have a bunch of communities opening up in Atlanta this year, we have a bunch of communities opening up in Nashville in the year. So we really feel the benefit of those will be developed in Q4 fully. Charlotte, we'll get a little bit later.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [11]

--------------------------------------------------------------------------------

It's on the Q3.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [12]

--------------------------------------------------------------------------------

Yes, you'll see modest improvement throughout the year, but we really feel like the full weight of it will be in Q4. And the communities that we did opened up this quarter in the South did well. Again it was just in the last few weeks of the month, but it do well.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question is from Alan Ratner of Zelman & Associates.

--------------------------------------------------------------------------------

Alan S. Ratner, Zelman & Associates LLC - Director [14]

--------------------------------------------------------------------------------

Following on the margins. So the guidance obviously implies a pretty significant ramp through the year. And I know you've kind of talked about the levers there. It sounds like you guys were successful in bringing forward some of those community openings, and I recognize that didn't really show up in the quarter because it happened late in March. But now that you are 4, 5, 6 weeks into having these communities open, I was hoping you could give us a little bit of an update on how those communities are faring, maybe talk about the absorptions there, but more specifically, how do the margins look on those homes in backlog today as of late April versus what you've been delivering over the past few quarters, because on the surface, it seems like the margin improvement's really dependent on a lot of things going right, but if you could give a little bit more data that would show some of that margin improvements already baked in backlog based on these communities you've opened up here over the last month or 6 weeks, that would be helpful in providing some confidence there?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [15]

--------------------------------------------------------------------------------

Sure. We haven't closed any of those houses yet. So we don't have the final numbers, but I can certainly tell you that our pro formas show us that all those communities that we opened in the last 6 or 7 weeks have good margins, more in line with our underwriting and the overall margins for the company that we expect. I'd also tell you that the numbers are showing me that we've been able to raise prices modestly more than the cost of increase. So I think that is also going to help us lift our margins through the remainder of the year and that's why the margin ramp is so back-end loaded because homes that we're selling in this quarter are going to begin to close next quarter and quarter after. And we're selling more specs than we ever have before. That will also help the margin increases come sooner. So I think there's a lot of -- there's a lot of positive things happening on the margin front that I'm very encouraged about. But there's also some things I'm worried about as far as additional lumber increases that could have an impact as well. But overall, I'm feeling pretty bullish about getting those increases that we're projecting for the second half of the year that will get us in line with last year's margin.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [16]

--------------------------------------------------------------------------------

Just to add to what Steve said, the projections that we provided today have obviously some underlying assumptions based on those new communities. Even though it's very preliminary, 6 to 7 weeks in the life of a sold home is not too far of a development, the costs are tracking in mind with the underwriting pro forma that we use in the forecast, and so far everything we're seeing is trending in line with our expectations. And then sometimes we get questions about whether the spec margin, since we're selling a higher percentage of our homes in spec status, whether the spec margins are trending something lower than our to-be-built dirt starts, and they are not. So at this point in time, the spec margins that we closed in the first quarter were in line with our dirt margins.

--------------------------------------------------------------------------------

Alan S. Ratner, Zelman & Associates LLC - Director [17]

--------------------------------------------------------------------------------

So you mentioned the pricing power running a little bit above the cost inflation. Do you have those numbers in terms of what your apples-to-apples pricing is up year-over-year versus costs, and maybe talk about how that compares to a year ago when presumably your costs were outpacing that price appreciation?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [18]

--------------------------------------------------------------------------------

I mean, the only number I can really give you is, I'm thinking it's about 50 bps. So the net difference between prices and cost in Q1 is about 50 bps. Last year, I think it was negative. It was going in the other direction. But this year, I think prices are increasing over cost about 50 bps.

--------------------------------------------------------------------------------

Alan S. Ratner, Zelman & Associates LLC - Director [19]

--------------------------------------------------------------------------------

Just to understand that then, so eventually that's the type of year-over-year spread you should expect to see on your margin, or are there other pieces there that we need to consider?

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [20]

--------------------------------------------------------------------------------

Over time, that's not going to be '17 over '16 spreads or projecting margins to be consistent. But performance that we're modeling now for new communities that are opening up that will be closing into latter '17 into '18 have that spread.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [21]

--------------------------------------------------------------------------------

With the combination of things happening, newer communities with better margins, because of more efficient product, because of better land buys, because of better operations, and then just pure price appreciation over cost escalation of about 50 bps, the 2 of them combined is going to raise our margins through the remainder of the year to get back to the number that we had last year. Where we go beyond that? It's hard to tell, but I'm also feeling like we're going to have even better margins next year. But we can give you a lot more clarity on that next quarter's call.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Your next question is from Michael Rehaut of JPMorgan.

--------------------------------------------------------------------------------

Jason Aaron Marcus, JP Morgan Chase & Co, Research Division - Analyst [23]

--------------------------------------------------------------------------------

It's Jason in for Mike. The first question is on cycle times. So your closings in the quarter came in above -- nicely above where your guidance was. I just wanted to see if maybe this is an improvement in cycle times that you're seeing recently going across the footprint? And then the other part to that I guess is, in terms of labor availability, I wanted to see if that has varied much as you look across the different geographic regions?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [24]

--------------------------------------------------------------------------------

I don't think cycle times necessarily improved which drove more closings. It's actually to the contrary. Cycle times are elongating, which is going to impact our second quarter closings, particularly in California, where we had a lot of rain. And in Arizona and Colorado, where activity is super strong and it's becoming more challenging to get our homes completed on time. So I can't tell you that's the reason why we closed more homes because of the cycle times. Maybe our guidance was just a little conservative going into the year.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [25]

--------------------------------------------------------------------------------

And it was because we sell a lot more spec, so (inaudible)

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [26]

--------------------------------------------------------------------------------

Yes, we sold more spec. Then we sold 47% spec in Q1, which is a high water mark for us on that metric. But I can tell you, labor is tough in California. Labor is tough, I mean, everywhere in the West. And in some markets, in Texas, labor is challenging and even a little bit in Florida, but we're doing our best to manage through it and making a lot of strategic moves in the way we build homes, which we talked about at our Analyst Day and earlier in the call with building more specs, doing more line building, more uniflow, and I think all that's going to play off.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [27]

--------------------------------------------------------------------------------

We entered Q1 with the highest spec per community we've ever had. So we were able to translate that. Now we're still entering Q2 with a high number of specs, but it's down a bit for communities in Q1 and you'll see that a little bit in the conversion rate.

--------------------------------------------------------------------------------

Jason Aaron Marcus, JP Morgan Chase & Co, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Okay, great. Next question, just going back to the SG&A for a minute. So you got some really nice leverage in the quarter, I think more so than what we were looking for, I think more so than what we've seen over the last few quarters. I wanted to see if there is anything specific to call out there that was maybe onetime in nature, and if not, how we should think about what could get you to the lower end of the SG&A range as you progress through the year, aside from getting to the high end of the revenue range?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [29]

--------------------------------------------------------------------------------

We will hold the line on our overhead. We've made some adjustments in the fourth quarter. And really trying to do more with less right now. And I think we gave guidance, the SG&A would be 10.5% to 11% for the year, and we feel very positive that we're going to be there.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [30]

--------------------------------------------------------------------------------

There were no unique onetime items in the current quarter or the prior year's first quarter for comparison. So this is our new trend line. We touched in a little bit earlier that the -- what you're giving up a little bit on margin on entry-level products, you should see coming back to you on the leverage on the overhead and that's exactly what's happening.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

The next question is from Stephen Kim of Evercore ISI.

--------------------------------------------------------------------------------

Stephen Kim, Evercore ISI, Research Division - Senior MD, Head of Housing Research Team and Fundamental Research Analyst [32]

--------------------------------------------------------------------------------

It's Steve Kim. I just have one question. We've recently seen your -- some of your newer products in Dallas. We're pretty impressed with it and was curious as to the ability to build that product. I'm thinking specifically the bundle of products, but also you could apply this to -- maybe to LiVE. NOW and some just generally some of the newer products that you've been introducing to the market. What is your ability to build those on the existing land portfolio that you've had? Maybe you can just give us a sense for what are the -- some of the -- what's the ability sort of proliferate this more quickly than it would otherwise be if you had to buy the land [just below] for it?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [33]

--------------------------------------------------------------------------------

Yes, we can't really build any of that product on existing lots. We have to buy new lots for that land and that's why it takes a couple of years to make that shift, because you got to get the land, make sure it's entitled, developed, build models, bring them to market. But as we've said in the script here, we've bought many communities already in Dallas. I think we have 6 bundle of communities opening up here this year. We have 6 LiVE. NOW communities in Arizona already opened, which are predominantly selling specs. We're opening LiVE. NOW communities in other markets. We have a few opened in Houston, a few in Orlando. So we've been buying a lot. 2/3 of the lots that we bought in the quarter were for entry-level plus communities and LiVE. NOW communities, and we're continuing to buy for that segment. And that's where we're seeing the greatest demand and we're also seeing the best way for us to manage our costs. We're able to drive the costs down in those communities because of the more simpler process, less upgrades. There are no design center, and line and even flow building helps both of those product series, and so that's some (inaudible) , so if you haven't got it already, that's a big push where we're heading.

--------------------------------------------------------------------------------

Stephen Kim, Evercore ISI, Research Division - Senior MD, Head of Housing Research Team and Fundamental Research Analyst [34]

--------------------------------------------------------------------------------

No doubt. I guess, I was wondering about ways that we could maybe accelerate the process. So how about land sales, because I imagine that a lot of the land you have is certainly, there's nothing particularly wrong with it, it's just that it's not necessarily in the direction that you're headed. Have you contemplated accelerating your land sales or doing more land swaps with other builders, if you could just comment on that opportunity?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [35]

--------------------------------------------------------------------------------

No, I mean, we don't really have anything to sell. I mean, we're not certainly not abandoning the move-up market. I mean, that's still going to be more than half the business that we're in. We're a free land light builder relative to our production. We don't have a lot of excess land. So there's just not really anything to sell, but I do believe that our asset turns will increase as we get rid of some of these older FHA-impacted communities at higher price points, moving to these lower price points, ROA and ROE is going to increase. And turns are going to increase and I'm feeling like we've got a really good pipeline of entry-level land coming into production.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

The next question is from Nishu Sood of Deutsche Bank.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank AG, Research Division - Director [37]

--------------------------------------------------------------------------------

So a lot of discussion obviously about the positive investments getting the community count for the year already in the first quarter. I just wanted to dig into -- obviously there's been a lot of focus on resetting, relaunching communities with new product lines, et cetera. Looking ahead, like has that -- do you think that's going to have an effect on potential growth for 2018, given that there's been so much focus on kind of resetting, or obviously, you laid out the land spend for 1Q. Obviously that's just one step in the process, so how should we think about that? Has all this internal effort perhaps diverted some of the attention that might have gone ordinarily towards 2018 and 2019?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [38]

--------------------------------------------------------------------------------

No, I think it's to the contrary. 2018 is where the big reward's going to be, because everything that we're doing now that we've been doing for a couple of quarters, then we're doing it over the next couple of quarters, particularly in the South with the new communities opening there with our new product, the big payday for that's going to be in '18. And LiVE. NOW and entry-level plus is going to be at full speed. We're just accelerating right now, but it's going to be at full speed in '18. So the growth that we're experiencing this year is muted by my history and my expectations. It's not something I'm extremely proud of. We're growing but not at the pace that I would like, but I think what we're going to see in '18 is going to be in line with the history of this company.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [39]

--------------------------------------------------------------------------------

Yes, Nishu, the lots under control and the land and development spend that we're incurring every quarter for the last 6 quarters, it's at a quicker pace than we have experienced since the downturn. So we're clearly moving up for '18 and even into '19, making sure that our community count accelerates, doesn't decelerate and that we're reloading it with the right kind of lots, as Steve mentioned, the entry-level focus.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank AG, Research Division - Director [40]

--------------------------------------------------------------------------------

Got it. Got it. Makes sense. And thinking about the longer term, '19 to '20, gross margin, you give us some good details on the individual kind of drivers or components of how you get there. How should we think about it regionally, and what I mean by that is, obviously, based on the disclosures, the Southeast region, in particular, was where the gross margins were more depressed. So as we think about the improvement, do you think it will be more and more regionally focused in the Southeast and the West to some extent of catching up with Central or do you think that the efforts that you're making will be more evenly spread across the divisions?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [41]

--------------------------------------------------------------------------------

I think the margin improvement is going to be clearly in the South and those 5 cities that we're operating in the South, excluding Florida. I think we'll have margin improvement in Tampa. I think we're going to have margin improvement in Phoenix. We'll have margin improvement in Southern California. Margins may go down a little bit in Northern California. Land has gotten pretty expensive there. Our margins have been pretty good. But again, that's going to all have to be weighed against what happens with construction costs and lumber and those things. But we have a lot of markets that we can do better on the margin front and we have strategies in place to achieve better margins and I expect those to start to coming through later in the year and into '18.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

The next question is from Mike Dahl of Barclays.

--------------------------------------------------------------------------------

Michael Glaser Dahl, Barclays PLC, Research Division - Research Analyst [43]

--------------------------------------------------------------------------------

Just a follow-up on that regional commentary and tying it to back to your comments around pricing power earlier. Are you seeing pricing power across your regions or I'm thinking specifically with the South and East where you've gone through some of the -- or you're in the process of going through the new product rollout. Your absorptions aren't quite up at the pace that would be normally be supportive of price, so maybe you're seeing a bit slower pickup on price in that region? Can you just give us a little color there?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [44]

--------------------------------------------------------------------------------

It's hard for us to really get a strong indicator in the South, because when we're opening new communities, we're not -- although we raise prices as demand builds, there's so much transition in communities in the South. It's really hard for us to get a handle on that. I would say, Florida, the price increases are more muted and Houston's more muted. San Antonio is a pretty steady and stable market. But we're pushing prices certainly in Dallas. We're pushing prices in Austin. We're definitely pushing prices in Phoenix and Denver, and in California, of course.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [45]

--------------------------------------------------------------------------------

One more comment in the South. It's difficult to compare the existing product and the existing absorption space to what we'll be able to achieve in the new communities. The new product has very widespread market acceptance based on our research. So our ability to gain momentum once those communities start really selling will be different than what we've currently experienced in the South.

--------------------------------------------------------------------------------

Michael Glaser Dahl, Barclays PLC, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

Okay. And as a follow-up to that one, when we're thinking about some of the potential increases in lumber costs, in a region, just conceptually, a region like the South or the East, we've thought of sticks and bricks representing a relatively higher percentage of your selling price than somewhere like California. And so, are you comfortable that you may need relatively greater price increases in those markets and are you comfortable that you have the pricing power or you can incorporate that pricing into the new product?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [47]

--------------------------------------------------------------------------------

The sticks and bricks in those areas that you mentioned don't cost more than the sticks and bricks in the West or in Texas. It's just, they're a larger percentage of the total, because the land is a lower percentage. And you get more house for your money in those markets. So I don't see those places being impacted any more than anywhere else by lumber price increases.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [48]

--------------------------------------------------------------------------------

We haven't touched specifically on lumber prices, and we don't want to get too granular, but as a lot of the other builders have echoed, a lot of those increases have already been built in. There have been lumber locks over the last 30, 60, 90 days that have captured a lot of this anticipated impact. So even though it's tough to determine where the final impact will be, we believe a majority of it, or a significant portion of it has already been addressed in the existing lumber pricing.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

The next question is from Jade Rahmani of KBW.

--------------------------------------------------------------------------------

Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [50]

--------------------------------------------------------------------------------

This is actually Ryan Tomasello on for Jade. Regarding the overall weaker East region, is there a particular cohort of the market that's driving that? For example, how does your entry-level product in those markets in demand for that product compare to move-up?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [51]

--------------------------------------------------------------------------------

We don't have a lot of entry-level product online yet in those markets. So it's not a product mix issue or a product segment issue. It's just new product versus old product. And we have a lot of new communities open even in those markets in the East that we've been in a while. But I can say we have opened a couple of new entry-level communities in Atlanta and they're doing really well. So we just need to continue to get more ELP communities open in that region.

--------------------------------------------------------------------------------

Ryan John Tomasello, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [52]

--------------------------------------------------------------------------------

And then secondly, can you provide an update on your Artesia joint venture with iStar in Scottsdale?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [53]

--------------------------------------------------------------------------------

We're in the design review right now with the city of Scottsdale and we expect to break ground on that at the end of this year or in January of next year and begin presales in the spring of 2018. But I get more bullish based upon looking at the comps in the market every day in that community, and I think it's going to be a home run for us.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

The next question is from Carl Reichardt of BTIG.

--------------------------------------------------------------------------------

Carl Edwin Reichardt, BTIG, LLC, Research Division - MD [55]

--------------------------------------------------------------------------------

Can you guys quantify the differential in absorption rate between LiVE. NOW, entry-level plus versus move-up? And was the spec ramp largely confined to the low end or was there also a move-up on spec ramp too?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [56]

--------------------------------------------------------------------------------

No, we haven't really increased our specs substantively in the move-up space, but they're significantly higher for the entry-level communities and we differentiate the traditional entry-level communities from the LiVE. NOW communities even within those 2 subsets. LiVE. NOW is higher than the straight entry-level communities. Absorptions have been near 4 -- around 4 for the entry-level communities and they've been closer to 2.5 for the move-up communities, and that's really what the difference is.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [57]

--------------------------------------------------------------------------------

We're still pretty early on in monitoring the velocity of the entry-level plus. As we get a couple of more quarters deep, we'll refresh that. Probably the information that we provided on the Analyst Day slides is the most current that we have, but back half of the year, we should have cleaner data to present.

--------------------------------------------------------------------------------

Carl Edwin Reichardt, BTIG, LLC, Research Division - MD [58]

--------------------------------------------------------------------------------

It's nice to have a baseline. And then, second, we talked about one of the reasons to move towards a combined LiVE. NOW, entry-level plus is subs. And I'm curious if, as you've ramped the store base, you are seeing some improvement in either the ability to keep subs on job or even maybe on a piece-rate basis starting to see a little bit of a moderation in cost. So I'm curious how they've responded to the product rollout.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [59]

--------------------------------------------------------------------------------

Yes, again, where we have had the most success is in Austin and Phoenix where we've rolled it out the most, but absolutely, we've been able to have much stronger production out of those sites than we thought. And so the trades can line build all the way down. We're starting with a much higher percentage of specs. So we keep the crews on site. And as Steve mentioned earlier, the product's been extremely efficient. We're not sending buyers to the design studio, where there's no -- there's very limited structural options. There's very limited elevation variation, and so because of the simplicity, the trades are giving us better numbers. They're going to be building them faster as we roll it out and kind of dial that in and we're getting more stable costs as well. So it's all been positive from that perspective.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

The next question is from John Lovallo of Bank of America.

--------------------------------------------------------------------------------

Peter T. Galbo, BofA Merrill Lynch, Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

This is actually Pete Galbo in for John. Steve, you had made an interesting comment in your prepared remarks about getting communities opened in the first quarter a little bit faster than you had anticipated. I'm just wondering, a lot of talk on the labor side about shortages, but have you seen easing at all on the land entitlement side that made the process easier this quarter or is it just kind of a timing-related incident?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [62]

--------------------------------------------------------------------------------

No, I wouldn't say it's that at all. It's just we just knew that we needed a -- to get our community count revved up and we just busted a hump to get some of these communities open in Q1 versus Q2 and that's really what the bottom line is. Some of those communities, we maybe didn't have quite the model completely finished. We maybe sold out of a trailer, but we'd gotten to the point where customers could make a decision and we had strong interest lists and so we took sales and opened them.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [63]

--------------------------------------------------------------------------------

The entitlement profits is probably occurring a couple quarters prior to that.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [64]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [65]

--------------------------------------------------------------------------------

So it's not necessarily that. It's mostly an internal effort to push to the finish line.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [66]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [67]

--------------------------------------------------------------------------------

And maybe there are communities that we thought were going to open up in late April, and as you said, we were able to accelerate some of the things that we needed to do to get it open and we got really strong interest lists and we were able to open them earlier.

--------------------------------------------------------------------------------

Peter T. Galbo, BofA Merrill Lynch, Research Division - Research Analyst [68]

--------------------------------------------------------------------------------

Got it. No, that's helpful. And maybe just a point clarification on the pretax income guide, the $45 million to $50 million. Is that just a homebuilding guide? I know there have been confusion in the past about whether or not included financial services income and then some of the other items, but just wanted to clarify that.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [69]

--------------------------------------------------------------------------------

All in pretax.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [70]

--------------------------------------------------------------------------------

Everything.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [71]

--------------------------------------------------------------------------------

Everything.

--------------------------------------------------------------------------------

Operator [72]

--------------------------------------------------------------------------------

There are 2 questions left in the queue. We have Will Randow of Citigroup.

--------------------------------------------------------------------------------

Will Randow, Citigroup Inc, Research Division - Director [73]

--------------------------------------------------------------------------------

I guess in terms of -- I apologize if I missed this, but in terms of land cost, when you're looking at it from a margin perspective, with the smaller product or call it smaller [fund foot] product, are you seeing more competition for that land, and it sounds like pricing has been strong enough in that product line, like the bungalows mentioned earlier, that you can cover that inflation?

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [74]

--------------------------------------------------------------------------------

Yes. This is Phillippe. Land is competitive everywhere, but that being said, as we've pivoted into LiVE. NOW and ELP, we're going into some submarkets that maybe we weren't looking at before from a move-up perspective, where there still does seem to be some availability. So I think we're getting our fair share. But it's not to say that we're not competing at all with the Hortons of the world and some of the other builders that are moving into that space relatively fast as well. I do think that the entry-level segment is really strong right now across the country, and specifically in Texas and the West, and the South, although we just don't have a lot going on there just yet. And so there is pricing power, especially as it relates to our ability to stay ahead of our costs. So there's strong demand and there's -- that we believe there is pricing power at that lower price point as that segment grows. And the key to it, in our opinion, is staying below FHA, so that's kind of the governor, but there is pricing power.

--------------------------------------------------------------------------------

Will Randow, Citigroup Inc, Research Division - Director [75]

--------------------------------------------------------------------------------

And I guess as a follow-up, as you think about it strategically over the next year or 2, obviously move-up was the earlier strategy, so to speak, earlier in the cycle. Are you worried that, that, call it, first-time buyers segment gets too crowded or it seems like there's pent-up demand? I'd love to hear your thoughts.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [76]

--------------------------------------------------------------------------------

Yes, it's been a big part of the market, much bigger than the move-up in our opinion. The entry-level buyers are just a huge segment that fuels everything. So yes, it'll get more competitive for sure. All of us builders kind of think about things the same sometimes, but we think it is plenty big enough for all of us. As long as job growth continues and financing is accessible, we think there's enough share to go around and a lot of the permit volume growth is going to come from that segment.

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [77]

--------------------------------------------------------------------------------

And we've seen a short to midterm, maybe even longer term, there's been such depressed demand in this segment. It's got a longer run rate just to get back to neutral, much less get overheated.

--------------------------------------------------------------------------------

Phillippe Lord, Meritage Homes Corporation - COO and EVP [78]

--------------------------------------------------------------------------------

Yes, and the last thing I would say is as interest rates rise, I think more people that were thinking about being a move-up may become an entry-level or high-end entry level, which is sort of an ELP strategy.

--------------------------------------------------------------------------------

Operator [79]

--------------------------------------------------------------------------------

And the final question this morning is from Alex Barrón from Housing Research Center.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [80]

--------------------------------------------------------------------------------

I wanted to focus a little bit on your gross margin outlook. So you said you want to get to 19% to 20%. I was just curious, is that more of a 2018-type timing or you think you could hit that at some point in the year, or is that more further out?

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [81]

--------------------------------------------------------------------------------

I hate to give a specific target on when we're going to get there. Probably not in '18, but maybe in '19. There's so many factors that come into play that determine whether we're going to be able to get there or not. And certainly, construction costs are probably the biggest one, but also what kind of appreciation are we going to see on our existing land book. But that's a number we aspire towards and that's the number where we realistically think we can get to.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [82]

--------------------------------------------------------------------------------

Okay. Yes, I think you can get there too. I was just trying to get a sense how soon.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [83]

--------------------------------------------------------------------------------

Yes. I appreciate that.

--------------------------------------------------------------------------------

Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [84]

--------------------------------------------------------------------------------

Other question on the gross margin is the component of interest that gets expensed. I think you're getting pretty close to the same rate that you're incurring right now, so I'm curious whether you're going to -- whether you expect to see some more leverage from that next year as well?

--------------------------------------------------------------------------------

Hilla Sferruzza, Meritage Homes Corporation - CFO, CAO and EVP [85]

--------------------------------------------------------------------------------

Probably we'll continue in a similar trajectory than we have been. We actually noted on the call today that we expect that the interest may be a little bit higher actually in the back half of the year. It was very, very low in the first quarter. It was only about $800,000. So as we continue to build up our land book and we continue to invest in land and development, we're going to be dipping into our revolver a little bit more than we have been and we expect that to actually inch up a bit. Not a lot, but inch up a bit throughout the year.

--------------------------------------------------------------------------------

Operator [86]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Steve Hilton for any closing remarks.

--------------------------------------------------------------------------------

Steven J. Hilton, Meritage Homes Corporation - Co-Founder, Chairman and CEO [87]

--------------------------------------------------------------------------------

So thank you for your support, and thank you for participating in our Q1 2017 earnings call. And we'll look forward to talk with you further at the -- in July. Have a great day.

--------------------------------------------------------------------------------

Operator [88]

--------------------------------------------------------------------------------

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.