UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2016~~2017



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-9977

(Exact Name of Registrant as Specified in its Charter)



Maryland		86-0611231
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

8800 E. Raintree Drive, Suite 300, Scottsdale, Arizona		85260
(Address of Principal Executive Offices)		(Zip Code)

(480) 515-8100

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by a checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Common shares outstanding as of ~~October 26, 2016: 40,024,984~~August 1, 2017: 40,320,282

MERITAGE HOMES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2016~~2017

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016	3

Unaudited Consolidated Income Statements for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016	4

Unaudited Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016	5

Notes to Unaudited Consolidated Financial Statements	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4039

Item 4. Controls and Procedures	4039

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	4140

Item 1A. Risk Factors	4140

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4140

Items 3-5. Not Applicable

Item 6. Exhibits	4241

SIGNATURES	4342

INDEX OF EXHIBITS	4342

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Assets
Cash and cash equivalents	$	107,915	$	262,208	$	216,739	$	131,702
Other receivables	76,371		57,296		73,109		70,355
Real estate	2,429,014		2,098,302		2,638,407		2,422,063
Real estate not owned					9,987		—
Deposits on real estate under option or contract	91,053		87,839		74,750		85,556
Investments in unconsolidated entities	11,831		11,370		16,678		17,097
Property and equipment, net	33,983		33,970		32,620		33,202
Deferred tax asset	57,552		59,147		55,290		53,320
Prepaids, other assets and goodwill	65,436		69,645		83,112		75,396
Total assets	$	2,873,155	$	2,679,777	$	3,200,692	$	2,888,691
Liabilities
Accounts payable	$	148,260	$	106,440	$	139,957	$	140,682
Accrued liabilities	180,687		161,163		166,080		170,852
Home sale deposits	36,988		36,197		36,197		28,348
Liabilities related to real estate not owned					8,489		—
Loans payable and other borrowings	45,183		23,867		17,256		32,195
Senior and convertible senior notes, net	1,094,632		1,093,173		1,340,274		1,095,119
Total liabilities	1,505,750		1,420,840		1,708,253		1,467,196
Stockholders’ Equity
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at September 30, 2016 and December 31, 2015	—		—
Common stock, par value $0.01. Authorized 125,000,000 shares; issued 40,024,984 and 39,669,094 shares at September 30, 2016 and December 31, 2015, respectively	400		397
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at June 30, 2017 and December 31, 2016					—		—
Common stock, par value $0.01. Authorized 125,000,000 shares; issued 40,320,282 and 40,030,518 shares at June 30, 2017 and December 31, 2016, respectively					403		400
Additional paid-in capital	570,223		559,492		578,295		572,506
Retained earnings	796,782		699,048		913,741		848,589
Total stockholders’ equity	1,367,405		1,258,937		1,492,439		1,421,495
Total liabilities and stockholders’ equity	$	2,873,155	$	2,679,777	$	3,200,692	$	2,888,691

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Homebuilding:
Home closing revenue	$	735,870		$	661,884		$	2,127,332		$	1,770,184		$	797,780		$	795,845		$	1,458,397		$	1,391,462
Land closing revenue	16,987			8,072			21,187			16,285			4,198			2,051			16,353			4,200
Total closing revenue	752,857			669,956			2,148,519			1,786,469			801,978			797,896			1,474,750			1,395,662
Cost of home closings	(604,891		)	(536,267		)	(1,755,260		)	(1,434,843		)	(656,870		)	(658,099		)	(1,210,219		)	(1,150,369		)
Cost of land closings	(16,092		)	(7,445		)	(19,485		)	(14,992		)	(4,198		)	(1,693		)	(13,858		)	(3,393		)
Total cost of closings	(620,983		)	(543,712		)	(1,774,745		)	(1,449,835		)	(661,068		)	(659,792		)	(1,224,077		)	(1,153,762		)
Home closing gross profit	130,979			125,617			372,072			335,341			140,910			137,746			248,178			241,093
Land closing gross profit	895			627			1,702			1,293			—			358			2,495			807
Total closing gross profit	131,874			126,244			373,774			336,634			140,910			138,104			250,673			241,900
Financial Services:
Revenue	3,139			3,000			9,115			8,276			3,649			3,476			6,593			5,976
Expense	(1,398		)	(1,253		)	(4,152		)	(3,914		)	(1,551		)	(1,508		)	(2,930		)	(2,754		)
Earnings from financial services unconsolidated entities and other, net	4,215			3,854			10,802			9,155			3,459			3,795			6,184			6,587
Financial services profit	5,956			5,601			15,765			13,517			5,557			5,763			9,847			9,809
Commissions and other sales costs	(52,478		)	(48,097		)	(155,034		)	(134,876		)	(54,701		)	(56,379		)	(103,021		)	(102,556		)
General and administrative expenses	(33,258		)	(28,774		)	(91,774		)	(86,074		)	(29,591		)	(28,898		)	(59,213		)	(58,516		)
Earnings/(loss) from other unconsolidated entities, net	440			(123		)	856			(415		)
Earnings from other unconsolidated entities, net													570			573			943			416
Interest expense	(167		)	(4,187		)	(5,127		)	(11,962		)	(1,620		)	(1,672		)	(2,445		)	(4,960		)
Other income/(expense), net	1,435			(3,996		)	3,263			(3,445		)
Other income, net													2,080			1,545			3,190			1,828
Earnings before income taxes	53,802			46,668			141,723			113,379			63,205			59,036			99,974			87,921
Provision for income taxes	(16,915		)	(16,360		)	(43,989		)	(37,538		)	(21,625		)	(19,158		)	(34,822		)	(27,074		)
Net earnings	$	36,887		$	30,308		$	97,734		$	75,841		$	41,580		$	39,878		$	65,152		$	60,847
Earnings per common share:
Basic	$	0.92		$	0.76		$	2.45		$	1.92		$	1.03		$	1.00		$	1.62		$	1.52
Diluted	$	0.88		$	0.73		$	2.33		$	1.83		$	0.98		$	0.95		$	1.54		$	1.45
Weighted average number of shares:
Basic	40,022			39,663			39,958			39,568			40,317			40,012			40,248			39,926
Diluted	42,608			42,192			42,541			42,134			42,781			42,533			42,836			42,477

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2015			2017			2016
Cash flows from operating activities:
Net earnings	$	97,734		$	75,841		$	65,152		$	60,847
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	11,470			10,294			7,872			7,600
Stock-based compensation	11,042			12,418			5,785			7,313
Excess income tax provision/(benefit) from stock-based awards	540			(2,040		)
Excess income tax provision from stock-based awards							—			526
Equity in earnings from unconsolidated entities	(11,658		)	(8,740		)	(7,127		)	(7,003		)
Distributions of earnings from unconsolidated entities	11,439			9,446			6,712			7,343
Other	4,942			1,246			10			3,262
Changes in assets and liabilities:
Increase in real estate	(318,490		)	(198,520		)	(211,384		)	(193,981		)
(Increase)/decrease in deposits on real estate under option or contract	(3,160		)	2,719
Decrease/(increase) in deposits on real estate under option or contract							9,308			(3,551		)
Increase in other receivables, prepaids and other assets	(14,201		)	(6,067		)	(9,428		)	(9,368		)
Increase in accounts payable and accrued liabilities	61,206			39,949
(Decrease)/increase in accounts payable and accrued liabilities							(5,497		)	12,944
Increase in home sale deposits	791			10,208			7,849			3,449
Net cash used in operating activities	(148,345		)	(53,246		)	(130,748		)	(110,619		)
Cash flows from investing activities:
Investments in unconsolidated entities	(242		)	(300		)	(408		)	(159		)
Distributions of capital from unconsolidated entities							1,250			—
Purchases of property and equipment	(12,256		)	(12,334		)	(8,322		)	(7,570		)
Proceeds from sales of property and equipment	144			92			86			87
Maturities/sales of investments and securities	645			—			1,258			645
Payments to purchase investments and securities	(645		)	—			(1,258		)	(645		)
Net cash used in investing activities	(12,354		)	(12,542		)	(7,394		)	(7,642		)
Cash flows from financing activities:
Proceeds from Credit Facility, net	25,000			—
Repayment of Credit Facility, net							(15,000		)	—
Repayment of loans payable and other borrowings	(18,286		)	(4,044		)	(5,725		)	(15,482		)
Repurchase of convertible senior notes							(52,098		)	—
Proceeds from issuance of senior notes	—			200,000			300,000			—
Debt issuance costs	—			(3,013		)
Excess income tax (provision)/benefit from stock-based awards	(540		)	2,040
Payment of debt issuance costs							(3,998		)	—
Excess income tax provision from stock-based awards							—			(526		)
Proceeds from stock option exercises	232			2,881			—			232
Net cash provided by financing activities	6,406			197,864
Net (decrease)/increase in cash and cash equivalents	(154,293		)	132,076
Net cash provided by/(used in) financing activities							223,179			(15,776		)
Net increase/(decrease) in cash and cash equivalents							85,037			(134,037		)
Cash and cash equivalents, beginning of period	262,208			103,333			131,702			262,208
Cash and cash equivalents, end of period	$	107,915		$	235,409		$	216,739		$	128,171

See Supplemental Disclosure of Cash Flow Information in Note 13.

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Organization. Meritage Homes is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal to a wide range of homebuyers, including first-time, move-up, active adult and luxury. We have homebuilding operations in three regions: West, Central and East, which are comprised of nine states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee. We also operate a wholly-owned title company, Carefree Title Agency, Inc. ("Carefree Title"). Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers. Through our predecessors, we commenced our homebuilding operations in 1985. Meritage Homes Corporation was incorporated in 1988 in the state of Maryland.

Our homebuilding and marketing activities are conducted under the name of Meritage Homes in each of our homebuilding ~~markets, other than Tennessee, where we currently operate under the name of Phillips Builders.~~markets. We also offer luxury homes ~~in some markets~~ under the brand name of Monterey ~~Homes.~~Homes in some markets. At ~~September~~June 30, ~~2016~~2017, we were actively selling homes in ~~237~~257 communities, with base prices ranging from approximately ~~$162,000~~$170,000 to $~~1,440,000~~1,380,000.

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016. The consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited financial statements include all adjustments (consisting only of normal recurring entries), necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.

Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $~~64.9~~35.2 million and ~~$74.5~~$75.3 million are included in cash and cash equivalents at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. ~~Included in our balance as of~~ ~~September 30, 2016~~ ~~and December 31, 2015 is $0.1 million and $20.0 million, respectively, of money market funds that are invested in short term (three months or less) government securities.~~

Real Estate. Real estate is stated at cost unless the asset is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”). Inventory includes the costs of land acquisition, land development, home construction, capitalized interest, real estate taxes, capitalized direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes under construction when construction begins. Home construction costs are accumulated on a per-home basis, while selling costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in the community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to cost of sales.

We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address

uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate construction and land costs.

Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the homes. Actual community lives will vary based on the size of the community, the sales absorption rate and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be shorter.

All of our land inventory and related real estate assets are reviewed for recoverability, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges are recorded to write down an asset to its estimated fair value if the undiscounted cash flows expected to be generated by the asset are lower than its carrying amount. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. Such an analysis is conducted if there is an indication of a decline in value of our land and real estate assets. The impairment of a community is allocated to each lot on a straight-line basis.

Deposits. Deposits paid related to land options and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of real estate inventory at the time the deposit is ~~used~~applied to ~~offset~~ the acquisition price of the lots based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of the non-refundable deposits and any ancillary capitalized costs. Our deposits on real estate under option or contract were ~~$91.1~~$74.8 million and ~~$87.8~~$85.6 million as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on ~~at least~~ an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is ~~more likely than not that the fair value of~~necessary to perform a ~~reporting unit is less than its carrying amount, including goodwill.~~two-step goodwill impairment test. ASC 350 states that an entity may first assess qualitative factors to determine whether it is necessary to perform a ~~two-step~~ goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials and labor costs, and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, the two-step impairment testing in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. Under the guidelines contained in ASC 350, we evaluate goodwill for impairments annually or more frequently if deterioration in our inputs exists. See Note 9 for additional information related to goodwill.

Off-Balance Sheet Arrangements - Joint Ventures. ~~In the past, we have participated~~We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile and leveraging our capital ~~base; however, in recent years, such ventures have not been a significant vehicle for us to access lots.~~base. See Note 4 for additional discussion of our investments in unconsolidated ~~entities.~~entities.

Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to option and purchase agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators). See Note 3 for additional information on off-balance sheet arrangements.

Surety Bonds and Letters of Credit. We provide letters of credit in support of our obligations relating to the development of our projects and other corporate purposes. Surety bonds are generally posted in lieu of letters of credit or cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of completion of our development activities. Bonds are generally not released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.

The table below outlines our surety bond and letter of credit obligations (in thousands):


	As of								As of
	September 30, 2016				December 31, 2015				June 30, 2017				December 31, 2016
	Outstanding		Estimated work remaining to complete		Outstanding		Estimated work remaining to complete		Outstanding		Estimated work remaining to complete		Outstanding		Estimated work remaining to complete
Sureties:
Sureties related to joint ventures	$	—	$	—	$	87	$	87
Sureties related to owned projects and lots under contract	234,014		73,207		250,639		103,200		$	262,702	$	107,198	$	239,246	$	85,706
Total Sureties	$	234,014	$	73,207	$	250,726	$	103,287	$	262,702	$	107,198	$	239,246	$	85,706
Letters of Credit (“LOCs”):
LOCs in lieu of deposits for contracted lots	$	250	N/A		$	—	N/A		$	3,631	N/A		$	250	N/A
LOCs for land development	28,375		N/A		23,934		N/A		51,261		N/A		39,839		N/A
LOCs for general corporate operations	3,750		N/A		3,750		N/A		3,750		N/A		3,750		N/A
Total LOCs	$	32,375	N/A		$	27,684	N/A		$	58,642	N/A		$	43,839	N/A

Accrued Liabilities. Accrued liabilities at ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 consisted of the following (in thousands):


	As of				As of
	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Accruals related to real estate development and construction activities	$	65,929	$	37,509	$	57,691	$	53,778
Payroll and other benefits	42,112		41,240		38,608		52,941
Accrued taxes	8,687		9,950		13,525		9,637
Warranty reserves	21,966		21,615		23,620		22,660
Legal reserves (1)	1,602		18,812		615		673
Other accruals	40,391		32,037		32,021		31,163
Total	$	180,687	$	161,163	$	166,080	$	170,852

~~(1) See Note 15 for additional information related to our legal reserves.~~


(1)	See Note 15 for additional information related to our legal reserves.

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty typically during the first one to two years after the close of the home and a structural warranty that typically extends up to 10 years subsequent to the close of the home. With the assistance of an actuary, we have estimated these reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our communities. We also use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. ~~Based on such reviews of warranty costs incurred, no adjustments were made to our warranty reserve in~~In the three and six months ended ~~September~~June 30, 2016 ~~and September 30, 2015. We~~we decreased our warranty reserve balance by $275,000, ~~in the nine months ended September 30, 2016,~~ which decreased our cost of sales. InWe had no such adjustments for the ~~nine~~three and six months ended ~~September~~June 30, ~~2015 we increased our warranty reserve balance by $750,000, which increased our cost of sales.~~2017. A summary of changes in our warranty reserves follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Balance, beginning of period	$	22,699		$	21,993		$	21,615		$	22,080		$	22,477		$	22,308		$	22,660		$	21,615
Additions to reserve from new home deliveries	4,110			3,376			12,068			9,000			4,310			4,423			8,125			7,958
Warranty claims	(4,843		)	(4,229		)	(11,442		)	(10,690		)	(3,167		)	(3,757		)	(7,165		)	(6,599		)
Adjustments to pre-existing reserves	—			—			(275		)	750			—			(275		)	—			(275		)
Balance, end of period	$	21,966		$	21,140		$	21,966		$	21,140		$	23,620		$	22,699		$	23,620		$	22,699

Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory

warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the general liability insurance we maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.

Recent Accounting Pronouncements.

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230), ("ASU 2016-15"). ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15 is effective for us beginning January 1, 2018. Early adoption is permitted. We are currently evaluating the impact adopting this guidance will have on classifications in our statement of cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. In addition, ASU 2016-09 ispermits entities to make an election to either estimate forfeitures or recognize them as they occur. ASU 2016-09 was effective for us beginning January 1, ~~2017. We are currently evaluating~~2017, and is reflected prospectively in the ~~potential~~provision for income taxes in the accompanying unaudited consolidated income statement. The impact of ~~adopting this guidance but do~~the adoption was not ~~expect it~~material to ~~have a material impact on~~ our consolidated financial ~~statements.~~statements, including our prior year statement of cash flow, which was not revised. We continue to estimate forfeitures in calculating stock-based compensation expense and have not elected to recognize forfeitures as they occur.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, 2019, and early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact adopting this guidance will have on our financial statements.

~~In April 2015, the FASB issued ASU 2015-03,~~ ~~Interest — Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs~~ (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability, other than those related to a revolving debt arrangement, be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, ~~Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting~~ ("ASU 2015-15"), which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU 2015-03. In particular, ASU 2015-15 clarifies that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 represents a change in accounting principle and was effective on January 1, 2016 and was applied on a retrospective basis. The adoption of ASU 2015-03 resulted in a retrospective reclassification of our debt costs as described above from Prepaids, other assets and goodwill to Senior and convertible senior notes, net on our December 31, 2015 balance sheet in the amount of $10.7 million. As allowed by ASU 2015-15, we elected not to reclassify deferred debt issuance costs associated with our Credit Facility and continue to present these capitalized costs as an asset.

~~In February 2015, the FASB issued ASU 2015-02,~~ ~~Consolidation: Amendments to the Consolidation Analysis(Topic 810)~~ ("ASU 2015-02"). ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. ASU 2015-02 was effective for us beginning January 1, 2016 and had no effect on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services by applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 supersedes the revenue

recognition requirements in ASU 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the ASC, and some cost guidance related to construction-type and production-type contracts. ~~Subsequent to the issuance of~~ ASU 2014-09 ~~the FASB issued several amendments in 2016 to the original standard including ASU 2016-08,~~ ~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10,~~ ~~Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing~~ ~~and ASU 2016-12,~~ ~~Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients~~. These amendments do not change the core principle of the guidance stated in ASU 2014-09. Rather, they are intended to clarify and improve understanding of certain topics included within the revenue standard. ASU 2014-09 and the related amendments areis effective for us on January 1, ~~2018. Early adoption is permitted only as~~2018, and the guidance allows for full retrospective or modified retrospective methods of ~~annual reporting periods beginning after December 15, 2016.~~adoption. We are currently evaluating the potential impact of adopting this guidance ~~will have~~ on our consolidated financial statements. We do not believe the adoption of ASU 2014-09 will have an impact on the amount or timing of our homebuilding revenues. We are still evaluating the potential impact the adoption of ASU 2014-09 will have on the timing and recognition of certain selling costs we incur to obtain a sales contract.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate consists of the following (in thousands):


	As of				As of
	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Homes under contract under construction ⁽¹⁾	$	632,454	$	456,138	$	662,829	$	508,927
Unsold homes, completed and under construction ⁽¹⁾	377,490		307,425		423,887		431,725
Model homes ⁽¹⁾	150,662		138,546		146,602		147,406
Finished home sites and home sites under development ⁽²⁾	1,268,408		1,196,193		1,405,089		1,334,005
Total	$	2,429,014	$	2,098,302	$	2,638,407	$	2,422,063


(1)	Includes the allocated land and land development costs associated with each lot for these homes.

(2)

Includes raw land, land held for development and land held for sale. Land held for development primarily reflects land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we may have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Capitalized interest, beginning of period	$	64,682		$	58,870		$	61,202		$	54,060		$	70,885		$	64,126		$	68,196		$	61,202
Interest incurred	17,372			17,857			52,644			49,665			19,280			17,713			37,175			35,272
Interest expensed	(167		)	(4,187		)	(5,127		)	(11,962		)	(1,620		)	(1,672		)	(2,445		)	(4,960		)
Interest amortized to cost of home and land closings	(14,256		)	(11,144		)	(41,088		)	(30,367		)	(16,218		)	(15,485		)	(30,599		)	(26,832		)
Capitalized interest, end of period ⁽¹⁾	$	67,631		$	61,396		$	67,631		$	61,396		$	72,327		$	64,682		$	72,327		$	64,682


~~(1)~~	Approximately $383,000 and $445,000 of the capitalized interest is related to our joint venture investments and is a component of Investments in unconsolidated entities on our consolidated balance sheet as of September 30, 2016 and December 31, 2015, respectively.

NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED

We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures reduce our financial risk associated with land acquisitions and allow us to better leverage our balance sheet.

Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into a purchase or option agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all purchase and option agreements for land to determine whether they are a VIE. ASC 810, Consolidation, requires that for each VIE, we assess whether we are the primary beneficiary and, if so, consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned. The liabilities related to consolidated VIEs are generally excluded from our debt covenant calculations.

In order to determine if we are the primary beneficiary, we must first assess whether we have the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to: the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability of the VIE to acquire additional land or dispose of land not under contract with Meritage; and the ability to change or amend the existing option contract with the VIE. If we are not determined to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis

by determining if we are also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will benefit from a potentially significant amount of the VIE’s expected gains.

In substantially all cases, creditors of the entities with which we have option agreements have no recourse against us and the maximum exposure to loss in our option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Often, we are at risk for items over budget related to land development on property we have under option if we are the land developer. In these cases, we have contracted to complete development at a fixed cost for our benefit, but on behalf of the land owner, and any budget savings or shortfalls are typically borne by us. Some of our option deposits may be refundable to us if certain contractual conditions are not performed by the party selling the lots.

The table below presents a summary of our lots under option at ~~September~~June 30, ~~2016~~2017 (dollars in thousands):

Projected Number
of Lots

Purchase
Price

Option/
Earnest Money
Deposits–Cash

Purchase and option contracts recorded on balance sheet as Real estate not owned —
$ —
$ —

Option contracts not recorded on balance sheet — non-refundable deposits, committed (1)
4,395
437,644
63,645

Purchase contracts not recorded on balance sheet — non-refundable deposits, committed (1)
4,330
266,086
20,079

Purchase contracts not recorded on balance sheet —refundable deposits, committed 820
31,414
1,855

Total committed (on and off balance sheet) 9,545
735,144
85,579

Total purchase and option contracts not recorded on balance sheet — refundable deposits, uncommitted (2)
7,343
361,238
5,474

Total lots under contract or option 16,888
$ 1,096,382
$ 91,053

Total purchase and option contracts not recorded on balance sheet (3)
16,888
$ 1,096,382
$ 91,053
(4)



	Projected Number of Lots		Purchase Price		Option/ Earnest Money Deposits–Cash
Purchase and option contracts recorded on balance sheet as Real estate not owned	65		$	9,987	$	1,498
Option contracts — non-refundable deposits, committed (1)	4,202		324,101		43,139
Purchase contracts — non-refundable deposits, committed (1)	6,974		354,503		25,645
Purchase and option contracts —refundable deposits, committed	1,935		68,966		1,366
Total committed	13,176		757,557		71,648
Purchase and option contracts — refundable deposits, uncommitted (2)	9,323	��	264,717		4,600
Total lots under contract or option	22,499		$	1,022,274	$	76,248
Total purchase and option contracts not recorded on balance sheet (3)	22,434		$	1,012,287	$	74,750	(4)


(1)	Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.


(2)	Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.


(3)	Except for our specific performance contracts recorded on our balance sheet as Real estate not owned, ~~if any,~~ none of our option agreements require us to purchase lots.


(4)	Amount is reflected on our consolidated balance sheet in Deposits on real estate under option or contract as of ~~September~~June 30, ~~2016.~~2017.

Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically

structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace in order to meet the pre-established minimum number of lots or we will work to restructure our original contract to terms that more accurately reflect our revised sales pace expectations.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

~~In the past, we have entered~~We may enter into land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile and leveraging our capital base. While purchasing land through a joint venture can be beneficial, ~~in recent years they have~~currently we do not ~~been a significant source~~view joint ventures as critical to the success of ~~land for us.~~our homebuilding operations. In 2016, we entered into our first new joint venture since 2008. Based on the structure of ~~these~~each joint ~~ventures, they~~venture, it may or may not be consolidated into our results. Our joint venture partners are generally other homebuilders, land sellers or other real estate investors. We generally do not have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with, or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. As of ~~September~~June 30, ~~2016~~2017, we had ~~two~~three active equity-method land ventures.

We have two separate ongoing legal proceedings related to a minority ownership interest in one of our inactive joint ventures, the South Edge joint venture. The first involves pending litigation regarding the amount of attorneys' fees that are payable by us relating to resolved litigation about the guarantee related to that venture. The other South Edge related matter involves pending arbitration proceedings regarding claims we have asserted against certain members of the inactive joint venture. See Note 15 regarding the outstanding litigation related to this joint venture.

As of ~~September~~June 30, ~~2016~~2017, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers. Our investment in this mortgage joint venture as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015~~2016 was $1.8 million and ~~$2.5~~$2.3 million, respectively.

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):


	As of				As of
	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Assets:
Cash	$	10,311	$	7,888	$	7,807	$	7,446
Real estate	31,233		33,366		53,172		54,319
Other assets	5,129		4,514		4,572		6,461
Total assets	$	46,673	$	45,768	$	65,551	$	68,226
Liabilities and equity:
Accounts payable and other liabilities	$	5,858	$	7,331	$	5,679	$	7,339
Notes and mortgages payable	12,594		13,345		23,887		23,000
Equity of:
Meritage ⁽¹⁾	9,136		8,194		14,430		14,245
Other	19,085		16,898		21,555		23,642
Total liabilities and equity	$	46,673	$	45,768	$	65,551	$	68,226


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Revenue	$	13,374		$	10,252		$	34,875		$	25,406		$	13,430		$	10,430		$	21,029		$	21,501
Costs and expenses	(5,762		)	(4,649		)	(15,408		)	(12,057		)	(6,106		)	(4,670		)	(10,586		)	(9,646		)
Net earnings of unconsolidated entities	$	7,612		$	5,603		$	19,467		$	13,349		$	7,324		$	5,760		$	10,443		$	11,855
Meritage’s share of pre-tax earnings ^{(1) (2)}	$	4,681		$	3,754		$	11,719		$	8,763		$	4,068		$	4,402		$	7,250		$	7,038

(1)

Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in our consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses. As discussed in Note 2 to these unaudited combined financial statements, balances do not include $383,000 and $445,000 of capitalized interest that is a component of our investment balances at September 30, 2016 and December 31, 2015, respectively.


(2)	Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net and Earnings/(loss) from other unconsolidated entities, net on our consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

~~The joint venture assets and liabilities noted in the table above primarily represent two active land ventures,~~ ~~one~~ ~~mortgage venture and various inactive ventures.~~ Our total investment in all of these joint ventures is ~~$11.8~~$16.7 million and ~~$11.4~~$17.1 million as of ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. We believe these ventures are in compliance with their respective debt agreements, if applicable, and such debt is non-recourse to us.

NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS

Loans payable and other borrowings consist of the following (in thousands):


	As of				As of
	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Other borrowings, real estate notes payable ⁽¹⁾	$	20,183	$	23,867	$	17,256	$	17,195
$500 million unsecured revolving credit facility with interest approximating LIBOR (approximately 0.53% at September 30, 2016) plus 1.75% or Prime (3.50% at September 30, 2016) plus 0.75%	25,000		—
$625 million unsecured revolving credit facility with interest approximating LIBOR (approximately 1.22% at June 30, 2017) plus 1.75% or Prime (4.25% at June 30, 2017) plus 0.75%					—		15,000
Total	$	45,183	$	23,867	$	17,256	$	32,195


(1)	Reflects balance of non-recourse notes payable in connection with land purchases, with interest rates ranging from 0% to 8%.

The Company has a ~~$500.0~~$625.0 million unsecured revolving credit facility ("Credit Facility"), with an accordion feature that permits the size of the facility to increase to a maximum of ~~$600.0~~$725.0 million. In ~~June 2016,~~May 2017, the maturity date ~~of a substantial portion~~ of the credit facility was extended whereby $60.0 million matures in July 2019 with the remainder maturing in July ~~2020.~~2021. Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of ~~$670.3~~$987.4 million (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months.

We had ~~$25.0 million of~~no outstanding borrowings under the Credit Facility as of ~~September~~June 30, ~~2016~~2017 and no$15.0 million in borrowings at December 31, ~~2015.~~2016. During the three months ended ~~September~~June 30, ~~2016,~~2017 we had ~~$50.0 million and $25.0~~$85.0 million of gross borrowings and ~~repayments, respectively, with no activity for the 2015 period.~~$145.0 million of repayments. During the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 we had ~~$106.0~~$245.0 million of gross borrowings and ~~$81.0~~$260.0 million of repayments. During both the ~~nine~~three and six months ended ~~September~~June 30, ~~2015,~~2016 we had $56.0 million of gross borrowings and ~~repayments each totaled $210.0 million.~~repayments. As of ~~September~~June 30, ~~2016~~2017 we had

~~outstanding borrowings of $25.0 million and~~ outstanding letters of credit issued under the Credit Facility totaling ~~$32.4~~$58.6 million, ~~respectively,~~ leaving ~~$442.6~~$566.4 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR AND CONVERTIBLE SENIOR NOTES, NET

Senior and convertible senior notes, net consist of the following (in thousands):


	As of						As of
	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
4.50% senior notes due 2018	$	175,000		$	175,000		$	175,000		$	175,000
7.15% senior notes due 2020. At September 30, 2016 and December 31, 2015 there was approximately $1,991 and $2,418 in net unamortized premium, respectively	301,991			302,418
7.15% senior notes due 2020. At June 30, 2017 and December 31, 2016 there was approximately $1,564 and $1,849 in net unamortized premium, respectively							301,564			301,849
7.00% senior notes due 2022	300,000			300,000			300,000			300,000
6.00% senior notes due 2025	200,000			200,000			200,000			200,000
1.875% convertible senior notes due 2032 ⁽¹⁾	126,500			126,500
5.125% senior notes due 2027							300,000			—
1.875% convertible senior notes due 2032							74,593			126,500
Net debt issuance costs	(8,859		)	(10,745		)	(10,883		)	(8,230		)
Total	$	1,094,632		$	1,093,173		$	1,340,274		$	1,095,119


~~(1)~~	~~The Convertible Notes may be redeemed by the note-holders on the fifth, tenth and fifteenth anniversary dates of the September 18, 2012 issuance date of the Convertible Notes.~~

On June 6, 2017, we completed an offering of $300.0 million aggregate principal amount of Senior Notes due 2027 (the "2027 Notes"). The 2027 Notes bear interest at 5.125% per annum, payable on June 6 and December 6 of each year, commencing on December 6, 2017.

The indentures for all of our senior notes contain covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We believe we are in compliance with all such covenants as of ~~September~~June 30, ~~2016.~~2017. Our convertible senior notes ("Convertible Notes") do not have any financial covenants.

The ~~convertible senior notes~~Convertible Notes are convertible into shares of our common stock at an initial conversion rate of 17.1985 shares of our common stock per $1,000 principal amount of convertible senior notes. This corresponds to an initial conversion price of $58.14 per share and represented a 47.5% conversion premium based on the closing price of our common stock on the issue date of the convertible senior notes. In June 2017, we repurchased in privately negotiated transactions $51.9 million of the Convertible Notes aggregate principal amount, incurring a loss on extinguishment of debt of $0.3 million included in Other income, net, in the accompanying consolidated income statements for the three and six months ended June 30, 2017. The Convertible Notes may be redeemed by the note-holders on the fifth, tenth and fifteenth anniversary dates of the Convertible Notes. On such dates, the note-holders may require us to repurchase all or any portion of their outstanding notes. The fifth anniversary of the Convertible Notes is September 15, 2017. On or after September 20, 2017, we may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. The Company intends to issue a notice of redemption to the holders of its Convertible Notes to redeem all outstanding Convertible Notes ($74.6 million as of June 30, 2017) on September 20, 2017.

Obligations to pay principal and interest on the senior and convertible notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are nonguarantor subsidiaries are, individually and in the aggregate, minor.

NOTE 7 — FAIR VALUE DISCLOSURES

We account for non-recurring fair value measurements of our non-financial assets and liabilities in accordance with ASC 820-10 Fair Value Measurement ("ASC 820"). This guidance defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:

Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.

Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.

If the only observable inputs are from inactive markets or for transactions which the company evaluates as “distressed”, the use of Level 1 inputs should be modified by the company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs. Refer to Notes 1 and 2 for additional information regarding the valuation of our non-financial assets.

Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (level 2 inputs as per the discussion above) and is as follows (in thousands):


	As of								As of
	September 30, 2016				December 31, 2015				June 30, 2017				December 31, 2016
	Aggregate Principal		Estimated Fair Value		Aggregate Principal		Estimated Fair Value		Aggregate Principal		Estimated Fair Value		Aggregate Principal		Estimated Fair Value
4.50% senior notes	$	175,000	$	178,938	$	175,000	$	175,000	$	175,000	$	176,313	$	175,000	$	177,625
7.15% senior notes	$	300,000	$	333,750	$	300,000	$	315,750	$	300,000	$	331,500	$	300,000	$	325,500
7.00% senior notes	$	300,000	$	334,500	$	300,000	$	313,500	$	300,000	$	341,250	$	300,000	$	324,750
6.00% senior notes	$	200,000	$	212,500	$	200,000	$	197,500	$	200,000	$	214,000	$	200,000	$	202,500
5.125% senior notes									$	300,000	$	300,390	$	—	$	—
1.875% convertible senior notes	$	126,500	$	126,184	$	126,500	$	124,128	$	74,593	$	74,593	$	126,500	$	126,105

Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

NOTE 8 — EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Basic weighted average number of shares outstanding	40,022		39,663		39,958		39,568		40,317		40,012		40,248		39,926
Effect of dilutive securities:
Convertible senior notes ⁽¹⁾	2,176		2,176		2,176		2,176		1,991		2,176		2,083		2,176
Stock options and unvested restricted stock	410		353		407		390
Unvested restricted stock									473		345		505		375
Diluted average shares outstanding	42,608		42,192		42,541		42,134		42,781		42,533		42,836		42,477
Net earnings as reported	$	36,887	$	30,308	$	97,734	$	75,841	$	41,580	$	39,878	$	65,152	$	60,847
Interest attributable to convertible senior notes, net of income taxes	403		385		1,210		1,189		354		400		739		801
Net earnings for diluted earnings per share	$	37,290	$	30,693	$	98,944	$	77,030	$	41,934	$	40,278	$	65,891	$	61,648
Basic earnings per share	$	0.92	$	0.76	$	2.45	$	1.92	$	1.03	$	1.00	$	1.62	$	1.52
Diluted earnings per share ⁽¹⁾	$	0.88	$	0.73	$	2.33	$	1.83	$	0.98	$	0.95	$	1.54	$	1.45
Antidilutive stock options not included in the calculation of diluted earnings per share	17		3		5		—
Antidilutive stock not included in the calculation of diluted earnings per share									59		289		2		19


(1)	In accordance with ASC 260-10, Earnings Per Share, ("ASC 260-10") we calculate the dilutive effect of convertible securities using the "if-converted" ~~method.~~method based on the number of days the convertible senior notes were outstanding during the period.

NOTE 9 — ACQUISITIONS AND GOODWILL

Goodwill. Over the past several years, we entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions are recorded in accordance with ASC 805, Business Combinations ("ASC 805") and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions is allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on our consolidated balance sheet in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

A summary of the carrying amount of goodwill follows (in thousands):


	West		Central		East		Financial Services		Corporate		Total		West		Central		East		Financial Services		Corporate		Total
Balance at December 31, 2015	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Balance at December 31, 2016													$	—	$	—	$	32,962	$	—	$	—	$	32,962
Additions	—		—		—		—		—		—		—		—		—		—		—		—
Impairments	—		—		—		—		—		—		—		—		—		—		—		—
Balance at September 30, 2016	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Balance at June 30, 2017													$	—	$	—	$	32,962	$	—	$	—	$	32,962

NOTE 10 — STOCKHOLDERS’ EQUITY

A summary of changes in ~~shareholders’~~stockholders’ equity is presented below (in thousands):


	Nine Months Ended September 30, 2016											Six Months Ended June 30, 2017
	(In thousands)											(In thousands)
	Number of Shares	Common Stock		Additional Paid-In Capital			Retained Earnings		Total			Number of Shares	Common Stock		Additional Paid-In Capital			Retained Earnings		Total
Balance at December 31, 2015	39,669	$	397	$	559,492		$	699,048	$	1,258,937
Balance at December 31, 2016												40,031	$	400	$	572,506		$	848,589	$	1,421,495
Net earnings	—	—		—			97,734		97,734			—	—		—			65,152		65,152
Exercise/vesting of stock-based awards	356	3		229			—		232			289	3		(3		)	—		—
Excess income tax provision from stock-based awards	—	—		(540		)	—		(540		)
Stock-based compensation expense	—	—		11,042			—		11,042			—	—		5,792			—		5,792
Balance at September 30, 2016	40,025	$	400	$	570,223		$	796,782	$	1,367,405
Balance at June 30, 2017												40,320	$	403	$	578,295		$	913,741	$	1,492,439


	Nine Months Ended September 30, 2015									Six Months Ended June 30, 2016
	(In thousands)									(In thousands)
	Number of Shares	Common Stock		Additional Paid-In Capital		Retained Earnings		Total		Number of Shares	Common Stock		Additional Paid-In Capital			Retained Earnings		Total
Balance at December 31, 2014	39,147	$	391	$	538,788	$	570,310	$	1,109,489
Balance at December 31, 2015										39,669	$	397	$	559,492		$	699,048	$	1,258,937
Net earnings	—	—		—		75,841		75,841		—	—		—			60,847		60,847
Exercise/vesting of stock-based awards	519	6		2,875		—		2,881		349	3		229			—		232
Excess income tax benefit from stock-based awards	—	—		2,040		—		2,040		—	—		(526		)	—		(526		)
Stock-based compensation expense	—	—		12,418		—		12,418		—	—		7,313			—		7,313
Balance at September 30, 2015	39,666	$	397	$	556,121	$	646,151	$	1,202,669
Balance at June 30, 2016										40,018	$	400	$	566,508		$	759,895	$	1,326,803

NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION

We have a ~~stock~~stock-based compensation plan, the Amended and Restated 2006 Stock Incentive Plan (the “Plan”), that was adopted in 2006 and has been amended or restated from time to time. The Plan was approved by our stockholders and is administered by our Board of Directors. The provisions of the Plan allow for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. The Plan authorizes awards to officers, key employees, non-employee directors and consultants for up to 5,350,000 shares of common stock, of which ~~1,729,563~~1,102,665 shares remain available for grant at ~~September~~June 30, ~~2016~~2017. The available shares include shares from expired, terminated or forfeited awards under prior plans that have since expired and are thus available for grant under the Plan. We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees and with a three-year cliff vesting for both non-vested stock and performance-based awards granted to certain senior executive officers and non-employee directors.

Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718-10-25-20, Compensation – Stock Compensation ("ASC 718"), which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense recorded on a straight-line basis through the end of the award vesting period. Beginning with grants in 2014, a portion of the performance-based restricted stock awards granted contain market conditions as defined by ASC 718. The guidance in ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engaged a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight-line over the service period of the awards. Below is a summary of compensation expense and stock award activity (dollars in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Stock-based compensation expense	$	3,729	$	3,953	$	11,042	$	12,418	$	2,490	$	2,555	$	5,785	$	7,313
Non-vested shares granted	3,500		20,600		497,365		424,387		—		—		416,500		493,865
Performance-based non-vested shares granted	—		—		66,698		66,187		—		—		154,120		66,698
Stock options exercised(1)	—		3,000		14,400		146,640		—		3,200		—		14,400
Restricted stock awards vested (includes performance-based awards)	6,940		1,800		341,490		372,004		6,190		29,465		289,764		334,550


(1)	As of December 31, 2016, we have no remaining unexercised stock options.

The following table includes additional information regarding our Plan (dollars in thousands):


	As of				As of
	September 30, 2016		December 31, 2015		June 30, 2017		December 31, 2016
Unrecognized stock-based compensation cost	$	21,678	$	18,545	$	24,115	$	18,528
Weighted average years expense recognition period	2.82		2.34		4.15		2.56
Total stock-based awards outstanding ⁽¹⁾	1,169,625		1,078,877		1,328,601		1,147,271


(1)	Includes ~~options outstanding and~~ unvested restricted stock and performance-based awards (at target level) and restricted stock units.

~~In 2013, we began to~~We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401k plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 or ~~2015,~~2016, other than minor administrative costs.

NOTE 12 — INCOME TAXES

Components of the income tax provision are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Federal	$	15,032	$	14,251	$	38,141	$	33,678	$	19,215	$	16,568	$	30,788	$	23,109
State	1,883		2,109		5,848		3,860		2,410		2,590		4,034		3,965
Total	$	16,915	$	16,360	$	43,989	$	37,538	$	21,625	$	19,158	$	34,822	$	27,074

The effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 was ~~31.4%~~34.2% and ~~31.0%~~34.8%, respectively, and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2015~~2016 was ~~35.1%~~32.5% and ~~33.1%~~30.8%, respectively. Our tax rate has been favorably impacted in both years by the homebuilding manufacturing deduction. ~~Due to the timing of enabling legislation related to federal energy tax credits, the~~The lower 2016 effective tax rate reflects the benefit of federal energy credits for homes sold in both ~~the three~~2016 and ~~nine months ended September 30, 2016 was reduced, whereas~~in prior ~~year rates not were impacted until the fourth quarter.~~

~~On December 18, 2015, Congress passed~~periods as a result of the Protecting Americans from Tax Hikes (PATH) Act of 2015. The PATH Act was the enabling legislation for claiming federal energy tax credits on homes qualifying in 2015 and 2016. ~~Under ASC 740, the effects of new~~This legislation ~~are~~has expired and has not ~~recognized until the period that includes the date of enactment. In accordance with ASC 740, at September 30, 2015 we did not recognize the benefit on~~yet been renewed for 2017. Accordingly, our effective tax rate ~~of claiming~~for 2017 does not reflect a tax benefit from federal energy ~~tax~~ credits for ~~qualifying 2015 homes. Rather, such benefit was recognized~~homes sold in ~~the fourth quarter of 2015.~~2017.

At ~~September~~June 30, ~~2016~~2017 and December 31, ~~2015,~~2016, we have no unrecognized tax ~~benefits due to the lapse of applicable statutes of limitations and completion of audits for prior years.~~benefits. We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in federal income tax expense.

We determine our deferred tax assets and liabilities in accordance with ASC 740-10, Income Taxes ("ASC 740"). We evaluate our deferred tax assets, including the benefit from ~~NOLs,~~net operating losses ("NOLs"), by jurisdiction to determine if a valuation allowance is required. Companies must assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets and NOL carryovers at ~~September~~June 30, ~~2016~~.2017.

At ~~September~~June 30, ~~2016~~,2017, we had no remaining federal NOL carry forward or un-utilized federal tax credits. At ~~September~~June 30, ~~2016,~~2017, and December 31, ~~2015~~2016 we had tax benefits for state NOL carry forwards of ~~$1.7~~$1.4 million, ~~and $1.5 million, respectively,~~ net of federal benefit, that begin to expire in 2028.

At ~~September~~June 30, ~~2016~~,2017, we have income taxes payable of ~~$3.0~~$8.3 million, which primarily consists of current federal and state tax accruals, net of estimated tax payments and tax credits. This amount is recorded in Accrued liabilities on the accompanying unaudited balance sheet at ~~September~~June 30, ~~2016~~.2017.

We conduct business and are subject to tax in the U.S. and several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2012. We have one state income tax examination of multiple years under audit at this time and do not expect it to have a material outcome.

The tax benefits from NOLs, built-in losses, and tax credits would be materially reduced or potentially eliminated if we experience an “ownership change” as defined under Internal Revenue Code §382. Based on our analysis performed as of ~~September~~June 30, ~~2016~~2017 we do not believe that we have experienced an ownership change. As a protective measure, our stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain transfers of our common stock. The amendment is intended to help us avoid an unintended ownership change and thereby preserve the value of any tax benefit for future utilization.

NOTE 13 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following table presents certain supplemental cash flow information (in thousands):


	Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2015			2017		2016
Interest capitalized, net	$	(9,053	)	$	(3,732	)	$	161	$	2,672
Income taxes paid	$	43,860		$	37,984		$	34,426	$	24,722
Non-cash operating activities:
Real estate not owned decrease	$	—		$	(4,999	)
Real estate not owned increase							$	9,987	$	—
Real estate acquired through notes payable	$	14,199		$	15,220		$	5,786	$	11,101

NOTE 14 — OPERATING AND REPORTING SEGMENTS

We operate with two principal business segments: homebuilding and financial services. As defined in ASC 280-10, Segment Reporting, we have nine homebuilding operating segments. The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our current reportable homebuilding segments are as follows:



	West:	Arizona, California and Colorado⁽¹⁾
	Central:	Texas
	East:	Florida, Georgia, North Carolina, South Carolina and Tennessee


~~(1)~~	~~Activity for our wind-down Nevada operations is reflected in the West Region's results.~~

Management’s evaluation of segment performance is based on segment operating income, which we define as homebuilding and land revenues less cost of home construction, commissions and other sales costs, land development and other land sales costs and other costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 1, “Organization and Basis of Presentation.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.

The following segment information is in thousands:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Homebuilding revenue ⁽¹⁾:
West	$	330,805		$	270,202		$	924,494		$	696,854		$	369,574		$	332,643		$	681,378		$	593,689
Central	200,446			191,132			571,036			524,633			225,679			208,701			400,510			370,590
East	221,606			208,622			652,989			564,982			206,725			256,552			392,862			431,383
Consolidated total	$	752,857		$	669,956		$	2,148,519		$	1,786,469		$	801,978		$	797,896		$	1,474,750		$	1,395,662
Homebuilding segment operating income:
West	$	27,829		$	24,347		$	71,387		$	53,800		$	35,131		$	27,495		$	59,143		$	43,558
Central	18,635			19,524			52,313			54,682			23,230			19,784			37,120			33,678
East	9,737			13,849			27,918			35,427			5,285			12,322			7,721			18,181
Total homebuilding segment operating income	56,201			57,720			151,618			143,909			63,646			59,601			103,984			95,417
Financial services segment profit	5,956			5,601			15,765			13,517			5,557			5,763			9,847			9,809
Corporate and unallocated costs ⁽²⁾	(10,063		)	(8,347		)	(24,652		)	(28,225		)	(7,028		)	(6,774		)	(15,545		)	(14,589		)
Earnings/(loss) from other unconsolidated entities, net	440			(123		)	856			(415		)	570			573			943			416
Interest expense	(167		)	(4,187		)	(5,127		)	(11,962		)	(1,620		)	(1,672		)	(2,445		)	(4,960		)
Other income, net	1,435			(3,996		)	3,263			(3,445		)	2,080			1,545			3,190			1,828
Net earnings before income taxes	$	53,802		$	46,668		$	141,723		$	113,379		$	63,205		$	59,036		$	99,974		$	87,921


(1)	Homebuilding revenue includes the following land closing revenue, by segment, as outlined in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2017		2016		2017		2016
Land closing revenue:
West	$	15,543	$	—	$	15,608	$	—	$	—	$	65	$	11,800	$	65
Central	947		7,677		4,659		14,194		—		1,794		122		3,712
East	497		395		920		2,091		4,198		192		4,431		423
Total	$	16,987	$	8,072	$	21,187	$	16,285	$	4,198	$	2,051	$	16,353	$	4,200


(2)	Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.


	At September 30, 2016															At June 30, 2017
	West		Central			East			Financial Services		Corporate and Unallocated			Total		West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	26,027	$	29,757		$	35,269		$	—	$	—		$	91,053	$	20,491		$	23,788		$	30,471		$	—	$	—		$	74,750
Real estate	1,145,566		590,472			692,976			—		—			2,429,014		1,179,257			671,392			787,758			—		—			2,638,407
Investments in unconsolidated entities	382		9,623			—			—		1,826			11,831		7,708			7,205			—			—		1,765			16,678
Other assets	59,158		87,842		(1)	76,465		(2)	847		116,945		(3)	341,257		46,699		(1)	89,947		(2)	73,315		(3)	689		260,207		(4)	470,857
Total assets	$	1,231,133	$	717,694		$	804,710		$	847	$	118,771		$	2,873,155	$	1,254,155		$	792,332		$	891,544		$	689	$	261,972		$	3,200,692

At December 31, 2015
West Central East Financial Services
Corporate and
Unallocated
Total
Deposits on real estate under option or contract $ 28,488
$ 30,241
$ 29,110
$ —
$ —
$ 87,839
Real estate 1,008,457
505,954
583,891
—
—
2,098,302
Investments in unconsolidated entities 204
8,704
—
—
2,462
11,370
Other assets 55,112
87,313
(1) 77,548
(2) 898
261,395
(3) 482,266
Total assets $ 1,092,261
$ 632,212
$ 690,549
$ 898
$ 263,857
$ 2,679,777


(1)	Balance consists primarily of cash, real estate not owned and property and equipment.


(2)	Balance consists primarily of development reimbursements from local municipalities and cash.


(3)	Balance consists primarily of goodwill (see Note 9) and prepaid permits and fees to local municipalities.


(4)	Balance consists primarily of cash and our deferred tax asset.



	At December 31, 2016
	West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	25,863		$	27,669		$	32,024		$	—	$	—		$	85,556
Real estate	1,120,038			595,485			706,540			—		—			2,422,063
Investments in unconsolidated entities	7,362			7,450			—			—		2,285			17,097
Other assets	45,624		(1)	94,299		(2)	93,245		(3)	812		129,995		(4)	363,975
Total assets	$	1,198,887		$	724,903		$	831,809		$	812	$	132,280		$	2,888,691


(1)	Balance consists primarily of cash and property and equipment.


(2)	Balance consists primarily of development reimbursements from local municipalities and cash.


(3)	Balance consists primarily of goodwill (see Note 9), prepaid permits and fees to local municipalities and cash.


~~(3)~~(4)	Balance consists primarily of cash and our deferred tax ~~assets.~~asset.

NOTE 15 — COMMITMENTS AND CONTINGENCIES

We are involved in various routine legal and regulatory proceedings, including, without limitation, warranty claims and litigation and arbitration proceedings alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of such legal proceedings, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved without the initiation of legal proceedings. We believe there are not any pending legal or warranty matters that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

~~Joint Venture Litigation~~

Since 2008, we have been involved in litigation initiated by the lender group for a large Nevada-based land acquisition and development joint venture in which we held a 3.53% interest. We were the only builder joint venture partner to have fully performed its obligations with respect to takedowns of lots from the joint venture, having completed our first takedown in April 2007 and having tendered full performance of our second and final takedown in April 2008. The joint venture and the lender group rejected our tender of performance for our second and final takedown, and as a result we contended, among other things, that the rejection by the joint venture and the lender group of our tender of full performance was wrongful and constituted a breach of contract and should release us of liability with respect to the takedown and extinguish or greatly reduce our exposure under all guarantees. On December 9, 2010, three of the lenders filed a petition seeking to place the venture into an involuntary bankruptcy (JP Morgan Chase Bank, N.A. v. South Edge, LLC (Case No. 10-32968-bam)). On June 6, 2011, we received a demand letter from the lenders requesting full payment of $13.2 million the lenders claimed to be owed under the springing repayment guarantee, including past-due interest and penalties. The lenders claimed that the involuntary bankruptcy filed by three of the co-lenders triggered the springing repayment guarantee. We contested the Lenders’ claim on the basis that the repayment guarantee was not properly triggered by the lenders' filing of the involuntary bankruptcy, the lenders breached their contract with us by refusing to accept the April 2008 tender of our performance and by refusing to release their lien in connection with our second and final takedown in this project. The U.S. District Court of Nevada entered judgments in favor of JP Morgan in a combined amount of $16.6 million, which included prejudgment interest and attorneys' fees, which we paid in January 2016. The only outstanding issue in that case involves the amount of attorneys' fees that will be payable by us related to the now resolved appeal of that case, for which we are fully reserved.

We contend that four of our co-venturers in the South Edge entity (KB Home, Toll Brothers, Pardee Homes and Beazer Homes) are liable to Meritage for certain issues and events related to the South Edge joint venture and property, and we have filed an arbitration claim against those builders to recover certain amounts from them based on breach of contract, unjust enrichment, and other claims.

Special Note of Caution Regarding Forward-Looking Statements

In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.

The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” "may," "will," "should," "could," “estimate,” “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Quarterly Report include: statements concerning trends in the homebuilding industry in general, and our markets and results specifically; our operating strategy and initiatives, including our strategy to expand ~~into~~the number of communities that target the first-time buyer segment; the amount, timing and benefits of planned community openings in our East region in the remainder of 2017; demand and pricing trends in the short-term throughout our geographies; our intention to redeem our remaining outstanding Convertible Notes; that we may opportunistically repurchase our debt and equity securities; the benefits of our land acquisition strategy and structures, including the use and the benefits of ~~land banking~~option contracts and joint ventures; that we expect to redeploy cash generated from operations to acquire and develop lot positions; management estimates regarding joint venture exposure; expectations regarding our industry and our business for the remainder of ~~2016~~2017 and beyond; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the adequacy of our insurance coverage and warranty reserves; ~~our strategy, legal positions and~~ the expected outcome of legal proceedings we are involved in and the sufficiency of our reserves relating thereto; the sufficiency of our liquidity and capital resources to support our business strategy; our ability and willingness to acquire land under option or contract; our strategy and trends and expectations concerning sales prices, sales pace, closings, orders, cancellations, material and labor costs for land development and home construction, gross margins, gross profit, revenues, net earnings, operating leverage, backlog, land prices, changes in and location of active communities, seasonality and the timing of new community openings; our future cash needs; that we may seek to raise additional debt and equity capital; and our intentions regarding the payment of dividends and the use of derivative contracts; our perceptions about the importance of joint ventures to our business; and the impact of ~~seasonality and~~ changes in interest rates.

Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: the availability and cost of finished lots and undeveloped land; changes in interest rates and ~~changes in~~ the availability and pricing of residential mortgages; ~~fluctuations~~shortages in the availability and cost of labor; changes in tax laws that adversely impact us or our homebuyers; the ~~continued availability~~success of ~~energy tax credits; reversal of the current economic recovery;~~our strategic initiatives; the ability of our potential buyers to sell their existing homes; cancellation rates; inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slower order absorption rates; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of option deposits; our potential exposure to natural disasters or severe weather conditions; competition; construction defect and home warranty claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance bonds in connection with our development work; the loss of key personnel; ~~enactment of new laws or regulations and~~ our failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government ~~regulations and~~regulations; the effect of legislative and other government actions, orders, policies or initiatives that impact housing, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, ~~2015~~2016 under the caption “Risk Factors,” which can be found on our website.

Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we undertake no obligations to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview and Outlook

~~The~~Favorable housing market ~~has generally experienced a steady level~~fundamentals continued throughout the first six months of ~~growth throughout 2016 supported by a stable economic environment~~2017 that, combined with historically low interest rates ~~modest wage growth and lower unemployment.~~despite several federal rate hikes, have contributed to a strong demand environment. The return of the first-time homebuyer to the market as well as the limited supply of resale homes have contributed to higher demand for new ~~homes has resulted in~~homes. While these dynamics have translated to rising average sales prices in some ~~geographies, as well as~~markets, the increase in demand has also resulted in rising land and ~~labor~~construction material costs, ~~and,~~limiting the potential expansion in some markets, labor shortages. These cost increases are out-pacing home price increases in many markets, creating pressure on both margins and cycle times. We believe the current homebuilding cycle will continue on a slow but steady improvement trajectory, which should help better align the rising land and labor prices with consumer demand.gross margins. We continue to ~~strategically~~ focus on strategic initiatives that are designed to position us for further growth and improve our margins. We remain committed to expanding our presence in our markets ~~through acquisitions~~by increasing our community count and ~~development of well-located communities~~ offering homes with energy-efficient features and appealing designs. We are always considering new market opportunities and we have entered six new markets over the last five years. We are also focused on expanding our presence in the growing first-time homebuyer segment as we continue to open new communities featuring plans targeted to that demographic.designs for today's homebuyer.

Summary Company Results

Total home closing revenue was ~~$735.9~~$797.8 million ~~and $2.1 billion~~ for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016, respectively, representing 11.2% and 20.2% increases~~2017, up nominally over the corresponding prior year ~~periods. Due~~period due to higher average sales prices, despite slightly lower closing volume. The $1.9 million in additional home closing revenue ~~with $74.0~~and improved home closing gross margin, provided $3.2 million in additional home closing gross profit, and ~~$357.1~~contributed to our higher net income of $41.6 million ~~increases~~ for the three ~~and nine~~ months ended ~~September~~June 30, 2017 versus $39.9 million for the 2016 ~~respectively, we benefited from~~period. 2017 results reflect a higher provision for income taxes due to a higher effective tax rate in 2017 of 34.2% versus 2016 of 32.5%. The lower 2016 effective tax rate reflects the benefit of federal energy credits for homes sold in both 2016 and in prior periods, as the legislation providing for these credits expired in 2016 and has not yet been renewed for 2017. Year-to-date results reflect $66.9 million in additional home closing revenue and $7.1 million higher home closing gross profit ~~in both periods. This revenue growth was~~versus the ~~principle driver of our higher~~six months ended June 30, 2016. Higher gross profit combined with relatively flat year-over-year selling and general and administrative costs and lower year over year interest expense led to net income of ~~$36.9 million and $97.7~~$65.2 million for the ~~three and nine~~six months ended ~~September~~June 30, ~~2016, respectively, as~~2017 compared to ~~$30.3~~$60.8 million and $75.8 million for the respective 2015 periods. Net income also benefited from lower interest expense than the prior year for both the three- and nine-month periods of 2016 as we have more inventory under development that qualifies for interest capitalization. Interest income from municipalities related to reimbursable land development costs favorably impacted Other income/(expense) in both the third quarter and year to date of 2016 while an adverse legal ruling unfavorably impacted the same periods in the prior year, which further contributed to the improved net income in 2016.

On a consolidated basis, we experienced year-over-year growth in ~~closings,~~ orders ~~and backlog, in both units and value~~ for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017. Closing units were down by 2.3% for the three-month period, but up year to date by 49 units, or 1.4%. Average sales prices for the three and six month periods ended June 30, 2017 in both closings and orders continue to rise in our consolidated results, although individual markets vary as ~~compared to prior year.~~we shift toward a higher percentage of entry-level homes. We ended the ~~third~~second quarter of ~~2016~~2017 with ~~3,251~~3,428 homes in backlog, ~~valued at~~3.4% higher than 2016 that contributed to a backlog value of $1.4 billion, ~~representing 6.8% and 8.8% increases~~a 3.8% increase over ~~September~~June 30, ~~2015, respectively.~~2016. ~~Our average sales price for homes in backlog increased 1.8% to $423,200 at September 30, 2016 from $415,700 at September 30, 2015, with increases reported in nearly all our markets.~~

Company Positioning

We believe that the investments in our new communities, new markets and industry-leading energy-efficient product offerings create a differentiated strategy that has aided us in our growth in the highly competitive new home market. We remain focused on our main goals of growing our orders, ~~pace~~revenue and ~~returning to normalized gross margins while controlling overhead costs~~profit, and maintaining a strong balance sheet. To help meet these goals, we continue to focus on the following initiatives:

Continuing to actively acquire and develop land in key markets in order to maintain and grow our lot supply and active community count;

~~Introducing LiVE.NOW, our newest~~Expanding the number of 'entry-level plus' ~~collection of product offerings~~communities that ~~targets~~target the growing first-time homebuyer segment;

Introducing newly designed plan offerings to meet homebuyers changing preferences in our markets, most recently an entire new product library in our East Region;

Expanding market share in our smaller markets;

Managing construction efficiencies and cost increases through national and regional vendor relationships with a focus on quality construction and warranty management;

~~Generating additional~~Growing revenue while managing costs, allowing us to improve overhead operating ~~leverage in all of our markets;~~leverage;

Generating additional working capital and maintaining adequate ~~liquidity;~~liquidity, most recently through a $300 million senior note debt issuance, a partial pay-down of our convertible senior notes, and expansion of our Credit Facility;

Increasing orders pace through the use of our consumer and market research to build homes that offer our buyers their desired features and amenities;


•	Continuing to innovate and promote our energy efficiency program and our recently announced M. Connected^TM Automation Suite to drive sales;

Adapting sales and marketing efforts to increase traffic and allow us to favorably compete with both resale and new homes;

Actively monitoring and adjusting our sales, construction and closing processes to incorporate enhancements identified through customer satisfaction surveys; and

Promoting a positive environment for our employees in order to ~~retain our employees~~develop and motivate them and to minimize turnover.

Critical Accounting Policies

The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, goodwill, deferred tax assets and warranty reserves as well as the calculation of compensation cost relating to share-based payments. There have been no significant changes to our critical accounting policies during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our ~~2015~~2016 Annual Report on Form 10-K.

Home Closing Revenue, Home Orders and Order Backlog

The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):


	Three Months Ended September 30,				Quarter over Quarter					Three Months Ended June 30,				Quarter over Quarter
	2016		2015		Chg $			Chg %		2017		2016		Change $			Change %
Home Closing Revenue
Total
Dollars	$	735,870	$	661,884	$	73,986		11.2	%	$	797,780	$	795,845	$	1,935		0.2	%
Homes closed	1,800		1,712		88			5.1	%	1,906		1,950		(44		)	(2.3	)%
Average sales price	$	408.8	$	386.6	$	22.2		5.7	%	$	418.6	$	408.1	$	10.5		2.6	%
West Region
Arizona
Dollars	$	89,092	$	92,888	$	(3,796	)	(4.1	)%	$	141,015	$	94,048	$	46,967		49.9	%
Homes closed	253		302		(49		)	(16.2	)%	419		279		140			50.2	%
Average sales price	$	352.1	$	307.6	$	44.5		14.5	%	$	336.6	$	337.1	$	(0.5	)	(0.1	)%
California
Dollars	$	142,056	$	120,387	$	21,669		18.0	%	$	140,270	$	156,058	$	(15,788	)	(10.1	)%
Homes closed	251		236		15			6.4	%	231		280		(49		)	(17.5	)%
Average sales price	$	566.0	$	510.1	$	55.9		11.0	%	$	607.2	$	557.4	$	49.8		8.9	%
Colorado
Dollars	$	84,114	$	56,927	$	27,187		47.8	%	$	88,289	$	82,472	$	5,817		7.1	%
Homes closed	167		123		44			35.8	%	154		169		(15		)	(8.9	)%
Average sales price	$	503.7	$	462.8	$	40.9		8.8	%	$	573.3	$	488.0	$	85.3		17.5	%
West Region Totals
Dollars	$	315,262	$	270,202	$	45,060		16.7	%	$	369,574	$	332,578	$	36,996		11.1	%
Homes closed	671		661		10			1.5	%	804		728		76			10.4	%
Average sales price	$	469.8	$	408.8	$	61.0		14.9	%	$	459.7	$	456.8	$	2.9		0.6	%
Central Region - Texas
Central Region Totals
Dollars	$	199,499	$	183,455	$	16,044		8.7	%	$	225,679	$	206,907	$	18,772		9.1	%
Homes closed	542		517		25			4.8	%	610		556		54			9.7	%
Average sales price	$	368.1	$	354.8	$	13.3		3.7	%	$	370.0	$	372.1	$	(2.1	)	(0.6	)%
East Region
Florida
Dollars	$	85,647	$	90,285	$	(4,638	)	(5.1	)%	$	82,448	$	103,342	$	(20,894	)	(20.2	)%
Homes closed	206		202		4			2.0	%	187		257		(70		)	(27.2	)%
Average sales price	$	415.8	$	447.0	$	(31.2	)	(7.0	)%	$	440.9	$	402.1	$	38.8		9.6	%
Georgia
Dollars	$	27,477	$	20,663	$	6,814		33.0	%	$	25,366	$	27,383	$	(2,017	)	(7.4	)%
Homes closed	83		62		21			33.9	%	73		81		(8		)	(9.9	)%
Average sales price	$	331.0	$	333.3	$	(2.3	)	(0.7	)%	$	347.5	$	338.1	$	9.4		2.8	%
North Carolina
Dollars	$	71,641	$	63,532	$	8,109		12.8	%	$	59,560	$	76,507	$	(16,947	)	(22.2	)%
Homes closed	177		165		12			7.3	%	132		179		(47		)	(26.3	)%
Average sales price	$	404.8	$	385.0	$	19.8		5.1	%	$	451.2	$	427.4	$	23.8		5.6	%
South Carolina
Dollars	$	22,658	$	25,812	$	(3,154	)	(12.2	)%	$	23,866	$	27,748	$	(3,882	)	(14.0	)%
Homes closed	76		80		(4		)	(5.0	)%	70		88		(18		)	(20.5	)%
Average sales price	$	298.1	$	322.7	$	(24.6	)	(7.6	)%	$	340.9	$	315.3	$	25.6		8.1	%
Tennessee
Dollars	$	13,686	$	7,935	$	5,751		72.5	%	$	11,287	$	21,380	$	(10,093	)	(47.2	)%
Homes closed	45		25		20			80.0	%	30		61		(31		)	(50.8	)%
Average sales price	$	304.1	$	317.4	$	(13.3	)	(4.2	)%	$	376.2	$	350.5	$	25.7		7.3	%
East Region Totals
Dollars	$	221,109	$	208,227	$	12,882		6.2	%	$	202,527	$	256,360	$	(53,833	)	(21.0	)%
Homes closed	587		534		53			9.9	%	492		666		(174		)	(26.1	)%
Average sales price	$	376.7	$	389.9	$	(13.2	)	(3.4	)%	$	411.6	$	384.9	$	26.7		6.9	%


	Nine Months Ended September 30,				Quarter over Quarter					Six Months Ended June 30,				Quarter over Quarter
	2016		2015		Chg $			Chg %		2017		2016		Chg $			Chg %
Home Closing Revenue
Total
Dollars	$	2,127,332	$	1,770,184	$	357,148		20.2	%	$	1,458,397	$	1,391,462	$	66,935		4.8	%
Homes closed	5,238		4,603		635			13.8	%	3,487		3,438		49			1.4	%
Average sales price	$	406.1	$	384.6	$	21.5		5.6	%	$	418.2	$	404.7	$	13.5		3.3	%
West Region
Arizona
Dollars	$	258,139	$	227,367	$	30,772		13.5	%	$	241,565	$	169,047	$	72,518		42.9	%
Homes closed	749		717		32			4.5	%	715		496		219			44.2	%
Average sales price	$	344.6	$	317.1	$	27.5		8.7	%	$	337.9	$	340.8	$	(2.9	)	(0.9	)%
California
Dollars	$	418,834	$	302,573	$	116,261		38.4	%	$	272,364	$	276,778	$	(4,414	)	(1.6	)%
Homes closed	738		565		173			30.6	%	441		487		(46		)	(9.4	)%
Average sales price	$	567.5	$	535.5	$	32.0		6.0	%	$	617.6	$	568.3	$	49.3		8.7	%
Colorado
Dollars	$	231,913	$	166,914	$	64,999		38.9	%	$	155,649	$	147,799	$	7,850		5.3	%
Homes closed	474		364		110			30.2	%	282		307		(25		)	(8.1	)%
Average sales price	$	489.3	$	458.6	$	30.7		6.7	%	$	551.9	$	481.4	$	70.5		14.6	%
West Region Totals
Dollars	$	908,886	$	696,854	$	212,032		30.4	%	$	669,578	$	593,624	$	75,954		12.8	%
Homes closed	1,961		1,646		315			19.1	%	1,438		1,290		148			11.5	%
Average sales price	$	463.5	$	423.4	$	40.1		9.5	%	$	465.6	$	460.2	$	5.4		1.2	%
Central Region - Texas
Central Region Totals
Dollars	$	566,377	$	510,439	$	55,938		11.0	%	$	400,388	$	366,878	$	33,510		9.1	%
Homes closed	1,563		1,466		97			6.6	%	1,105		1,021		84			8.2	%
Average sales price	$	362.4	$	348.2	$	14.2		4.1	%	$	362.3	$	359.3	$	3.0		0.8	%
East Region
Florida
Dollars	$	252,311	$	254,607	$	(2,296	)	(0.9	)%	$	148,022	$	166,664	$	(18,642	)	(11.2	)%
Homes closed	619		589		30			5.1	%	333		413		(80		)	(19.4	)%
Average sales price	$	407.6	$	432.3	$	(24.7	)	(5.7	)%	$	444.5	$	403.5	$	41.0		10.2	%
Georgia
Dollars	$	76,874	$	49,178	$	27,696		56.3	%	$	45,841	$	49,397	$	(3,556	)	(7.2	)%
Homes closed	229		156		73			46.8	%	128		146		(18		)	(12.3	)%
Average sales price	$	335.7	$	315.2	$	20.5		6.5	%	$	358.1	$	338.3	$	19.8		5.9	%
North Carolina
Dollars	$	198,525	$	148,721	$	49,804		33.5	%	$	116,467	$	126,884	$	(10,417	)	(8.2	)%
Homes closed	474		389		85			21.9	%	263		297		(34		)	(11.4	)%
Average sales price	$	418.8	$	382.3	$	36.5		9.5	%	$	442.8	$	427.2	$	15.6		3.7	%
South Carolina
Dollars	$	71,577	$	77,630	$	(6,053	)	(7.8	)%	$	49,921	$	48,919	$	1,002		2.0	%
Homes closed	231		247		(16		)	(6.5	)%	143		155		(12		)	(7.7	)%
Average sales price	$	309.9	$	314.3	$	(4.4	)	(1.4	)%	$	349.1	$	315.6	$	33.5		10.6	%
Tennessee
Dollars	$	52,782	$	32,755	$	20,027		61.1	%	$	28,180	$	39,096	$	(10,916	)	(27.9	)%
Homes closed	161		110		51			46.4	%	77		116		(39		)	(33.6	)%
Average sales price	$	327.8	$	297.8	$	30.0		10.1	%	$	366.0	$	337.0	$	29.0		8.6	%
East Region Totals
Dollars	$	652,069	$	562,891	$	89,178		15.8	%	$	388,431	$	430,960	$	(42,529	)	(9.9	)%
Homes closed	1,714		1,491		223			15.0	%	944		1,127		(183		)	(16.2	)%
Average sales price	$	380.4	$	377.5	$	2.9		0.8	%	$	411.5	$	382.4	$	29.1		7.6	%


	Three Months Ended September 30,				Quarter over Quarter					Three Months Ended June 30,				Quarter over Quarter
	2016		2015		Chg $			Chg %		2017		2016		Change $			Change %
Home Orders ⁽¹⁾
Total
Dollars	$	715,562	$	629,977	$	85,585		13.6	%	$	878,718	$	845,346	$	33,372		3.9	%
Homes ordered	1,737		1,567		170			10.8	%	2,153		2,073		80			3.9	%
Average sales price	$	412.0	$	402.0	$	10.0		2.5	%	$	408.1	$	407.8	$	0.3		0.1	%
West Region
Arizona
Dollars	$	116,815	$	96,867	$	19,948		20.6	%	$	129,870	$	115,812	$	14,058		12.1	%
Homes ordered	345		272		73			26.8	%	397		331		66			19.9	%
Average sales price	$	338.6	$	356.1	$	(17.5	)	(4.9	)%	$	327.1	$	349.9	$	(22.8	)	(6.5	)%
California
Dollars	$	125,920	$	110,076	$	15,844		14.4	%	$	162,597	$	165,931	$	(3,334	)	(2.0	)%
Homes ordered	216		203		13			6.4	%	274		289		(15		)	(5.2	)%
Average sales price	$	583.0	$	542.2	$	40.8		7.5	%	$	593.4	$	574.2	$	19.2		3.3	%
Colorado
Dollars	$	66,213	$	43,782	$	22,431		51.2	%	$	76,978	$	84,398	$	(7,420	)	(8.8	)%
Homes ordered	121		84		37			44.0	%	133		169		(36		)	(21.3	)%
Average sales price	$	547.2	$	521.2	$	26.0		5.0	%	$	578.8	$	499.4	$	79.4		15.9	%
West Region Totals
Dollars	$	308,948	$	250,725	$	58,223		23.2	%	$	369,445	$	366,141	$	3,304		0.9	%
Homes ordered	682		559		123			22.0	%	804		789		15			1.9	%
Average sales price	$	453.0	$	448.5	$	4.5		1.0	%	$	459.5	$	464.1	$	(4.6	)	(1.0	)%
Central Region - Texas
Central Region Totals
Dollars	$	178,934	$	165,206	$	13,728		8.3	%	$	254,642	$	202,948	$	51,694		25.5	%
Homes ordered	488		452		36			8.0	%	714		550		164			29.8	%
Average sales price	$	366.7	$	365.5	$	1.2		0.3	%	$	356.6	$	369.0	$	(12.4	)	(3.4	)%
East Region
Florida
Dollars	$	95,946	$	94,114	$	1,832		1.9	%	$	120,951	$	106,913	$	14,038		13.1	%
Homes ordered	208		227		(19		)	(8.4	)%	283		267		16			6.0	%
Average sales price	$	461.3	$	414.6	$	46.7		11.3	%	$	427.4	$	400.4	$	27.0		6.7	%
Georgia
Dollars	$	28,841	$	23,143	$	5,698		24.6	%	$	32,865	$	38,356	$	(5,491	)	(14.3	)%
Homes ordered	85		67		18			26.9	%	99		115		(16		)	(13.9	)%
Average sales price	$	339.3	$	345.4	$	(6.1	)	(1.8	)%	$	332.0	$	333.5	$	(1.5	)	(0.4	)%
North Carolina
Dollars	$	61,537	$	57,168	$	4,369		7.6	%	$	61,375	$	66,944	$	(5,569	)	(8.3	)%
Homes ordered	149		138		11			8.0	%	143		159		(16		)	(10.1	)%
Average sales price	$	413.0	$	414.3	$	(1.3	)	(0.3	)%	$	429.2	$	421.0	$	8.2		1.9	%
South Carolina
Dollars	$	22,434	$	26,766	$	(4,332	)	(16.2	)%	$	22,840	$	38,468	$	(15,628	)	(40.6	)%
Homes ordered	71		88		(17		)	(19.3	)%	66		118		(52		)	(44.1	)%
Average sales price	$	316.0	$	304.2	$	11.8		3.9	%	$	346.1	$	326.0	$	20.1		6.2	%
Tennessee
Dollars	$	18,922	$	12,855	$	6,067		47.2	%	$	16,600	$	25,576	$	(8,976	)	(35.1	)%
Homes ordered	54		36		18			50.0	%	44		75		(31		)	(41.3	)%
Average sales price	$	350.4	$	357.1	$	(6.7	)	(1.9	)%	$	377.3	$	341.0	$	36.3		10.6	%
East Region Totals
Dollars	$	227,680	$	214,046	$	13,634		6.4	%	$	254,631	$	276,257	$	(21,626	)	(7.8	)%
Homes ordered	567		556		11			2.0	%	635		734		(99		)	(13.5	)%
Average sales price	$	401.6	$	385.0	$	16.6		4.3	%	$	401.0	$	376.4	$	24.6		6.5	%


(1)	Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed.

Nine Months Ended September 30, Quarter over Quarter
2016 2015 Chg $ Chg %
Home Orders ⁽¹⁾

Total
Dollars $ 2,365,508
$ 2,188,604
$ 176,904
8.1 %
Homes ordered 5,797
5,532
265
4.8 %
Average sales price $ 408.1
$ 395.6
$ 12.5
3.2 %
West Region
Arizona
Dollars $ 322,807
$ 290,172
$ 32,635
11.2 %
Homes ordered 935
880
55
6.3 %
Average sales price $ 345.2
$ 329.7
$ 15.5
4.7 %
California
Dollars $ 442,863
$ 419,987
$ 22,876
5.4 %
Homes ordered 775
750
25
3.3 %
Average sales price $ 571.4
$ 560.0
$ 11.4
2.0 %
Colorado
Dollars $ 237,237
$ 213,610
$ 23,627
11.1 %
Homes ordered 459
454
5
1.1 %
Average sales price $ 516.9
$ 470.5
$ 46.4
9.9 %
West Region Totals
Dollars $ 1,002,907
$ 923,769
$ 79,138
8.6 %
Homes ordered 2,169
2,084
85
4.1 %
Average sales price $ 462.4
$ 443.3
$ 19.1
4.3 %
Central Region - Texas
Central Region Totals
Dollars $ 597,947
$ 574,533
$ 23,414
4.1 %
Homes ordered 1,629
1,644
(15 ) (0.9 )%
Average sales price $ 367.1
$ 349.5
$ 17.6
5.0 %
East Region
Florida
Dollars $ 295,453
$ 295,634
$ (181 ) (0.1 )%
Homes ordered 702
693
9
1.3 %
Average sales price $ 420.9
$ 426.6
$ (5.7 ) (1.3 )%
Georgia
Dollars $ 102,392
$ 64,051
$ 38,341
59.9 %
Homes ordered 305
197
108
54.8 %
Average sales price $ 335.7
$ 325.1
$ 10.6
3.3 %
North Carolina
Dollars $ 205,562
$ 191,460
$ 14,102
7.4 %
Homes ordered 497
467
30
6.4 %
Average sales price $ 413.6
$ 410.0
$ 3.6
0.9 %
South Carolina
Dollars $ 95,123
$ 85,767
$ 9,356
10.9 %
Homes ordered 296
283
13
4.6 %
Average sales price $ 321.4
$ 303.1
$ 18.3
6.0 %
Tennessee
Dollars $ 66,124
$ 53,390
$ 12,734
23.9 %
Homes ordered 199
164
35
21.3 %
Average sales price $ 332.3
$ 325.5
$ 6.8
2.1 %
East Region Totals
Dollars $ 764,654
$ 690,302
$ 74,352
10.8 %
Homes ordered 1,999
1,804
195
10.8 %
Average sales price $ 382.5
$ 382.7
$ (0.2 ) (0.1 )%


~~(1)~~	Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed.

Three Months Ended September 30,
2016 2015
Ending Average Ending Average
Active Communities
Total 237 239.0 250
245.0
West Region
Arizona 40 41.5 41
42.0
California 29 27.0 26
23.0
Colorado 10 11.0 15
15.5
West Region Totals 79 79.5 82
80.5
Central Region - Texas
Central Region Totals 74 73.5 70
68.0
East Region
Florida 26 26.0 31
30.5
Georgia 17 17.0 17
16.5
North Carolina 19 20.5 25
25.0
South Carolina 15 15.5 17
18.5
Tennessee 7 7.0 8
6.0
East Region Totals 84 86.0 98
96.5


	Nine Months Ended September 30,				Six Months Ended June 30,				Quarter over Quarter
	2016		2015		2017		2016		Chg $			Chg %
	Ending	Average	Ending	Average
Active Communities
Home Orders ⁽¹⁾
Total	237	245.5	250	239.5
Dollars					$	1,771,421	$	1,649,946	$	121,475		7.4	%
Homes ordered					4,288		4,060		228			5.6	%
Average sales price					$	413.1	$	406.4	$	6.7		1.6	%
West Region
Arizona	40	40.5	41	41.0
Dollars					$	263,702	$	205,992	$	57,710		28.0	%
Homes ordered					800		590		210			35.6	%
Average sales price					$	329.6	$	349.1	$	(19.5	)	(5.6	)%
California	29	26.5	26	25.0
Dollars					$	356,355	$	316,943	$	39,412		12.4	%
Homes ordered					602		559		43			7.7	%
Average sales price					$	592.0	$	567.0	$	25.0		4.4	%
Colorado	10	13.0	15	16.0
Dollars					$	159,073	$	171,024	$	(11,951	)	(7.0	)%
Homes ordered					276		338		(62		)	(18.3	)%
Average sales price					$	576.4	$	506.0	$	70.4		13.9	%
West Region Totals	79	80.0	82	82.0
Dollars					$	779,130	$	693,959	$	85,171		12.3	%
Homes ordered					1,678		1,487		191			12.8	%
Average sales price					$	464.3	$	466.7	$	(2.4	)	(0.5	)%
Central Region - Texas
Central Region Totals	74	73.0	70	64.5
Dollars					$	506,415	$	419,013	$	87,402		20.9	%
Homes ordered					1,407		1,141		266			23.3	%
Average sales price					$	359.9	$	367.2	$	(7.3	)	(2.0	)%
East Region
Florida	26	28.5	31	30.0
Dollars					$	222,511	$	199,507	$	23,004		11.5	%
Homes ordered					522		494		28			5.7	%
Average sales price					$	426.3	$	403.9	$	22.4		5.5	%
Georgia	17	17.0	17	15.0
Dollars					$	55,267	$	73,551	$	(18,284	)	(24.9	)%
Homes ordered					168		220		(52		)	(23.6	)%
Average sales price					$	329.0	$	334.3	$	(5.3	)	(1.6	)%
North Carolina	19	22.5	25	23.0
Dollars					$	127,707	$	144,025	$	(16,318	)	(11.3	)%
Homes ordered					293		348		(55		)	(15.8	)%
Average sales price					$	435.9	$	413.9	$	22.0		5.3	%
South Carolina	15	16.5	17	18.5
Dollars					$	48,378	$	72,689	$	(24,311	)	(33.4	)%
Homes ordered					138		225		(87		)	(38.7	)%
Average sales price					$	350.6	$	323.1	$	27.5		8.5	%
Tennessee	7	8.0	8	6.5
Dollars					$	32,013	$	47,202	$	(15,189	)	(32.2	)%
Homes ordered					82		145		(63		)	(43.4	)%
Average sales price					$	390.4	$	325.5	$	64.9		19.9	%
East Region Totals	84	92.5	98	93.0
Dollars					$	485,876	$	536,974	$	(51,098	)	(9.5	)%
Homes ordered					1,203		1,432		(229		)	(16.0	)%
Average sales price					$	403.9	$	375.0	$	28.9		7.7	%


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,
	2016		2015		2016		2015		2017		2016
Cancellation Rates ⁽¹⁾
									Ending	Average	Ending	Average
Active Communities
Total	14	%	15	%	12	%	12	%	257	256.5	241	242.0
West Region
Arizona	12	%	11	%	12	%	9	%	39	40.5	43	42.5
California	19	%	14	%	13	%	10	%	26	27.5	25	24.5
Colorado	13	%	18	%	10	%	11	%	10	10.0	12	13.0
West Region Totals	14	%	14	%	12	%	10	%	75	78.0	80	80.0
Central Region - Texas
Central Region Totals	16	%	19	%	15	%	15	%	92	88.5	73	71.5
East Region
Florida	13	%	11	%	11	%	14	%	30	31.0	26	26.0
Georgia	12	%	16	%	13	%	13	%	19	18.0	17	17.5
North Carolina	10	%	11	%	8	%	10	%	20	19.0	22	23.0
South Carolina	15	%	9	%	8	%	8	%	14	14.5	16	16.0
Tennessee	7	%	23	%	8	%	10	%	7	7.5	7	8.0
East Region Totals	12	%	12	%	10	%	12	%	90	90.0	88	90.5



	Six Months Ended June 30,
	2017		2016
	Ending	Average	Ending	Average
Active Communities
Total	257	250.0	241	247.5
West Region
Arizona	39	40.5	43	42.0
California	26	27.0	25	24.5
Colorado	10	10.0	12	14.0
West Region Totals	75	77.5	80	80.5
Central Region - Texas
Central Region Totals	92	86.0	73	72.5
East Region
Florida	30	28.5	26	28.5
Georgia	19	18.0	17	17.0
North Carolina	20	18.5	22	24.0
South Carolina	14	14.5	16	17.0
Tennessee	7	7.0	7	8.0
East Region Totals	90	86.5	88	94.5



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Cancellation Rates ⁽¹⁾
Total	13	%	11	%	13	%	11	%
West Region
Arizona	12	%	12	%	13	%	12	%
California	15	%	9	%	13	%	10	%
Colorado	8	%	8	%	10	%	9	%
West Region Totals	13	%	10	%	12	%	10	%
Central Region - Texas
Central Region Totals	15	%	16	%	14	%	14	%
East Region
Florida	11	%	9	%	12	%	10	%
Georgia	18	%	12	%	18	%	13	%
North Carolina	9	%	9	%	8	%	7	%
South Carolina	14	%	7	%	11	%	5	%
Tennessee	8	%	10	%	13	%	9	%
East Region Totals	12	%	9	%	12	%	9	%


(1)	Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.


	At September 30,				Quarter over Quarter					At June 30,				Quarter over Quarter
	2016		2015		Chg $			Chg %		2017		2016		Change $			Change %
Order Backlog ⁽¹⁾
Total
Dollars	$	1,375,857	$	1,264,872	$	110,985		8.8	%	$	1,448,782	$	1,396,165	$	52,617		3.8	%
Homes in backlog	3,251		3,043		208			6.8	%	3,428		3,314		114			3.4	%
Average sales price	$	423.2	$	415.7	$	7.5		1.8	%	$	422.6	$	421.3	$	1.3		0.3	%
West Region
Arizona
Dollars	$	182,574	$	129,023	$	53,551		41.5	%	$	183,480	$	154,851	$	28,629		18.5	%
Homes in backlog	503		355		148			41.7	%	529		411		118			28.7	%
Average sales price	$	363.0	$	363.4	$	(0.4	)	(0.1	)%	$	346.8	$	376.8	$	(30.0	)	(8.0	)%
California
Dollars	$	208,175	$	241,377	$	(33,202	)	(13.8	)%	$	237,629	$	224,311	$	13,318		5.9	%
Homes in backlog	326		397		(71		)	(17.9	)%	392		361		31			8.6	%
Average sales price	$	638.6	$	608.0	$	30.6		5.0	%	$	606.2	$	621.4	$	(15.2	)	(2.4	)%
Colorado
Dollars	$	167,475	$	168,329	$	(854	)	(0.5	)%	$	157,508	$	185,376	$	(27,868	)	(15.0	)%
Homes in backlog	317		358		(41		)	(11.5	)%	267		363		(96		)	(26.4	)%
Average sales price	$	528.3	$	470.2	$	58.1		12.4	%	$	589.9	$	510.7	$	79.2		15.5	%
West Region Totals
Dollars	$	558,224	$	538,729	$	19,495		3.6	%	$	578,617	$	564,538	$	14,079		2.5	%
Homes in backlog	1,146		1,110		36			3.2	%	1,188		1,135		53			4.7	%
Average sales price	$	487.1	$	485.3	$	1.8		0.4	%	$	487.1	$	497.4	$	(10.3	)	(2.1	)%
Central Region - Texas
Central Region Totals
Dollars	$	381,764	$	373,135	$	8,629		2.3	%	$	460,761	$	402,329	$	58,432		14.5	%
Homes in backlog	1,008		1,036		(28		)	(2.7	)%	1,233		1,062		171			16.1	%
Average sales price	$	378.7	$	360.2	$	18.5		5.1	%	$	373.7	$	378.8	$	(5.1	)	(1.3	)%
East Region
Florida
Dollars	$	161,148	$	143,597	$	17,551		12.2	%	$	190,943	$	150,849	$	40,094		26.6	%
Homes in backlog	370		341		29			8.5	%	442		368		74			20.1	%
Average sales price	$	435.5	$	421.1	$	14.4		3.4	%	$	432.0	$	409.9	$	22.1		5.4	%
Georgia
Dollars	$	58,944	$	31,457	$	27,487		87.4	%	$	42,789	$	57,580	$	(14,791	)	(25.7	)%
Homes in backlog	171		94		77			81.9	%	131		169		(38		)	(22.5	)%
Average sales price	$	344.7	$	334.6	$	10.1		3.0	%	$	326.6	$	340.7	$	(14.1	)	(4.1	)%
North Carolina
Dollars	$	118,515	$	110,907	$	7,608		6.9	%	$	98,492	$	128,619	$	(30,127	)	(23.4	)%
Homes in backlog	283		263		20			7.6	%	223		311		(88		)	(28.3	)%
Average sales price	$	418.8	$	421.7	$	(2.9	)	(0.7	)%	$	441.7	$	413.6	$	28.1		6.8	%
South Carolina
Dollars	$	53,657	$	34,257	$	19,400		56.6	%	$	39,093	$	53,881	$	(14,788	)	(27.4	)%
Homes in backlog	153		106		47			44.3	%	111		158		(47		)	(29.7	)%
Average sales price	$	350.7	$	323.2	$	27.5		8.5	%	$	352.2	$	341.0	$	11.2		3.3	%
Tennessee
Dollars	$	43,605	$	32,790	$	10,815		33.0	%	$	38,087	$	38,369	$	(282	)	(0.7	)%
Homes in backlog	120		93		27			29.0	%	100		111		(11		)	(9.9	)%
Average sales price	$	363.4	$	352.6	$	10.8		3.1	%	$	380.9	$	345.7	$	35.2		10.2	%
East Region Totals
Dollars	$	435,869	$	353,008	$	82,861		23.5	%	$	409,404	$	429,298	$	(19,894	)	(4.6	)%
Homes in backlog	1,097		897		200			22.3	%	1,007		1,117		(110		)	(9.8	)%
Average sales price	$	397.3	$	393.5	$	3.8		1.0	%	$	406.6	$	384.3	$	22.3		5.8	%


(1)	Our backlog represents net sales that have not closed.

Operating Results

Companywide. Home closing revenue for the three months ended ~~September~~June 30, ~~2016 increased 11.2% to $735.9 million when compared to the same quarter of the~~2017 was up nominally from prior year, ~~driven by~~increasing 0.2% to $797.8 million despite 2.3% lower closing volume, as a ~~5.1% increase in volume for 88 additional home closings with~~result of higher average sales prices of ~~$22,200~~$10,500, or ~~5.7%~~2.6%. Home orders ~~also~~volume improved ~~during the quarter,~~year over year, with order value growing by ~~13.6%~~3.9% to ~~$715.6~~$878.7 million on ~~1,737~~2,153 homes in ~~2016~~the second quarter of 2017 as compared to ~~$630.0~~$845.3 million on ~~1,567~~2,073 homes in ~~2015. This was primarily~~ the ~~result~~second quarter of 2016. We maintained a relatively flat ending community count, opening 26 new communities and closing out 25 communities during the ~~10.8% additional units, along with a $10,000 increase in average sales prices. Improved home orders and higher average sales prices resulted in our 208-home and $111.0 million increase in~~second quarter of 2017 for an ending ~~backlog, 6.8% and 8.8% higher than the prior year, respectively. In the three months ended September 30, 2016, the~~count of 257 actively selling communities. Our company-wide orders pace ~~grew in many~~ of ~~the markets in which we operate, providing a consolidated 14.1% year-over-year improvement with 7.3~~8.4 homes ordered per average ~~number of communities in 2016 compared to 6.4~~community in the ~~comparable 2015 period.~~

second quarter of 2017 is relatively consistent with 8.6 in the prior year. We ended the quarter with 3,428 homes in backlog, up 114 units or 3.4% from 2016 and with a higher backlog value of $52.6 million, up 3.8%. For the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, home ~~closings~~closing units and revenue grew by ~~635~~49 units and ~~$357.1~~$66.9 million for ending home closing revenue of ~~$2.1~~$1.5 billion, ~~20.2%~~4.8% higher than the ~~nine~~six month period in ~~2015. The combination of improved order volume~~2016. Orders for the six months ended June 30, 2017 were up 5.6% from the prior year and, ~~higher~~coupled with average sales ~~prices, 4.8% and 3.2%, respectively, led to 5,797 homes ordered with a~~price increases, order value ~~of $2.4 billion as of September 30, 2016.~~

rose 7.4%.

~~West.~~West. During the three months ended ~~September~~June 30, ~~2016,~~2017, the West region led the company in home closing volume and revenue, as well as year-over-year growth in ~~home closing revenue.~~these metrics. Home closing revenue rose ~~16.7%~~11.1% over the ~~2015~~2016 period, ~~mainly~~primarily from the ~~$61,000 increase in average sales prices,~~76 additional units closed, resulting in ~~671~~804 closings valued at ~~$315.3~~$369.6 million for the three months ended ~~September~~June 30, ~~2016, compared to 661 closings and $270.2 million, respectively, for 2015.~~2017. Order units and value in the West Region improved by ~~22.0%~~1.9% and ~~23.2%~~0.9%, respectively, ending the quarter with ~~682~~804 orders valued at ~~$308.9 million versus 559 orders valued at $250.7 million~~$369.4 million. Community count in the ~~prior year. The additional 123 units ordered is a result of the improved~~West was down, although orders pace ~~of 8.6~~improved with 10.3 for the quarter ended ~~September~~June 30, ~~2016~~2017 as compared to ~~6.9~~9.9 in ~~2015, demonstrating~~2016. Arizona drove the ~~high demand~~improvements in ~~the Region.~~

~~California was the largest contributor to~~ home ~~closing revenue~~closings and orders in the Region during the ~~third~~second quarter, ~~with $142.1 million on 251 units, 18.0% and 6.4% increases over 2015, respectively. We opened several new communities across California during~~as well as the period, resulting in a 17.4% increase in average active communities over prior year. This increase contributed to a 6.4% increase in orders along with a 14.4% increase in order value, resulting from a $40,800 increase in average sales prices. The exceptionally fast sell out of several Northern California communities contributed to some slowing inrising orders pace, ~~however~~although demand is high throughout the entire region. Colorado and California still maintains a pace that exceeds the company average. Colorado provided the largest gains on closings within the Region over prior year with 47.8% and 35.8% increases in home closing revenue and units, respectively. The increase in closings, coupled with a $40,900 increase in average sales prices resulted in $84.1 million in home closing revenue in the third quarter of 2016 compared to $56.9 million in 2015. Colorado also provided higher orders year over year, with a 103.7% improvement in orders pace which more than offset the 29.0% decline in the average number of actively-selling communities. This translated to a 44.0% increase in orders over the third quarter of 2015, ending with 121 homes ordered valued at $66.2 million. The tremendous demand in this market is evidenced in the rising average sales prices and the 11.0 orders per average number of communities, theboast our highest orders pace in the ~~company. We expect~~company and we are actively working to open additional communities, as the ~~rising average~~pace at which we are currently selling is translating to faster community sell out than originally anticipated. Average sales prices in the Region are starting to temper as ~~we introduce more communities targeted~~Arizona is contributing a larger percentage to ~~first time move-up homebuyers currently expected to open for sales in 2017. Home closing revenue in Arizona declined by 4.1% to $89.1 million, as we closed 16.2% fewer units than in 2015 mainly due~~the Region's results and is shifting to a ~~slower spring~~higher number of lower priced, faster selling ~~season in 2016 than prior year. The 27.7% improved orders pace, from 6.5 in 2015~~communities aimed to 8.3 in 2016, provided total order value growth of 20.6%, or $19.9 million. As evidenced by the stronger orders pace, demand is strengthening in some segments of the Arizona market, particularly in some of our newly opened communities that appeal to the first time homebuyer segment which have lower average sales prices.

first-time buyers.

Year-to-date results in the West Region ~~reflect~~were similar to that of the ~~largest improvements in closings and associated revenue in the company over prior year.~~second quarter of 2017. The number and value of units closed versus prior year ~~increased~~improved by ~~19.1%~~11.5% and ~~30.4%~~12.8%, respectively, ~~with increases~~driven by significant growth in ~~all states within~~Arizona. Orders in Arizona were also the ~~Region. Orders and order value also improved in all states~~driver for ~~a total increase of $79.1 million or 8.6%, with 85 additional~~the Region's 12.8% higher orders ~~and a $19,100 increase in average sales price. Demand in the West remains high, providing the strongest orders pace in the Company. The high demand, as well as a shift in product mix compared~~year to ~~prior year, has helped to drive improving average sales prices in each market in the West.~~date. The Region ended the ~~third quarter~~six-month period with overall growth in order value of $85.2 million on 191 more units and ending backlog of ~~$19.5~~$578.6 million on ~~36 additional units, ending the quarter with 1,146 homes valued at $558.2 million.~~

1,188 units.

~~Central.~~Central. In the ~~third~~second quarter of ~~2016,~~2017, the Central Region, made up of our Texas markets, closed ~~542~~610 homes and generated ~~$199.5~~$225.7 million in home closing revenue, ~~4.8%~~improvements of 9.7% and ~~8.7% improvements,~~9.1%, respectively, leading to overall year over year home closing revenue growth of ~~$16.0~~$18.8 million. ~~Orders also~~We continue to see improved demand trends in the ~~third quarter, growing~~Central Region, evidenced by ~~8.0%~~the improved orders and orders pace in the second quarter. We are answering the demand in this Region with a strong transition to first-time buyers, as evidenced in the moderately decreasing average sales prices year over year. Orders grew by 29.8% to a total of ~~488~~714 units valued at ~~$178.9~~$254.6 million as compared to ~~452~~550 units valued at ~~$165.2~~$202.9 million in the prior year. Average community count and orders pace increased by

~~8.1%~~ 23.8% and 5.2%, respectively, in the ~~third~~second quarter, while orders pace remained consistent with prior year at 6.6 orders per average number of communities. While our Houston market continues to perform below recent years and there has been some softening at higher price points in our Dallas/Ft. Worth market, the Central Region historically provides our least volatile results year-over-year. We remain confidentdirectly resulting in the ~~long-term outlook for~~higher orders year over year.

Year-to-date saw overall improvements in the Region ~~and we have significant plans for growth through community openings scheduled over the next twelve months.~~

~~Year-to-date results in the Central Region echoed the third quarter results with 6.6% and 11.0% increases in~~as well. Home closings and home closing revenue ~~respectively. Order~~were up 8.2% and 9.1%, respectively, and orders and order value ~~improved~~were up year over year by $23.4 million over prior year, primarily as a result of a $17,600 increase in average sales prices coupled with a slight decline in orders. Average community count year to date improved 13.2% over prior year.23.3% and 20.9%, respectively. The Region ended the quarter with 1,233 homes in backlog ~~of 1,008 homes~~ valued at ~~$381.8~~$460.8 million, ~~a 2.3% improvement in backlog value primarily driven by an $18,500 increase in average sales prices.~~

16.1% and 14.5% improvements, respectively.

~~East.~~East. Our East region generated ~~587~~492 closings ~~and $221.1 million in revenue~~ in the third quarter of 2016, 9.9% and 6.2% increases, respectively, from the same period in 2015. Order value in the East region grew $13.6 million on 11 additional units over prior year primarily as a result of a $16,600 increase in average sales prices despite a 10.9% decrease in average community count. The Region benefited from a 13.8% higher orders pace with significant improvements over prior year in nearly all of our markets. We anticipate opening several new communities in the Region during the firstsecond quarter of 2017, ~~in advance of the spring selling season.~~

The Florida market, as the largest contributor to the Region's results, reported $85.6 million in home closing revenue on 206 closings. The 2.0% increase in homes closed during the quarter was offset by an average sales pricea decline of ~~$31,200, resulting in a 5.1% decrease in revenue compared to~~26.1% from the prior year. ~~A shift~~The decline in ~~product mix in the state directly contributed to the sales price decline as several luxury communities~~closing volume was partially offset with ~~above-average sales prices contributed~~ a higher percentage of closings in the third quarter of 2015 than 2016. The Florida market generated 208 orders for the three-month period ending September 30, 2016, an 8.4% decrease from 2015, which was offset by an 11.3%6.9% or $26,700 increase in average sales price, ~~for a total order value of $95.9 million. The improvement~~as all markets in the Region experienced higher average sales prices on ~~orders during the~~their second quarter relates primarily to product mix with a larger percentage of 2016 order value from communities at higher price points than the comparable 2015 period. The order volume decline was largely the result of 14.8% fewer average communities during the quarter, which was partially offset by an 8.1% improvement in orders pace overclosings versus prior year. ~~Several community openings are planned in Florida~~Order volume dropped by 99 units, or 13.5%, with higher average sales prices of $24,600, or 6.5%, partially offsetting the unit decline. Lower beginning backlog and a lower number of actively-selling communities entering the year have impacted home closing volume and associated revenues in the ~~early part of 2017.~~Operations in North Carolina expanded their overall contribution to the Region's results year-over-year, with 177 homes closed and $71.6 million in home closing revenue, 7.3% and 12.8% improvements, respectively. In addition, North Carolina contributed 149 homes ordered and $61.5 million in order value in the thirdsecond quarter of 2017 versus 2016. Order volume and value increased by 8.0% and 7.6%, respectively, over the prior year due primarily to the 32.7% improvement in orders pace despite a temporary reduction in the average community count. NewThe delay of certain community openings in 2017 and the ~~North Carolina market are scheduled for the first half of 2017. Tennessee generated significant home closing revenue~~transition to updated product offerings has also had an impact on our results on orders. Community count growth in the third quarter of 2016, $5.8 million higher than the respective period in 2015 on 20 more units, representing 72.5% and 80.0% increases over prior year. The largest driver for this was the 23.1% increase in average actively-selling communities year to date, which also contributed to the 50.0% higher number of units ordered and 47.2% increase in order value. Growth in Georgia continues to behigh-demand sub-markets is a strategic focus for us ~~as this~~in the East Region and has been intentionally timed to coincide with the roll-out of our new product offering throughout the majority of the region. While certain markets have seen community count growth thus far, we still have a significant number of additional new communities anticipated to open in the next several months in the region. We expect these new communities with updated plan offerings will capture the existing strong market ~~demonstrates solid buyer~~ demand and ~~is one of the strongest homebuilding markets~~provide improved orders and orders pace in the country. Accordingly, operations in Georgia continue to expand and provided 83 closings valued at $27.5 million during the third quarter of 2016, 33.9% and 33.0% increases over prior year, respectively. Orders in Georgia grew by 26.9% or 18 units, largely attributable to a 22.0% increase in the orders pace during the quarter combined with a nominal increase in average communities. Total order value improved by $5.7 million year over year. The South Carolina market provided 76 closings and $22.7 million in home closing revenue during the third quarter of 2016, down 5.0% and 12.2% respectively from prior year, primarily due to a 16.2% decline in average communities. This decline also contributed to a 17 unit or 19.3% decline in orders during the third quarter compared to prior year.future.

The year-to-date results of the East Region ~~results through September 30, 2016~~ were similar to those of the ~~third~~second quarter, with ~~1,714~~944 units closed, providing ~~$652.1~~$388.4 million in home closing revenue, ~~15.0%~~16.2% and ~~15.8% higher~~9.9% lower than the ~~2015 period.~~2016 period, respectively. The number and value of orders also ~~improved~~declined by ~~195~~229 units and ~~$74.4~~$51.1 million, ~~each representing increases of 10.8% over the prior year. The Region finished the third quarter of 2016 with 1,097 units~~contributing to a year-over-year decline in backlog of 110 units, ending the second quarter with ~~a value of $435.9 million, 22.3% and 23.5% improvements over 2015, respectively.~~1,007 units valued at $409.4 million.

Land Closing Revenue and Gross Profit

From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of ~~$17.0~~$4.2 million and ~~$8.1~~$2.1 million for the three months ending ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$21.2 million~~$16.4 and ~~$16.3~~$4.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015, respectively. For both years, modest profits were achieved on these land~~

~~sales, $0.9 million and $0.6 million for the three months ended September 30,~~ 2016, ~~and 2015, respectively and $1.7 million and $1.3 million for the nine months ended September 30, 2016 and 2015,~~ respectively.

Other Operating Information (dollars in thousands)


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended June 30,								Six Months Ended June 30,
	2016				2015				2016				2015				2017				2016				2017				2016
	Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue		Dollars		Percent of Home Closing Revenue
Home Closing Gross Profit ⁽¹⁾
Total	$	130,979	17.8	%	$	125,617	19.0	%	$	372,072	17.5	%	$	335,341	18.9	%	$	140,910	17.7	%	$	137,746	17.3	%	$	248,178	17.0	%	$	241,093	17.3	%

West	$	56,381	17.9	%	$	50,377	18.6	%	$	156,879	17.3	%	$	126,274	18.1	%	$	65,962	17.8	%	$	57,184	17.2	%	$	114,467	17.1	%	$	100,498	16.9	%

Central	$	39,546	19.8	%	$	39,247	21.4	%	$	112,664	19.9	%	$	109,973	21.5	%	$	45,856	20.3	%	$	41,016	19.8	%	$	79,132	19.8	%	$	73,118	19.9	%

East	$	35,052	15.9	%	$	35,993	17.3	%	$	102,529	15.7	%	$	99,094	17.6	%	$	29,092	14.4	%	$	39,546	15.4	%	$	54,579	14.1	%	$	67,477	15.7	%

(1)

Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings includes land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.

Companywide. Home closing gross profit for the three ~~and nine~~ months ended ~~September~~June 30, ~~2016 was $131.0 million and $372.1 million, respectively, increases of $5.4 million and $36.7~~2017 increased $3.2 million versus the respective ~~periods~~period in ~~2015~~2016 as a result of higher home closing revenue ~~from more units closed~~ and ~~higher average sales prices. The 120 and 140 basis point declines~~a 40-basis-point improvement in home closing gross margin ~~for~~year over year. With improved demand and pricing power, we have been successful in some markets in minimizing the ~~three and nine months ended September 30, 2016, respectively, is primarily from a combination~~impact of ~~higher labor, construction and land costs~~rising costs. Charges incurred on asset write-offs in the ~~2016 periods than~~second quarter of 2017 of approximately $1.2 million impacted gross margin by 20 basis points in the ~~comparable~~second quarter of 2017 and were primarily related to price reductions in a slow-moving Southern California community. Impairment charges in 2016 had a 30-basis-point impact on the prior year periods, partially offset by increasing average sales prices. Labor costs have not yet normalized and land prices continue to place pressure on margins, as most of our markets continue to experience steadily increasing land prices. Despite the year over year decline,period home closing gross margin, ~~improved sequentially from~~as well. For the ~~second~~six months ended June 30, 2017, home closing gross profit increased by $7.1 million over the 2016 period, but margins declined by 30 basis points. The year-over-year decline in home closing gross margin is largely the result of reduced leverage and relatively higher costs in the first quarter of 2017 as compared to 2016, ~~by 50 basis points, thanks in part to our success in achieving higher average sales prices in high demand markets.~~creating a drag on year-to-date margins.

West. Our West Region reported ~~lower~~higher year-over-year home closing gross margin ~~17.9%~~ for ~~the third quarter of 2016 compared to 18.6% in 2015, although improved sequentially by 70 basis points from~~ the second quarter of ~~2016.The year-over-year margin decline is largely the result~~2017 of higher land prices in the Region, as we are focused on building communities in highly sought-after submarkets, which demand high land prices. In particular, 2015 margins in the Southern California markets benefited from lower land prices in several communities that are now closed as17.8% compared to 17.2% in 2016, and 17.1% versus 16.9% for the ~~replacement communities with closings in 2016.~~ six months ended June 30, 2017 and 2016, respectively.We are making concerted efforts to maximize margins in the Region and have been successful with raising average sales prices in certain markets ~~that~~to offset land and labor cost increases. ~~Home~~Higher volume has also helped with the improved home closing gross margin as we leverage construction overhead costs. Margin improvement was tempered by asset write-offs, primarily in Southern California and impacted gross margin by 30 and 20 basis points for the ~~nine~~three and six months ended ~~September~~June 30, 2017, respectively. 2016 ~~also declined from 18.1% in 2015 to 17.3% in 2016~~asset write-offs had a 10-basis-point impact for both the ~~same reasons noted for the third quarter.~~three- and six-month periods.

Central. The Central Region produced the highest home closing gross margin in the company ~~although the third quarter margins declined~~and improved 50 basis points year over year, with 20.3% in 2017 versus 19.8% in ~~2016 versus 21.4%~~2016. Year to date, the Region's margins were relatively flat, declining year over year by 10 basis points. We believe the volatility from oil price uncertainty has recently started to stabilize. This stability coupled with the improving demand trends across the Region, is resulting in ~~2015. While we have experienced some~~ pricing power, which combined with improved average sales prices, the increases are at a slower pace than that of rising labor, construction and land costs. In addition, several higher margin communities closed out, providing fewer 2016 closings than in the prior year. Year-to-dateincreasing volume translates to solid margins in this ~~Region declined to 19.9% in 2016 versus 21.5% in 2015, also related to the circumstances described for the third quarter.~~Region.

East. The East Region gross margins in the ~~third~~second quarter ~~and first nine months~~ of ~~2016~~2017 of ~~15.9% and 15.7%, respectively,~~14.4% declined from 15.4% in the ~~17.3% and 17.6% for~~2016 period. Year-to-date margin had similar year-over-year fluctuations, declining 160 basis points to 14.1% in 2017 versus 15.7% in 2016. Lower margins in the ~~respective periods in 2015. Margins improved sequentially from the second quarter by 50 basis points. A shift in product mix in Florida contributed~~Region are largely attributed to the ~~decline in margin year over year, as several luxury~~mix of closings from communities ~~that generated above-average margins~~ with high closing volume in 2015 tapered off in 2016. This Region currently delivers our lowest gross margins, although our newer divisions are seeing improvements in terms of operational efficiencies, as their volumes are increasing and we continue to shiftolder product ~~mix as we expand our operations in these markets.~~offerings where

demand was not as robust, limiting our pricing power. As we are in a period of growth in several of the markets in this Region, we expect that our scheduled community count openings with our new product offering in high demand areas will provide us with pricing power opportunities as well as greater leverage of overhead costs.

Financial Services Profit (in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2016 2015 2015 2014
Financial services profit $ 5,956
$ 5,601
$ 15,765
$ 13,517



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Financial services profit	$	5,557	$	5,763	$	9,847	$	9,809

Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title company, Carefree Title, as well as our portion of earnings from a mortgage joint venture. ~~The increase in financial services profit year over year is the result of the increases in home closings and revenue.~~

Selling, General and Administrative Expenses and Other Expenses ($ in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2017			2016			2017			2016
Commissions and Other Sales Costs
Dollars	$	(52,478	)	$	(48,097	)	$	(155,034	)	$	(134,876	)	$	(54,701	)	$	(56,379	)	$	(103,021	)	$	(102,556	)
Percent of home closing revenue	7.1		%	7.3		%	7.3		%	7.6		%	6.9		%	7.1		%	7.1		%	7.4		%
General and Administrative Expenses
Dollars	$	(33,258	)	$	(28,774	)	$	(91,774	)	$	(86,074	)	$	(29,591	)	$	(28,898	)	$	(59,213	)	$	(58,516	)
Percent of total closing revenue	4.4		%	4.3		%	4.3		%	4.8		%	3.7		%	3.6		%	4.0		%	4.2		%
Earnings/(Loss) from Other Unconsolidated Entities, Net
Earnings from Other Unconsolidated Entities, Net
Dollars	$	440		$	(123	)	$	856		$	(415	)	$	570		$	573		$	943		$	416
Interest Expense
Dollars	$	(167	)	$	(4,187	)	$	(5,127	)	$	(11,962	)	$	(1,620	)	$	(1,672	)	$	(2,445	)	$	(4,960	)
Other Income, Net
Dollars	$	1,435		$	(3,996	)	$	3,263		$	(3,445	)	$	2,080		$	1,545		$	3,190		$	1,828
Provision for Income Taxes
Dollars	$	(16,915	)	$	(16,360	)	$	(43,989	)	$	(37,538	)	$	(21,625	)	$	(19,158	)	$	(34,822	)	$	(27,074	)

Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. ~~As a result of the additional revenues on homes closed, these~~These costs ~~increased~~decreased by ~~$4.4 million and $20.2~~$1.7 million for the three ~~and nine~~ months ended ~~September~~June 30, 2017 versus 2016 ~~respectively, versus the 2015 periods.~~and increased $0.5 million year to date. As a percentage of home closing revenue, commissions and other sales costs declined by 20 basis points to 6.9% during the three months ended June 30, 2017, and declined by 30 basis points ~~respectively,~~ to 7.1% ~~and 7.3% during~~for the ~~three and nine~~six months ended ~~September~~June 30, ~~2016 compared to~~2017. This is the ~~respective 2015 periods as a~~ result of improved overhead leverage onand the ~~additional revenue dollars. We have made concerted efforts to contain these costs and recently modified our internal~~revised commission structure ~~as part~~we implemented in the latter half of ~~our~~2016 and other cost-cutting ~~initiatives.~~measures.

General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months ended ~~September~~June 30, ~~2016,~~2017, general and administrative expenses were ~~$33.3~~$29.6 million ~~compared to $28.8 million in 2015. For the nine months ended September 30, 2015, we had $91.8 million in expenses~~ as compared to ~~$86.1~~$28.9 million for the ~~same period~~2016 period. For the six months ended June 30, 2017, these costs were $59.2 million versus $58.5 million in ~~2015.~~2016. As a percentage of total closing revenue, these costs were relatively flat, increasing by 10 basis points for the ~~three month~~three-month period ending ~~September~~June 30, ~~2016~~2017 to ~~4.4% and declining~~3.7%, while decreasing by 5020 basis points ~~for the nine-month period ending September 30, 2016~~year to ~~4.3%. This~~date. The improved leverage year to date is mainly attributable to the additional closing revenue in ~~2016~~2017 over ~~2015.~~2016. We continually strive to optimize overhead leverage through cost control efforts at both corporate and divisional levels.

~~Earnings/(Loss)~~Earnings from Other Unconsolidated Entities, Net. ~~Earnings/(loss)~~Earnings from other unconsolidated entities, net represents our portion of pre-tax earnings/(losses) from non-financial services joint ventures. Included in this amount is both the pass through of earnings/(losses) from the joint ventures' most recently available financial statements as well as any accrued expected earnings/(losses) for the periods presented that might not have been reflected in the joint ventures' financial statements provided to us. The ~~three- and nine-month~~three-month periods ended ~~September~~June 30, 2017 and 2016 both reported earnings of $0.6 million. The six-month period ended June 30, 2017 reported earnings of $0.9 million as compared to $0.4 million ~~and $0.9 million, respectively, compared to losses for~~in the ~~prior year periods of $0.1 million and $0.4 million, respectively. The~~ 2016 ~~earnings are the result of land sales recorded in our land joint ventures in 2016, with minimal comparable land sales in 2015.~~period.

Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, convertible senior notes, other borrowings, and our Credit Facility. Interest expense decreased year over year for both the three- and ~~nine-month~~six-

month periods, as we have more inventory under development that qualifies for interest capitalization. ~~During the three months ended September 30, 2016 and September 30, 2015, our~~Our non-capitalizable interest expense was ~~$0.2~~$1.6 million and ~~$4.2~~$2.4 million ~~respectively. For~~for the ~~year-to-date results, our interest expense~~three and six months ended June 30, 2017, respectively, and was ~~$5.1~~$1.7 million and ~~$12.0~~$5.0 million, ~~respectively.~~respectively, for the 2016 periods.

Other ~~Income/(Expense),~~Income, Net. Other ~~income/(expense),~~income, net, primarily consists of (i) forfeited deposits from potential homebuyers who canceled their purchase contracts with us, (ii) sublease income, (iii) interest earned on our cash and cash equivalents, and (iv) payments and awards related to legal settlements. For the three-month period, Other ~~income/(expense),~~income, net ~~was favorably impacted~~includes $0.3 million in ~~2016 both in the third quarter and year to date by interest income from municipalities~~charges related to ~~reimbursable land development costs while~~the early repurchase of a ~~$4.1~~portion of our convertible notes. These charges were offset by a higher amount of forfeited buyer deposits and other minor activity contributing to $0.5 million ~~adverse legal ruling unfavorably impacted the same periods in~~increase over the prior year.

Income Taxes. Our effective tax rate was ~~31.4%~~34.2% and ~~35.1%~~32.5% for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~31.0%~~34.8% and ~~33.1%~~30.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~2015,~~2016, respectively. Our tax rate has been favorably impacted in both years by the homebuilding manufacturing deduction. Due to ~~the timing~~expiration of ~~enabling~~ legislation related to federal energy tax credits for tax years after 2016, only the 2016 effective tax rate ~~for both~~reflects the ~~three and nine months ended September 30, 2016 was reduced, whereas prior year rates were not impacted until the fourth quarter.~~benefit of federal energy credits.

Liquidity and Capital Resources

Overview

Our principal uses of capital in ~~2016~~the first six months of 2017 were acquisition and development of new and strategic lot positions, operating expenses, home construction and the payment of routine liabilities. ~~In the first nine months of 2016, we~~We used funds generated by operations and borrowings under our Credit Facility to meet our short-term working capital requirements. We remain focused on acquiring desirable land positions, generating increasing margins in our homebuilding operations and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.

Operating Cash Flow Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 and ~~September~~June 30, ~~2015,~~2016, net cash used in operations totaled ~~$148.3~~$130.7 million and ~~$53.2~~$110.6 million, respectively. Operating cash flows in both ~~2016~~2017 and ~~2015~~2016 benefited from cash generated by net earnings of ~~$97.7~~$65.2 million and ~~$75.8~~$60.8 million, respectively, offset mainly by increases in real estate of ~~$318.5~~$211.4 million and ~~$198.5~~$194.0 million, respectively, reflecting increased land and land development spending.

Investing Cash Flow Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, net cash used in investing activities totaled ~~$12.4~~$7.4 million as compared to ~~$12.5~~$7.6 million for the same period in ~~2015.~~2016. Cash used in investing activities in ~~2016~~2017 and ~~2015~~2016 is mainly attributable to the purchases of property and equipment of ~~$12.3~~$8.3 and $7.6 million ~~in both periods.~~for 2017 and 2016, respectively.

Financing Cash Flow Activities

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, net cash provided by financing activities totaled ~~$6.4~~$223.2 million as compared to ~~$197.9~~net cash used in financing activities of $15.8 million for the same period in ~~2015.~~2016. The net cash provided by financing activities in ~~2016~~2017 is primarily the result of ~~$25.0~~$296.0 million in net proceeds received from our ~~Credit Facility~~5.125% bond issuance offset partially by repayments of ~~loans payable~~our Credit Facility and ~~other borrowings~~$52.1 million of ~~$18.3 million.~~repurchases of a portion of our Convertible Senior Notes. Our ~~2015~~2016 results were mainly attributable to ~~$200.0~~$15.5 million in ~~proceeds from the issuance~~payments of ~~our 2025 senior notes.~~

notes payable and other borrowings.

Overview of Cash Management

Cash flows for each of our communities depend on their stage of the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and not recognized in our statement of operations until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently actively acquiring and developing lots in our markets to maintain and grow our lot supply and active community count. We are also using our cash on hand and draws under our Credit Facility, as needed, to fund operations in newer markets. As demand for new homes improves and we continue to expand our business, we expect cash outlays for land purchases, land development and home construction will continue to exceed our cash generated from operations in the near term.

During the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, we closed ~~5,238~~3,487 homes, purchased about ~~6,400~~5,000 lots for ~~$478.7~~$335.2 million, spent ~~$188.5~~$150.4 million on land development, paid ~~$54.7~~$35.7 million in lot purchase and option deposits, and started ~~approximately 6,142~~construction on 4,261 homes. The opportunity to purchase substantially finished lots in desired locations continues to be more limited and competitive as compared to prior years. As a result, we are purchasing more undeveloped land and partially-finished lots than in recent years and subsequently incurring development dollars in order to bring them to a finished status ready for home construction. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended the ~~third~~second quarter of ~~2016~~2017 with ~~$107.9~~$216.7 million of cash and cash equivalents, ~~a $154.3~~an $85.0 million ~~decrease~~increase from December 31, ~~2015.~~ 2016, primarily the result of the net proceeds from our June 2017 bond issuance.

We expect to generate cash from the sale of our inventory, but we intend to redeploy that cash to acquire and develop strategic and well-positioned lots to grow our business.

We believe that we currently have strong liquidity. Nevertheless, we may seek additional capital to strengthen our liquidity position, enable us to opportunistically acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs. We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase our outstanding senior and convertible senior notes.

In May 2017, we entered into an amendment to our Credit Facility, which among other things, increased the total commitments available from from $540.0 million to $625.0 million and extends the maturity date of a substantial portion of the Credit Facility. Of the total commitments, $60.0 million matures in July 2019 and the remaining $565.0 million matures in July 2021. In June 2017, we completed an offering of $300 million aggregate principal amount of Senior Notes due 2027, bearing interest at 5.125%. In addition, in June 2017 we redeemed $51.9 million of aggregate principal amount of our Convertible Notes in privately negotiated transactions. Our Convertible Notes may be redeemed by the note-holders on the fifth, tenth, and fifteenth anniversary dates of the Convertible Notes. The fifth anniversary is September 15, 2017. On or after September 20, 2017, we may redeem for cash all or part of the Convertible Notes at a redemption price equal to 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. The Company intends to issue a notice of redemption to the holders of its Convertible Notes to redeem all outstanding Convertible Notes ($74.6 million as of June 30, 2017) on September 20, 2017. Reference is made to Notes 5 and 6 in the accompanying unaudited consolidated financial statements.

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands):


	As of						As of
	September 30, 2016			December 31, 2015			June 30, 2017			December 31, 2016
Notes payable and other borrowings	$	1,139,815		$	1,117,040		$	1,357,530		$	1,127,314
Stockholders’ equity	1,367,405			1,258,937			1,492,439			1,421,495
Total capital	$	2,507,220		$	2,375,977		$	2,849,969		$	2,548,809
Debt-to-capital ⁽¹⁾	45.5		%	47.0		%	47.6		%	44.2		%
Notes payable and other borrowings	$	1,139,815		$	1,117,040		$	1,357,530		$	1,127,314
Less: cash and cash equivalents	(107,915		)	(262,208		)	(216,739		)	(131,702		)
Net debt	1,031,900			854,832			1,140,791			995,612
Stockholders’ equity	1,367,405			1,258,937			1,492,439			1,421,495
Total net capital	$	2,399,305		$	2,113,769		$	2,633,230		$	2,417,107
Net debt-to-capital ⁽²⁾	43.0		%	40.4		%	43.3		%	41.2		%


(1)	Debt-to-capital is computed as senior and convertible senior notes, net and loans payable and other borrowings divided by the aggregate of total senior and convertible senior notes, net and loans payable and other borrowings and stockholders' equity.

(2)

Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is total senior and convertible senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt to total capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing.

Credit Facility Covenants

Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of ~~$670.3~~$987.4 million (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of ~~September~~June 30, ~~2016.~~2017. Our actual financial covenant calculations as of ~~September~~June 30, ~~2016~~2017 are reflected in the table below.



Financial Covenant (dollars in thousands):	Covenant Requirement	Actual
Minimum Tangible Net Worth	> ~~$843,740~~$1,008,197	$~~1,330,036~~1,452,661
Leverage Ratio	< 60%	~~42%~~41%
Interest Coverage Ratio ⁽¹⁾	> 1.50	4.51
Minimum Liquidity ⁽¹⁾	> ~~$70,521~~$72,251	$~~550,540~~783,097
Investments other than defined permitted investments	< ~~$399,011~~$435,798	$~~11,831~~16,678


(1)	We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.

Off-Balance Sheet Arrangements

Reference is made to Notes 1, 3, 4, and 15 in the accompanying Notes to the unaudited consolidated financial statements included in this Quarterly Report on Form ~~10-Q.~~10-Q, which are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated.

Seasonality

Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy seasonally higher deliveries in the second half of the year. We expect this seasonal pattern to continue over the long term.

Recently Issued Accounting Pronouncements

See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting standards.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Our fixed rate debt is made up primarily of $175.0 million in principal of our 4.50% senior notes, $300.0 million in principal of our 7.15% senior notes, $300.0 million in principal of our 7.00% senior notes, $200.0 million in principal of our 6.00% senior notes, $300.0 million of our 5.125% senior notes, and ~~$126.5~~$74.6 million in principal of our 1.875% convertible senior notes. Except in limited circumstances, or upon the occurrence of specific trigger events for our convertible notes, we do not have an obligation to prepay our fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed rate borrowings until we would be required to repay such debt. Our Credit Facility is subject to interest rate changes as the borrowing rates are based on LIBOR or PRIME (see Note 5 in the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q).

Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margins and net income and would also increase our variable rate borrowing costs. We do not enter into, or intend to enter into, derivative financial instruments for trading or speculative purposes.



Item 4.	Controls and Procedures

In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have developed and implemented disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Form 10-Q (the “Evaluation Date”). Based on such evaluation, management has concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that information that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

During the fiscal quarter covered by this Form 10-Q, there has not been any change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

We are involved in various routine legal and regulatory proceedings, including, without limitation, claims and litigation alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of pending legal proceedings, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to the initiation of legal proceedings. We believe there are not any pending legal or warranty matters that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved. Information related to pending legal proceedings is presented in Note 15 - Commitments on Contingencies, in the accompanying consolidated financial statements and is incorporated by reference herein.



Item 1A.	Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, financial condition and/or operating results.



Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities:

~~We did not acquire any~~

A summary of ~~our own equity securities during~~the Company's repurchase activity for the three months ended ~~September~~June 30, ~~2016.~~2017 is as follows:



Period	Total Number of Shares Purchased ⁽¹⁾	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs ⁽²⁾
April 1, 2017 - April 30, 2017	—	$	—	—	$	130,202,650
May 1, 2017 - May 31, 2017	—	$	—	—	$	130,202,650
June 1, 2017 - June 30, 2017	—	$	—	—	$	130,202,650
Total	—			—


(1)	During the second quarter of 2017 the Company repurchased $51.9 million in aggregate principal amount of the Convertible Notes in privately negotiated transactions for $52.1 million in cash, inclusive of accrued interest (See Note 6 - Senior and Convertible Senior Notes, Net in the Notes to the Consolidated Financial Statements in Item I of this Form 10-Q for additional details).

(2)

On February 21, 2006, we announced that our Board of Directors approved a stock repurchase program, authorizing the expenditure of up to $100 million to repurchase shares of our common stock, in open market or privately negotiated transactions, based on market conditions and subject to certain price parameters. On August 15, 2006, the Board of Directors authorized an additional $100 million under this program. There is no stated expiration date for this program. As of June 30, 2017, we had approximately $130.2 million of the authorized amount available to repurchase shares under this program.

We have never declared cash dividends, nor do we intend to declare cash dividends in the foreseeable future. We plan to retain our cash to finance the continuing development of the business. Future cash dividends, if any, will depend upon financial condition, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.



Item 6.	Exhibits



Exhibit Number	Description	Page or Method of Filing
3.1	Restated Articles of Incorporation of Meritage Homes Corporation	Incorporated by reference to Exhibit 3 of Form 8-K dated June 20, ~~2002.~~2002

3.1.1	Amendment to Articles of Incorporation of Meritage Homes Corporation	Incorporated by reference to Exhibit 3.1 of Form 8-K dated September 15, ~~2004.~~2004

3.1.2	Amendment to Articles of Incorporation of Meritage Homes Corporation	Incorporated by reference to Appendix A of the Proxy Statement for the Registrant's 2006 Annual Meeting of ~~Stockholders.~~Stockholders

3.1.3	Amendment to Articles of Incorporation of Meritage Homes Corporation	Incorporated by reference to Appendix B of Proxy Statement for the Registrant's 2008 Annual Meeting of ~~Stockholders.~~Stockholders

3.1.4	Amendment to Articles of Incorporation of Meritage Homes Corporation	Incorporated by reference to Appendix A of the Definitive Proxy Statement filed with the Securities and Exchange Commission on January 9, ~~2009.~~2009

3.2	Amended and Restated Bylaws of Meritage Homes Corporation	Incorporated by reference to Exhibit 3.1 of Form 8-K dated ~~November 24, 2014.~~May 10, 2017

4.1	Indenture for 5.125% Senior Notes due 2027, and Form of Note	Incorporated by reference to Exhibit 4.1 of Form 8-K dated June 6, 2017

10.1	Amendment to Phillippe Lord Employment Agreement	Incorporated by reference to Exhibit 10.1 of Form 8-K dated May 15, 2017

10.2	Third Amendment to Amended and Restated Credit Agreement	Incorporated by reference to Exhibit 10.1 of Form 8-K dated May 31, 2017

10.3	Registration Rights Agreement relating to 5.125% Senior Notes due 2027	Incorporated by reference to Exhibit 10.1 of Form 8-K dated June 6, 2017

31.1	Rule 13a-14(a)/15d-14(a) Certification of Steven J. Hilton, Chief Executive Officer	Filed ~~herewith.~~herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial Officer	Filed ~~herewith.~~herewith

32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer	~~Filed herewith.~~Furnished herewith

101.0	The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q for the ~~quarter~~three and six months ended ~~September~~June 30, ~~2016,~~2017, were formatted in XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) ~~the~~ Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly ~~authorized, this 28th day of October 2016.~~authorized.




	MERITAGE HOMES CORPORATION, a Maryland Corporation

By:	/s/ HILLA SFERRUZZA
	Hilla Sferruzza Chief Financial Officer and Chief Accounting Officer (Duly Authorized Officer and Principal Financial Officer)

Date:	August 3, 2017

INDEX OF EXHIBITS



3.1		Restated Articles of Incorporation of Meritage Homes Corporation

3.1.1		Amendment to Articles of Incorporation of Meritage Homes Corporation

3.1.2		Amendment to Articles of Incorporation of Meritage Homes Corporation

3.1.3		Amendment to Articles of Incorporation of Meritage Homes Corporation

3.1.4		Amendment to Articles of Incorporation of Meritage Homes Corporation

3.2		Amended and Restated Bylaws of Meritage Homes Corporation

4.1		Indenture for 5.125% Senior Notes due 2027, and Form of Note

10.1		Amendment to Phillippe Lord Employment Agreement

10.2		Third Amendment to Amended and Restated Credit Agreement

10.3		Registration Rights Agreement relating to 5.125% Senior Notes due 2027

31.1		Rule 13a-14(a)/15d-14(a) Certification of Steven J. Hilton, Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

101.0		The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q for the ~~quarter~~three and six months ended ~~September~~June 30, ~~2016,~~2017, were formatted in XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.

4342



	At December 31, 2015
	West		Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	28,488	$	30,241		$	29,110		$	—	$	—		$	87,839
Real estate	1,008,457		505,954			583,891			—		—			2,098,302
Investments in unconsolidated entities	204		8,704			—			—		2,462			11,370
Other assets	55,112		87,313		(1)	77,548		(2)	898		261,395		(3)	482,266
Total assets	$	1,092,261	$	632,212		$	690,549		$	898	$	263,857		$	2,679,777