UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, ~~2017~~2018



☐¨	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

Meritage Homes Corporation

(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 ☒ý 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 ☒ý No ☐¨

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



Large accelerated filer	☒ý	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 ☒ý

Common shares outstanding as of ~~August 1, 2017: 40,320,282~~July 26, 2018: 40,649,453

MERITAGE HOMES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, ~~2017~~2018

TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets as of June 30, ~~2017~~2018 and December 31, ~~2016~~2017	3

Unaudited Consolidated Income Statements for the Three and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	4

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	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	39

Item 4. Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	40

Item 1A. Risk Factors	40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40

Items 3-5. Not Applicable

Item 6. Exhibits	41

SIGNATURES	42

INDEX OF EXHIBITS	42

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Assets
Cash and cash equivalents	$	216,739	$	131,702	$	169,426	$	170,746
Other receivables	73,109		70,355		78,395		79,317
Real estate	2,638,407		2,422,063		2,870,047		2,731,380
Real estate not owned	9,987		—		38,864		38,864
Deposits on real estate under option or contract	74,750		85,556		48,880		59,945
Investments in unconsolidated entities	16,678		17,097		16,639		17,068
Property and equipment, net	32,620		33,202		52,122		33,631
Deferred tax asset	55,290		53,320		36,294		35,162
Prepaids, other assets and goodwill	83,112		75,396		84,227		85,145
Total assets	$	3,200,692	$	2,888,691	$	3,394,894	$	3,251,258
Liabilities
Accounts payable	$	139,957	$	140,682	$	154,819	$	140,516
Accrued liabilities	166,080		170,852		173,770		181,076
Home sale deposits	36,197		28,348		37,130		34,059
Liabilities related to real estate not owned	8,489		—		34,978		34,978
Loans payable and other borrowings	17,256		32,195		16,552		17,354
Senior and convertible senior notes, net	1,340,274		1,095,119
Senior notes, net					1,294,705		1,266,450
Total liabilities	1,708,253		1,467,196		1,711,954		1,674,433
Stockholders’ Equity
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
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at June 30, 2018 and December 31, 2017					—		—
Common stock, par value $0.01. Authorized 125,000,000 shares; issued 40,649,453 and 40,330,741 shares at June 30, 2018 and December 31, 2017, respectively					406		403
Additional paid-in capital	578,295		572,506		593,561		584,578
Retained earnings	913,741		848,589		1,088,973		991,844
Total stockholders’ equity	1,492,439		1,421,495		1,682,940		1,576,825
Total liabilities and stockholders’ equity	$	3,200,692	$	2,888,691	$	3,394,894	$	3,251,258

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 June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Homebuilding:
Home closing revenue	$	797,780		$	795,845		$	1,458,397		$	1,391,462		$	872,383		$	797,780		$	1,600,915		$	1,458,397
Land closing revenue	4,198			2,051			16,353			4,200			5,112			4,198			19,144			16,353
Total closing revenue	801,978			797,896			1,474,750			1,395,662			877,495			801,978			1,620,059			1,474,750
Cost of home closings	(656,870		)	(658,099		)	(1,210,219		)	(1,150,369		)	(712,868		)	(656,870		)	(1,317,070		)	(1,210,219		)
Cost of land closings	(4,198		)	(1,693		)	(13,858		)	(3,393		)	(5,799		)	(4,198		)	(21,041		)	(13,858		)
Total cost of closings	(661,068		)	(659,792		)	(1,224,077		)	(1,153,762		)	(718,667		)	(661,068		)	(1,338,111		)	(1,224,077		)
Home closing gross profit	140,910			137,746			248,178			241,093			159,515			140,910			283,845			248,178
Land closing gross profit	—			358			2,495			807
Land closing gross (loss)/profit													(687		)	—			(1,897		)	2,495
Total closing gross profit	140,910			138,104			250,673			241,900			158,828			140,910			281,948			250,673
Financial Services:
Revenue	3,649			3,476			6,593			5,976			3,870			3,649			6,918			6,593
Expense	(1,551		)	(1,508		)	(2,930		)	(2,754		)	(1,693		)	(1,551		)	(3,177		)	(2,930		)
Earnings from financial services unconsolidated entities and other, net	3,459			3,795			6,184			6,587			3,474			3,459			6,130			6,184
Financial services profit	5,557			5,763			9,847			9,809			5,651			5,557			9,871			9,847
Commissions and other sales costs	(54,701		)	(56,379		)	(103,021		)	(102,556		)	(60,823		)	(54,701		)	(113,575		)	(103,021		)
General and administrative expenses	(29,591		)	(28,898		)	(59,213		)	(58,516		)	(34,205		)	(29,591		)	(65,098		)	(59,213		)
Earnings from other unconsolidated entities, net	570			573			943			416
(Loss)/earnings from other unconsolidated entities, net													(156		)	570			(202		)	943
Interest expense	(1,620		)	(1,672		)	(2,445		)	(4,960		)	(44		)	(1,620		)	(180		)	(2,445		)
Other income, net	2,080			1,545			3,190			1,828			1,934			2,080			7,305			3,190
Earnings before income taxes	63,205			59,036			99,974			87,921			71,185			63,205			120,069			99,974
Provision for income taxes	(21,625		)	(19,158		)	(34,822		)	(27,074		)	(17,347		)	(21,625		)	(22,357		)	(34,822		)
Net earnings	$	41,580		$	39,878		$	65,152		$	60,847		$	53,838		$	41,580		$	97,712		$	65,152
Earnings per common share:
Basic	$	1.03		$	1.00		$	1.62		$	1.52		$	1.32		$	1.03		$	2.41		$	1.62
Diluted	$	0.98		$	0.95		$	1.54		$	1.45		$	1.31		$	0.98		$	2.37		$	1.54
Weighted average number of shares:
Basic	40,317			40,012			40,248			39,926			40,647			40,317			40,568			40,248
Diluted	42,781			42,533			42,836			42,477			41,164			42,781			41,193			42,836

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net earnings	$	65,152		$	60,847		$	97,712		$	65,152
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	7,872			7,600			12,608			7,872
Stock-based compensation	5,785			7,313			8,976			5,785
Excess income tax provision from stock-based awards	—			526
Equity in earnings from unconsolidated entities	(7,127		)	(7,003		)	(5,978		)	(7,127		)
Distributions of earnings from unconsolidated entities	6,712			7,343			6,834			6,712
Other	10			3,262			2,407			10
Changes in assets and liabilities:
Increase in real estate	(211,384		)	(193,981		)	(155,809		)	(211,384		)
Decrease/(increase) in deposits on real estate under option or contract	9,308			(3,551		)
Increase in other receivables, prepaids and other assets	(9,428		)	(9,368		)
(Decrease)/increase in accounts payable and accrued liabilities	(5,497		)	12,944
Decrease in deposits on real estate under option or contract							11,093			9,308
Decrease/(increase) in other receivables, prepaids and other assets							1,634			(9,428		)
Increase/(decrease) in accounts payable and accrued liabilities							6,997			(5,497		)
Increase in home sale deposits	7,849			3,449			3,071			7,849
Net cash used in operating activities	(130,748		)	(110,619		)	(10,455		)	(130,748		)
Cash flows from investing activities:
Investments in unconsolidated entities	(408		)	(159		)	(417		)	(408		)
Distributions of capital from unconsolidated entities	1,250			—			—			1,250
Purchases of property and equipment	(8,322		)	(7,570		)	(15,726		)	(8,322		)
Proceeds from sales of property and equipment	86			87			92			86
Maturities/sales of investments and securities	1,258			645			1,065			1,258
Payments to purchase investments and securities	(1,258		)	(645		)	(1,065		)	(1,258		)
Net cash used in investing activities	(7,394		)	(7,642		)	(16,051		)	(7,394		)
Cash flows from financing activities:
Repayment of Credit Facility, net	(15,000		)	—			—			(15,000		)
Repayment of loans payable and other borrowings	(5,725		)	(15,482		)	(2,499		)	(5,725		)
Repurchase of convertible senior notes	(52,098		)	—
Repayment of senior notes and senior convertible notes							(175,000		)	(52,098		)
Proceeds from issuance of senior notes	300,000			—			206,000			300,000
Payment of debt issuance costs	(3,998		)	—			(3,315		)	(3,998		)
Excess income tax provision from stock-based awards	—			(526		)
Proceeds from stock option exercises	—			232
Net cash provided by/(used in) financing activities	223,179			(15,776		)
Net increase/(decrease) in cash and cash equivalents	85,037			(134,037		)
Net cash provided by financing activities							25,186			223,179
Net (decrease)/increase in cash and cash equivalents							(1,320		)	85,037
Cash and cash equivalents, beginning of period	131,702			262,208			170,746			131,702
Cash and cash equivalents, end of period	$	216,739		$	128,171		$	169,426		$	216,739

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~~primarily focused on first-time and first move-up ~~active adult and luxury.~~buyers. 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. WeIn limited cases, we also offer luxury homes under the brand name of Monterey Homes in some markets. At June 30, ~~2017~~2018, we were actively selling homes in ~~257~~253 communities, with base prices ranging from approximately ~~$170,000~~$179,000 to $~~1,380,000~~1,311,000.

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, ~~2016.~~2017. 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 $~~35.2~~56.4 million and ~~$75.3~~$107.1 million are included in cash and cash equivalents at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

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 and marketing 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~~Cost of ~~sales.~~home closings.

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 and weather 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~~If an impairment of a community is required, the impairment charges are allocated to each lot on a straight-line basis.

Deposits. Deposits paid ~~related to~~for 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 applied to the acquisition price of the ~~lots~~land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition contract 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 ~~$74.8~~$48.9 million and ~~$85.6~~$59.9 million as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a ~~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 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.

Off-Balance Sheet Arrangements - Joint Ventures. 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. See Note 4 for additional discussion of our investments in unconsolidated 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 surety bonds or 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.~~bond or letter of credit. 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
	June 30, 2017				December 31, 2016				June 30, 2018				December 31, 2017
	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 owned projects and lots under contract	$	262,702	$	107,198	$	239,246	$	85,706	$	345,297	$	160,981	$	296,387	$	120,320
Total Sureties	$	262,702	$	107,198	$	239,246	$	85,706	$	345,297	$	160,981	$	296,387	$	120,320
Letters of Credit (“LOCs”):
LOCs in lieu of deposits for contracted lots	$	3,631	N/A		$	250	N/A
LOCs for land development	51,261		N/A		39,839		N/A		74,254		N/A		70,922		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	$	58,642	N/A		$	43,839	N/A		$	78,004	N/A		$	74,672	N/A

Accrued Liabilities. Accrued liabilities at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 consisted of the following (in thousands):


	As of				As of
	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Accruals related to real estate development and construction activities	$	57,691	$	53,778	$	65,468	$	53,522
Payroll and other benefits	38,608		52,941		39,559		58,186
Accrued interest					13,404		15,369
Accrued taxes	13,525		9,637		15,218		14,067
Warranty reserves	23,620		22,660		23,659		23,328
Legal reserves (1)	615		673
Other accruals	32,021		31,163		16,462		16,604
Total	$	166,080	$	170,852	$	173,770	$	181,076


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

Revenue Recognition. In accordance with ASC 606 Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligation. The performance obligation and subsequent revenue recognition for our three sources of revenue are outlined below:

Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.

Revenue from land sales is recognized when a significant down payment is received, title passes and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

Revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

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~~the 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. InIncluded in the ~~three and six months ended~~warranty reserve balances at June 30, ~~2016 we decreased our~~2018 and December 31, 2017 reflected in the table below are case-specific reserves for three warranty ~~reserve balance~~matters related to (1) alleged stucco defects in Florida; (2) a potentially faulty solar component in various locations provided by ~~$275,000, which decreased our cost of sales. We had no such adjustments for the three~~a bankrupt manufacturer; and ~~six months ended~~ (3) a foundation design matter affecting a single community in Texas.~~June 30, 2017~~.

A summary of changes in our warranty reserves follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Balance, beginning of period	$	22,477		$	22,308		$	22,660		$	21,615		$	23,812		$	22,477		$	23,328		$	22,660
Additions to reserve from new home deliveries	4,310			4,423			8,125			7,958			4,146			4,310			7,553			8,125
Warranty claims	(3,167		)	(3,757		)	(7,165		)	(6,599		)	(4,299		)	(3,167		)	(7,222		)	(7,165		)
Adjustments to pre-existing reserves	—			(275		)	—			(275		)	—			—			—			—
Balance, end of period	$	23,620		$	22,699		$	23,620		$	22,699		$	23,659		$	23,620		$	23,659		$	23,620

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~~trade partners 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.

We have received claims related to stucco installation from homeowners in certain Florida communities and we established reserves to cover our anticipated exposure related to the repairs based on the information available to us as of June 30, 2018. Our review of the stucco related matter is ongoing and our estimate of future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate. As of June 30, 2018, after taking into account potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the repairs related to the existing stucco claims.

Recent Accounting Pronouncements.

In ~~August 2016,~~January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"), which simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Under the new guidance, an impairment loss will reflect the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us beginning January 1, 2020, with early adoption permitted. We have elected to early adopt ASU 2017-04 effective January 1, 2018 and it did not have a material impact on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): 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 iswas effective for us beginning January 1, 2018. ~~Early~~A retrospective transition method was required on adoption ~~is permitted. We are currently evaluating the~~and it did not have a material 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 permits 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, and is reflected prospectively in the provision for income taxes in the accompanying unaudited consolidated income statement. The impact of the adoption was not material to our consolidated financial 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 with lease terms of greater than twelve months on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, ~~2019, and early adoption is permitted.~~2019. 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 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.services. We adopted 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. ASU 2014-09 is effective for us~~ on January 1, 2018 ~~and the guidance allows for full retrospective or~~using a modified retrospective ~~methods of adoption. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. We do not believe the~~method.

The adoption of ASU 2014-09 ~~will~~did not have an impact on the amount or timing of our homebuilding ~~revenues. We~~revenues, although forfeited customer deposits, typically an immaterial amount on an annual basis, that were previously included in Other income, net are ~~still evaluating the potential impact~~reported as Home closing revenue in our consolidated statements of operations effective January 1, 2018. Additionally, as a result of the adoption of ASU 2014-09, ~~will have on~~there was an immaterial adjustment to our opening balance of Retained earnings with respect to the timing ~~and recognition~~of expenses resulting from ceasing the capitalization of certain selling costs we incur as part of the selling process. The majority of these previously capitalized costs were allocated to ~~obtain~~either Real estate or Property and equipment, net on our opening 2018 consolidated balance sheet, with an immaterial amount recognized as a ~~sales contract.~~cumulative effect adjustment to the opening balance of retained earnings.

As of and for the three and six months ended June 30, 2018 the adoption of ASU 2014-09 did not have a material impact on our balance sheet, net earnings, stockholders' equity or our statement of cash flows. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate consists of the following (in thousands):


	As of				As of
	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Homes under contract under construction ⁽¹⁾	$	662,829	$	508,927	$	715,373	$	566,474
Unsold homes, completed and under construction ⁽¹⁾	423,887		431,725		562,435		516,577
Model homes ⁽¹⁾	146,602		147,406		138,441		142,026
Finished home sites and home sites under development ⁽²⁾	1,405,089		1,334,005		1,453,798		1,506,303
Total	$	2,638,407	$	2,422,063	$	2,870,047	$	2,731,380


(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.~~sale, less impairments, if any. 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 June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Capitalized interest, beginning of period	$	70,885		$	64,126		$	68,196		$	61,202		$	81,828		$	70,885		$	78,564		$	68,196
Interest incurred	19,280			17,713			37,175			35,272			21,374			19,280			42,243			37,175
Interest expensed	(1,620		)	(1,672		)	(2,445		)	(4,960		)	(44		)	(1,620		)	(180		)	(2,445		)
Interest amortized to cost of home and land closings	(16,218		)	(15,485		)	(30,599		)	(26,832		)	(18,715		)	(16,218		)	(36,184		)	(30,599		)
Capitalized interest, end of period	$	72,327		$	64,682		$	72,327		$	64,682		$	84,443		$	72,327		$	84,443		$	72,327

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~~ to determine 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 June 30, ~~2017~~2018 (dollars in thousands):


	Projected Number of Lots		Purchase Price		Option/ Earnest Money Deposits–Cash			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		228	$	38,864	$	3,886
Option contracts — non-refundable deposits, committed (1)	4,202		324,101		43,139			2,907	219,491		26,432
Purchase contracts — non-refundable deposits, committed (1)	6,974		354,503		25,645			5,854	229,643		18,353
Purchase and option contracts —refundable deposits, committed	1,935		68,966		1,366			866	33,091		1,021
Total committed	13,176		757,557		71,648			9,855	521,089		49,692
Purchase and option contracts — refundable deposits, uncommitted (2)	9,323	��	264,717		4,600			10,728	271,343		3,074
Total lots under contract or option	22,499		$	1,022,274	$	76,248		20,583	$	792,432	$	52,766
Total purchase and option contracts not recorded on balance sheet (3)	22,434		$	1,012,287	$	74,750	(4)	20,355	$	753,568	$	48,880	(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, none of our purchase or option ~~agreements~~contracts 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 June 30, ~~2017.~~2018.

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 and sales absorptions, 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~~pre-

established minimum number of lots or we will work to restructure our original contract to terms that more accurately reflect our revised ~~sales~~orders pace expectations.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

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, currently we do not view joint ventures as critical to the success of our homebuilding operations. ~~In 2016, we entered into our first new joint venture since 2008.~~ Based on the structure of each joint 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 June 30, ~~2017~~2018, we had three active equity-method land ventures.

As of June 30, ~~2017~~2018, 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 June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~$1.8~~$1.6 million and ~~$2.3~~$2.2 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
	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Assets:
Cash	$	7,807	$	7,446	$	8,441	$	8,942
Real estate	53,172		54,319		57,553		55,552
Other assets	4,572		6,461		3,451		4,323
Total assets	$	65,551	$	68,226	$	69,445	$	68,817
Liabilities and equity:
Accounts payable and other liabilities	$	5,679	$	7,339	$	6,492	$	7,516
Notes and mortgages payable	23,887		23,000		26,572		25,194
Equity of:
Meritage ⁽¹⁾	14,430		14,245		14,736		14,521
Other	21,555		23,642		21,645		21,586
Total liabilities and equity	$	65,551	$	68,226	$	69,445	$	68,817


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue	$	13,430		$	10,430		$	21,029		$	21,501		$	9,982		$	13,430		$	17,314		$	21,029
Costs and expenses	(6,106		)	(4,670		)	(10,586		)	(9,646		)	(3,408		)	(6,106		)	(7,343		)	(10,586		)
Net earnings of unconsolidated entities	$	7,324		$	5,760		$	10,443		$	11,855		$	6,574		$	7,324		$	9,971		$	10,443
Meritage’s share of pre-tax earnings ^{(1) (2)}	$	4,068		$	4,402		$	7,250		$	7,038		$	3,368		$	4,068		$	5,978		$	7,250

(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.

(2)

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

Our total investment in all of these joint ventures is ~~$16.7~~$16.6 million and $17.1 million as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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
	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Other borrowings, real estate notes payable ⁽¹⁾	$	17,256	$	17,195	$	16,552	$	17,354
$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
$780 million unsecured revolving credit facility with interest approximating LIBOR (approximately 2.09% at June 30, 2018) plus 1.75% or Prime (5.00% at June 30, 2018) plus 0.75%					—		—
Total	$	17,256	$	32,195	$	16,552	$	17,354


(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 $625.0 million~~entered into an amended and restated unsecured revolving credit facility ("Credit Facility")~~, with an~~ in 2014 that has been amended from time to time. In June 2018 the aggregate commitment was increased to $780.0 million, and the maturity date extended to July 2022. The accordion feature ~~that permits~~was also refreshed permitting the size of the facility to increase to a maximum of ~~$725.0~~$880.0 million. ~~In May 2017, the maturity date of the credit facility was extended whereby $60.0 million matures in July 2019 with the remainder maturing in July 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 ~~$987.4 million~~$1.1 billion (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 no outstanding borrowings under the Credit Facility as of June 30, ~~2017~~2018 and ~~$15.0~~December 31, 2017. During the three and six months ended June 30, 2018, we had $285.0 million in gross borrowings ~~at December 31, 2016.~~and repayments. During the three months ended June 30, 2017 we had $85.0 million of gross borrowings and $145.0 million of repayments. During the six months ended June 30, 2017, we had $245.0 million of gross borrowings and $260.0 million of repayments. ~~During both the three and six months ended June 30, 2016 we had $56.0 million of gross borrowings and repayments.~~ As of June 30, ~~2017~~2018, we had outstanding letters of credit issued under the Credit Facility totaling ~~$58.6~~$78.0 million, leaving ~~$566.4~~$702.0 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
	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
4.50% senior notes due 2018	$	175,000		$	175,000		$	—		$	175,000
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
7.15% senior notes due 2020. At June 30, 2018 and December 31, 2017 there was approximately $995 and $1,280 in net unamortized premium, respectively.							300,995			301,280
7.00% senior notes due 2022	300,000			300,000			300,000			300,000
6.00% senior notes due 2025	200,000			200,000
6.00% senior notes due 2025. At June 30, 2018 there was approximately $5,727 in net unamortized premium. ⁽¹⁾							405,727			200,000
5.125% senior notes due 2027	300,000			—			300,000			300,000
1.875% convertible senior notes due 2032	74,593			126,500
Net debt issuance costs	(10,883		)	(8,230		)	(12,017		)	(9,830		)
Total	$	1,340,274		$	1,095,119		$	1,294,705		$	1,266,450


(1)	$200.0 million of the total $400.0 million 6.00% Senior Notes due 2025 outstanding at December 31, 2017 was issued at par and had no unamortized premium.

~~On June 6, 2017, we~~In March 2018, the Company completed an offering of ~~$300.0~~$200.0 million aggregate principal amount of 6.00% Senior Notes due ~~2027~~2025 (the ~~"2027~~"Additional Notes"). The ~~2027~~Additional Notes ~~bear interest~~were issued as an add-on to the existing $200.0 million of 6.00% Senior Notes due 2025 that were issued in June 2015 which resulted in a combined $400.0 million aggregate principal amount of 6.00% Senior Notes due 2025 outstanding as of June 30, 2018. The Additional Notes were issued at ~~5.125% per annum, payable~~a premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemption of the Company's $175.0 million of 4.50% Senior Notes that were due to mature on ~~June 6 and December 6 of each year, commencing on December 6, 2017.~~March 1, 2018.

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 June 30, ~~2017. Our convertible senior notes ("Convertible Notes") do not have any financial covenants.~~

The 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, 2017.2018.

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~~non-guarantor 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
	June 30, 2017				December 31, 2016				June 30, 2018				December 31, 2017
	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	$	176,313	$	175,000	$	177,625	N/A		N/A		$	175,000	$	175,228
7.15% senior notes	$	300,000	$	331,500	$	300,000	$	325,500	$	300,000	$	317,250	$	300,000	$	326,250
7.00% senior notes	$	300,000	$	341,250	$	300,000	$	324,750	$	300,000	$	323,250	$	300,000	$	337,500
6.00% senior notes	$	200,000	$	214,000	$	200,000	$	202,500	$	400,000	$	405,000	$	200,000	$	214,000
5.125% senior notes	$	300,000	$	300,390	$	—	$	—	$	300,000	$	277,500	$	300,000	$	305,250
1.875% convertible senior notes	$	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 June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Basic weighted average number of shares outstanding	40,317		40,012		40,248		39,926		40,647		40,317		40,568		40,248
Effect of dilutive securities:
Convertible senior notes ⁽¹⁾	1,991		2,176		2,083		2,176
Convertible debt ⁽¹⁾									—		1,991		—		2,083
Unvested restricted stock	473		345		505		375		517		473		625		505
Diluted average shares outstanding	42,781		42,533		42,836		42,477		41,164		42,781		41,193		42,836
Net earnings as reported	$	41,580	$	39,878	$	65,152	$	60,847	$	53,838	$	41,580	$	97,712	$	65,152
Interest attributable to convertible senior notes, net of income taxes	354		400		739		801
Interest attributable to Convertible Notes, net of income taxes ⁽¹⁾									—		354		—		739
Net earnings for diluted earnings per share	$	41,934	$	40,278	$	65,891	$	61,648	$	53,838	$	41,934	$	97,712	$	65,891
Basic earnings per share	$	1.03	$	1.00	$	1.62	$	1.52	$	1.32	$	1.03	$	2.41	$	1.62
Diluted earnings per share ⁽¹⁾	$	0.98	$	0.95	$	1.54	$	1.45	$	1.31	$	0.98	$	2.37	$	1.54
Antidilutive stock not included in the calculation of diluted earnings per share	59		289		2		19		1		59		1		2


(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 based on the number of days ~~the convertible senior notes~~our Convertible Notes were outstanding during the period. All of the Convertible Notes were retired in the second half of 2017.

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, 2016	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Balance at December 31, 2017													$	—	$	—	$	32,962	$	—	$	—	$	32,962
Additions	—		—		—		—		—		—		—		—		—		—		—		—
Impairments	—		—		—		—		—		—		—		—		—		—		—		—
Balance at June 30, 2017	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Balance at June 30, 2018													$	—	$	—	$	32,962	$	—	$	—	$	32,962

NOTE 10 — STOCKHOLDERS’ EQUITY

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



	Six Months Ended June 30, 2017										Six Months Ended June 30, 2018
	(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, 2016	40,031	$	400	$	572,506		$	848,589	$	1,421,495
Balance at December 31, 2017											40,331	$	403	$	584,578		$	991,844		$	1,576,825
Adoption of ASU 2014-09 ⁽¹⁾											—	—		—			(583		)	(583		)
Net earnings	—	—		—			65,152		65,152		—	—		—			97,712			97,712
Exercise/vesting of stock-based awards	289	3		(3		)	—		—		318	3		(3		)	—			—
Stock-based compensation expense	—	—		5,792			—		5,792		—	—		8,986			—			8,986
Balance at June 30, 2017	40,320	$	403	$	578,295		$	913,741	$	1,492,439
Balance at June 30, 2018											40,649	$	406	$	593,561		$	1,088,973		$	1,682,940


(1)	Refer to Note 1 for additional information related to the adoption of ASU 2014-09.


	Six Months Ended June 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	—	—		—			60,847		60,847			—	—		—			65,152		65,152
Exercise/vesting of stock-based awards	349	3		229			—		232			289	3		(3		)	—		—
Excess income tax benefit from stock-based awards	—	—		(526		)	—		(526		)
Stock-based compensation expense	—	—		7,313			—		7,313			—	—		5,792			—		5,792
Balance at June 30, 2016	40,018	$	400	$	566,508		$	759,895	$	1,326,803
Balance at June 30, 2017												40,320	$	403	$	578,295		$	913,741	$	1,492,439

NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION

We have atwo stock-based compensation ~~plan,~~plans, the Amended and Restated 2006 Stock Incentive Plan (the ~~“Plan”~~“2006 Plan”) and the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), ~~that~~collectively the "Stock Plans". The 2006 Plan was approved by our Board of Directors and adopted in 2006 and has been amended or restated from time to time. The 2018 Plan was approved by our Board of Directors and our stockholders and isadopted in May 2018, authorizing 1,250,000 shares for issuance. Both plans are administered by our Board of ~~Directors. The provisions of the Plan~~Directors and 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~~Stock Plans authorize awards to officers, key employees, non-employee directors and ~~consultants for up to~~consultants. The 2006 Plan authorizes 5,350,000 shares of common stock to be awarded, of which ~~1,102,665~~643,793 shares remain available for grant at June 30, ~~2017~~2018. ~~The~~Upon expiration of the 2006 Plan in May 2019, any available ~~shares include~~ shares from expired, terminated or forfeited awards that remain under the 2006 Plan and prior plans ~~that have since expired and are thus~~will be available for grant under the 2018 Plan. The 2018 Plan has 1,250,000 shares available for grant at June 30, 2018. 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, less forfeitures, 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~~For the three and six months ended June 30, 2018, stock compensation increased as compared to prior year partially due to a change in ~~2014, a~~the compensation structure for certain executives to all performance-based equity grants. 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~~engage 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 June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Stock-based compensation expense	$	2,490	$	2,555	$	5,785	$	7,313	$	3,767	$	2,490	$	8,976	$	5,785
Non-vested shares granted	—		—		416,500		493,865		—		—		306,164		416,500
Performance-based non-vested shares granted	—		—		154,120		66,698		—		—		157,637		154,120
Stock options exercised ⁽¹⁾	—		3,200		—		14,400
Restricted stock awards vested (includes performance-based awards)	6,190		29,465		289,764		334,550		17,137		6,190		318,712		289,764


~~(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
	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Unrecognized stock-based compensation cost	$	24,115	$	18,528	$	25,155	$	18,439
Weighted average years expense recognition period	4.15		2.56		2.71		2.48
Total stock-based awards outstanding ⁽¹⁾	1,328,601		1,147,271
Total equity awards outstanding ⁽¹⁾					1,331,946		1,269,657


(1)	Includes unvested restricted stock, ~~and~~ performance-based awards ~~(at target level)~~(assuming 100% payout) and restricted stock units.

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~~401(k) 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 six months ended June 30, ~~2017~~2018 or ~~2016,~~2017, other than minor administrative costs.

NOTE 12 — INCOME TAXES

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Federal	$	19,215	$	16,568	$	30,788	$	23,109	$	14,425	$	19,215	$	17,371	$	30,788
State	2,410		2,590		4,034		3,965		2,922		2,410		4,986		4,034
Total	$	21,625	$	19,158	$	34,822	$	27,074	$	17,347	$	21,625	$	22,357	$	34,822

The effective tax rate for the three and six months ended June 30, ~~2017~~2018 was ~~34.2%~~24.4% and ~~34.8%~~18.6%, respectively, and for the three and six months ended June 30, ~~2016~~2017 was ~~32.5%~~34.2% and ~~30.8%~~34.8%, respectively. ~~Our tax rate has been favorably impacted in both years by the homebuilding manufacturing deduction.~~ The lower ~~2016~~2018 effective tax rates reflect lower corporate tax rates as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") passed in December 2017 and the lower year-to-date rate also reflects the ~~benefit~~impact from the President signing the Bipartisan Budget Act of ~~federal~~2018 in February 2018, which included a retroactive extension of the Internal Revenue Code ("IRC") §45L new energy efficient homes credit that had previously expired in 2016. This extension provision provides for a single year extension of energy tax credits for homes sold in ~~both 2016 and~~2017 that meet the qualification criteria. Under ASC 740, the effects of these tax credits were required to be recorded in ~~prior periods as a result~~2018, based on the date of enactment, regardless 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. This legislation has expired and has not yet been renewed for 2017. Accordingly, our effectiveretroactive treatment. Our tax rate for 2017 does not ~~reflect a tax benefit from federal~~include energy credits, but was favorably impacted by the homebuilding manufacturing deduction, which was eliminated for ~~homes sold~~2018 under the Tax Act. We anticipate that with the completion of our 2017 income tax returns, future guidance and additional information and interpretations with respect to the Tax Act will cause us to further adjust the provisional amounts recorded as of December 31, 2017. In accordance with SEC Staff Accounting Bulletin No. 118, we will record such adjustments in ~~2017.~~

the period that relevant guidance or additional information becomes available and our analysis is completed.

At June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we have no unrecognized tax 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 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 June 30, ~~2017.~~2018.

At June 30, ~~2017,~~2018, we had no remaining federal NOL carry forward or un-utilized federal tax credits. At June 30, ~~2017,~~2018, and December 31, ~~2016~~2017 we had tax benefits for state NOL carry forwards of ~~$1.4~~$1.8 million, net of federal benefit, that begin to expire in 2028.

At June 30, ~~2017,~~2018, we have income taxes payable of ~~$8.3~~$8.2 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 June 30, ~~2017.~~2018.

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.~~2013. 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 June 30, 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):


	Six Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2018		2017
Interest capitalized, net	$	161	$	2,672	$	4,602	$	161
Income taxes paid	$	34,426	$	24,722	$	22,353	$	34,426
Non-cash operating activities:
Real estate not owned increase	$	9,987	$	—	$	—	$	9,987
Real estate acquired through notes payable	$	5,786	$	11,101	$	1,697	$	5,786

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
	Central:	Texas
	East:	Florida, Georgia, North Carolina, South Carolina and Tennessee

Management’s evaluation of segment performance is based on segment operating income, which we define as ~~homebuilding~~home and land closing revenues less cost of home ~~construction,~~and land closings, 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 June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Homebuilding revenue ⁽¹⁾:
West	$	369,574		$	332,643		$	681,378		$	593,689		$	351,647		$	369,574		$	668,875		$	681,378
Central	225,679			208,701			400,510			370,590			260,106			225,679			451,976			400,510
East	206,725			256,552			392,862			431,383			265,742			206,725			499,208			392,862
Consolidated total	$	801,978		$	797,896		$	1,474,750		$	1,395,662		$	877,495		$	801,978		$	1,620,059		$	1,474,750
Homebuilding segment operating income:
West	$	35,131		$	27,495		$	59,143		$	43,558		$	33,062		$	35,131		$	54,183		$	59,143
Central	23,230			19,784			37,120			33,678			25,576			23,230			39,843			37,120
East	5,285			12,322			7,721			18,181			14,564			5,285			25,923			7,721
Total homebuilding segment operating income	63,646			59,601			103,984			95,417			73,202			63,646			119,949			103,984
Financial services segment profit	5,557			5,763			9,847			9,809			5,651			5,557			9,871			9,847
Corporate and unallocated costs ⁽²⁾	(7,028		)	(6,774		)	(15,545		)	(14,589		)	(9,402		)	(7,028		)	(16,674		)	(15,545		)
Earnings/(loss) from other unconsolidated entities, net	570			573			943			416
(Loss)/earnings from other unconsolidated entities, net													(156		)	570			(202		)	943
Interest expense	(1,620		)	(1,672		)	(2,445		)	(4,960		)	(44		)	(1,620		)	(180		)	(2,445		)
Other income, net(3)	2,080			1,545			3,190			1,828			1,934			2,080			7,305			3,190
Net earnings before income taxes	$	63,205		$	59,036		$	99,974		$	87,921		$	71,185		$	63,205		$	120,069		$	99,974


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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Land closing revenue:
West	$	—	$	65	$	11,800	$	65	$	1,935	$	—	$	14,390	$	11,800
Central	—		1,794		122		3,712		762		—		887		122
East	4,198		192		4,431		423		2,415		4,198		3,867		4,431
Total	$	4,198	$	2,051	$	16,353	$	4,200	$	5,112	$	4,198	$	19,144	$	16,353


(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 June 30, 2017
West Central East Financial Services
Corporate and
Unallocated
Total
Deposits on real estate under option or contract $ 20,491
$ 23,788
$ 30,471
$ —
$ —
$ 74,750
Real estate 1,179,257
671,392
787,758
—
—
2,638,407
Investments in unconsolidated entities 7,708
7,205
—
—
1,765
16,678
Other assets 46,699
(1) 89,947
(2) 73,315
(3) 689
260,207
(4) 470,857
Total assets $ 1,254,155
$ 792,332
$ 891,544
$ 689
$ 261,972
$ 3,200,692


~~(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~~For the six months ended June 30, 2018, Other income, net includes a favorable $4.8 million legal settlement from long-standing litigation related to ~~local municipalities.~~


~~(4)~~	~~Balance consists primarily of cash and our deferred tax asset.~~ a previous joint venture in Nevada.


	At December 31, 2016																At June 30, 2018
	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	$	25,863		$	27,669		$	32,024		$	—	$	—		$	85,556	$	11,790		$	15,512		$	21,578		$	—	$	—		$	48,880
Real estate	1,120,038			595,485			706,540			—		—			2,422,063		1,235,184			739,853			895,010			—		—			2,870,047
Investments in unconsolidated entities	7,362			7,450			—			—		2,285			17,097		8,073			6,974			—			—		1,592			16,639
Other assets	45,624		(1)	94,299		(2)	93,245		(3)	812		129,995		(4)	363,975		58,486		(1)	104,174		(2)	117,332		(3)	741		178,595		(4)	459,328
Total assets	$	1,198,887		$	724,903		$	831,809		$	812	$	132,280		$	2,888,691	$	1,313,533		$	866,513		$	1,033,920		$	741	$	180,187		$	3,394,894


(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 real estate not owned, goodwill (see Note 9)~~, prepaid permits~~ and ~~fees to~~property and equipment.


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



	At December 31, 2017
	West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	15,557		$	21,309		$	23,079		$	—	$	—		$	59,945
Real estate	1,174,285			700,460			856,635			—		—			2,731,380
Investments in unconsolidated entities	7,833			6,999			—			—		2,236			17,068
Other assets	58,470		(1)	110,173		(2)	144,681		(3)	1,249		128,292		(4)	442,865
Total assets	$	1,256,145		$	838,941		$	1,024,395		$	1,249	$	130,528		$	3,251,258


(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 real estate not owned, cash, and goodwill (see Note 9).


(4)	Balance consists primarily of cash and our deferred tax 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,~~pending litigation matters, 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.~~prior to litigation. We believe there are ~~not any~~no 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.

As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $23.7 million of total warranty reserves related to a foundation design matter affecting a single community in Texas. In addition to the repairs required to be made to homes within that community, we have been named as a defendant in several lawsuits filed by homeowners in that community. As of June 30, 2018, the claim we made for this matter under our general liability insurance policy has initially been denied, which we vehemently disagree with and have disputed with our insurance carrier. We regularly review our reserves, and adjust them, as necessary to reflect changes as more information becomes available. As of June 30, 2018, taking into account sources of potential recovery from the contractors involved with the construction design of the homes and their insurers, we believe our reserves are sufficient to cover repairs and related 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 and economic factors in the homebuilding industry in general, and our markets and results specifically; our operating strategy and initiatives, including our strategy to expand 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 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 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; 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 amount, type and timing of new community openings; seasonality; 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 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; shortages in the availability and cost of labor; changes in interest rates and the availability and pricing of residential mortgages; ~~shortages in the availability and cost of labor;~~ changes in tax laws that adversely impact us or our homebuyers; inflation in the cost of materials used to develop communities and construct homes; the success of ~~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~~slow absorption rates; slowing in the growth of first-time homebuyers; competition; 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 earnest money or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; ~~competition;~~home warranty and 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 and surety bonds in connection with our development work; the loss of key personnel; ~~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;~~financing if our credit ratings are downgraded; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations; the effect of legislative and other ~~government~~governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, 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; negative publicity that affects our reputation; 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, ~~2016~~2017 under the caption ~~“Risk~~"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 disclaim and 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

~~Favorable~~The housing market ~~fundamentals continued throughout~~has remained healthy during the first six months of ~~2017 that, combined with historically~~2018 as a solid economy assisted by low unemployment levels, wage growth and a shortage in the supply of homes, particularly at entry-level price points, has overcome concerns from potential impacts of rising interest rates ~~despite several federal rate hikes, have contributed~~and stock market volatility. We believe that these factors will continue to create a ~~strong~~positive demand ~~environment. The return of~~environment for our sector, particularly among the first-time homebuyer segment where lower-priced homes continue to ~~the market as well as the limited supply of resale homes have contributed to higher demand~~offer affordable solutions for home buyers.

The desire for new ~~homes. While these dynamics have translated~~homes continues to ~~rising average sales prices in some~~be strong across most of our markets, ~~the increase in demand has also resulted in rising land and construction material costs, limiting the potential expansion in gross margins.~~especially for our entry-level LiVE.NOW.^® communities that target first-time or move-down homebuyers looking for a lower priced product. We continue to focus on our key strategic initiatives such as home closing gross margin improvement, selling, general and administrative cost control and community count growth that ~~are designed to~~we believe will position us ~~for further~~to improve profitability, with our focus on the first-time and first move-up buyer. First-time buyers represented nearly half of our orders in the second quarter of 2018 and we expect that growth to continue as we are opening an increased number of communities that target the first-time buyer segment. Our entry-level product is also attracting move-down buyers with select floor plans and ~~improve our margins. We remain committed~~price points that appeal to ~~expanding our presence in our markets by increasing our community count and offering homes with energy-efficient features and appealing designs for today's homebuyer.~~an age-targeted audience.

Summary Company Results

Our second quarter 2018 results delivered on several of our key strategic initiatives, with growth in our entry-level business, growing orders pace in our markets and performance gains reflected in our improved home closing gross margins, most notably in our East region. Total home closing revenue was ~~$797.8~~$872.4 million for the three months ended June 30, ~~2017, up nominally~~2018, an increase of $74.6 million over the corresponding prior year period, due to ~~higher average sales prices, despite slightly~~233 additional homes closed. The increase in home closing revenue and 60-basis-point improvement in home closing gross margin provided $18.6 million in additional home closing gross profit which, combined with a $1.6 million decrease in interest expense and a lower ~~closing volume. The $1.9~~income tax provision, contributed to $53.8 million in net income for the three months ended June 30, 2018, a 29.5% improvement over the $41.6 million in the corresponding 2017 period. Second quarter 2018 results reflect a lower provision for income taxes due to a lower effective tax rate of 24.4% versus 34.2% in 2017 as a result of the Tax Act signed into law in December 2017, which resulted in a lower corporate tax rate. Similar to the second quarter, year-to-date results reflect $142.5 million in additional home closing revenue and improved home closing gross margin, provided $3.2 million in additional home closing gross profit, and contributed to our higher net income of $41.6 million for the three months ended June 30, 2017 versus $39.9 million for the 2016 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$35.7 million higher home closing gross profit versus the six months ended June 30, ~~2016.~~2017. Higher gross profit combined with ~~relatively flat year-over-year selling and general and administrative costs~~a $4.1 million increase in Other income, net and lower ~~year over year~~year-over-year interest expense led to net income of ~~$65.2~~$97.7 million for the six months ended June 30, ~~2017~~2018 compared to ~~$60.8~~$65.2 million ~~in 2016.~~for the 2017 period.

On a consolidated basis, we experienced ~~year-over-year~~year over year growth in closings and orders, both in units and value, for ~~both~~ the three and six months ended June 30, ~~2017. Closing units were down by 2.3% for~~2018 over 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 we shift toward a higher percentage of entry-level homes.prior year. We ended the second quarter of ~~2017~~2018 with ~~3,428~~3,619 homes in backlog ~~3.4% higher than 2016 that contributed to a backlog value of $1.4~~valued at $1.5 billion, ~~a 3.8% increase~~5.6% and 5.5% improvements, respectively, over June 30, ~~2016.~~2017. The growth in year-over-year backlog is the result of a 7.5% improvement in year-to-date orders at June 30, 2018 compared to the prior year, as our average sales price on homes in backlog was down slightly stemming from our pivot to entry-level product. The percentage of actively selling communities that target to the first-time buyer grew to 34.0% in the second quarter of 2018, as compared to 24.5% in the prior year second quarter.

Company Positioning

We believe that the investments in our new communities, ~~new markets~~particularly those designed for the first-time homebuyer, and industry-leading innovation in energy-efficient product offerings and automation 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, revenue and profit, and maintaining a strong balance sheet. To help meet these goals, we continue to~~

Our focus onincludes the following strategic initiatives:

~~Continuing~~

Expanding the number of LiVE.NOW® communities that target the growing first-time homebuyer segment;

Improving the overall customer experience, most recently through a simplification of the customer purchase and selection processes;

Enhancing our website and sales offices through investments in technology. As of June 30, 2018 all of our LiVE.NOW communities feature interactive tools offering homebuyers the ability to ~~actively~~search for available homes with their desired home features and based on their preferred availability or move-in dates;

Improving our home closing gross margin by growing revenue while managing costs, allowing us to better leverage our overhead;

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

~~Expanding~~

In order to maintain focus on growing our business, we also remain committed to the ~~number~~following:

Increasing orders and order pace through the use of ~~'entry-level plus' communities~~our consumer and market research to build homes that ~~target the growing first-time homebuyer segment;~~

~~Introducing newly designed plan offerings to meet homebuyers changing preferences in~~offer our ~~markets, most recently an entire new product library in our East Region;~~buyers their desired features and amenities;

Expanding market share in our smaller markets;

Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand;

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

~~Growing revenue while managing costs, allowing us to improve overhead operating leverage;~~

Generating additional working capital and maintaining adequate liquidity, most recently through a ~~$300~~$200 million ~~senior note debt issuance, a partial pay-down~~add-on to our existing $200.0 million of ~~our convertible senior notes,~~6.00% Senior Notes due 2025 and through the expansion and extension 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 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~~Other than the adoption of ASU 2014-09, as described in Note 1 in the accompanying unaudited consolidated financial statements, there have been no significant changes to our critical accounting policies during the six months ended June 30, ~~2017~~2018 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our ~~2016~~2017 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 June 30,				Quarter over Quarter
	2018		2017		Change $			Change %
Home Closing Revenue
Total
Dollars	$	872,383	$	797,780	$	74,603		9.4	%
Homes closed	2,139		1,906		233			12.2	%
Average sales price	$	407.8	$	418.6	$	(10.7	)	(2.6	)%
West Region
Arizona
Dollars	$	118,272	$	141,015	$	(22,743	)	(16.1	)%
Homes closed	366		419		(53		)	(12.6	)%
Average sales price	$	323.1	$	336.6	$	(13.4	)	(4.0	)%
California
Dollars	$	142,019	$	140,270	$	1,749		1.2	%
Homes closed	206		231		(25		)	(10.8	)%
Average sales price	$	689.4	$	607.2	$	82.2		13.5	%
Colorado
Dollars	$	89,421	$	88,289	$	1,132		1.3	%
Homes closed	162		154		8			5.2	%
Average sales price	$	552.0	$	573.3	$	(21.3	)	(3.7	)%
West Region Totals
Dollars	$	349,712	$	369,574	$	(19,862	)	(5.4	)%
Homes closed	734		804		(70		)	(8.7	)%
Average sales price	$	476.4	$	459.7	$	16.8		3.6	%
Central Region - Texas
Central Region Totals
Dollars	$	259,344	$	225,679	$	33,665		14.9	%
Homes closed	741		610		131			21.5	%
Average sales price	$	350.0	$	370.0	$	(20.0	)	(5.4	)%
East Region
Florida
Dollars	$	110,467	$	82,448	$	28,019		34.0	%
Homes closed	252		187		65			34.8	%
Average sales price	$	438.4	$	440.9	$	(2.5	)	(0.6	)%
Georgia
Dollars	$	34,835	$	25,366	$	9,469		37.3	%
Homes closed	104		73		31			42.5	%
Average sales price	$	335.0	$	347.5	$	(12.5	)	(3.6	)%
North Carolina
Dollars	$	77,075	$	59,560	$	17,515		29.4	%
Homes closed	195		132		63			47.7	%
Average sales price	$	395.3	$	451.2	$	(56.0	)	(12.4	)%
South Carolina
Dollars	$	26,885	$	23,866	$	3,019		12.6	%
Homes closed	76		70		6			8.6	%
Average sales price	$	353.8	$	340.9	$	12.8		3.8	%
Tennessee
Dollars	$	14,065	$	11,287	$	2,778		24.6	%
Homes closed	37		30		7			23.3	%
Average sales price	$	380.1	$	376.2	$	3.9		1.0	%
East Region Totals
Dollars	$	263,327	$	202,527	$	60,800		30.0	%
Homes closed	664		492		172			35.0	%
Average sales price	$	396.6	$	411.6	$	(15.1	)	(3.7	)%


	Three Months Ended June 30,				Quarter over Quarter					Six Months Ended June 30,				Quarter over Quarter
	2017		2016		Change $			Change %		2018		2017		Chg $			Chg %
Home Closing Revenue
Total
Dollars	$	797,780	$	795,845	$	1,935		0.2	%	$	1,600,915	$	1,458,397	$	142,518		9.8	%
Homes closed	1,906		1,950		(44		)	(2.3	)%	3,864		3,487		377			10.8	%
Average sales price	$	418.6	$	408.1	$	10.5		2.6	%	$	414.3	$	418.2	$	(3.9	)	(0.9	)%
West Region
Arizona
Dollars	$	141,015	$	94,048	$	46,967		49.9	%	$	209,268	$	241,565	$	(32,297	)	(13.4	)%
Homes closed	419		279		140			50.2	%	641		715		(74		)	(10.3	)%
Average sales price	$	336.6	$	337.1	$	(0.5	)	(0.1	)%	$	326.5	$	337.9	$	(11.4	)	(3.4	)%
California
Dollars	$	140,270	$	156,058	$	(15,788	)	(10.1	)%	$	301,410	$	272,364	$	29,046		10.7	%
Homes closed	231		280		(49		)	(17.5	)%	437		441		(4		)	(0.9	)%
Average sales price	$	607.2	$	557.4	$	49.8		8.9	%	$	689.7	$	617.6	$	72.1		11.7	%
Colorado
Dollars	$	88,289	$	82,472	$	5,817		7.1	%	$	143,807	$	155,649	$	(11,842	)	(7.6	)%
Homes closed	154		169		(15		)	(8.9	)%	256		282		(26		)	(9.2	)%
Average sales price	$	573.3	$	488.0	$	85.3		17.5	%	$	561.7	$	551.9	$	9.8		1.8	%
West Region Totals
Dollars	$	369,574	$	332,578	$	36,996		11.1	%	$	654,485	$	669,578	$	(15,093	)	(2.3	)%
Homes closed	804		728		76			10.4	%	1,334		1,438		(104		)	(7.2	)%
Average sales price	$	459.7	$	456.8	$	2.9		0.6	%	$	490.6	$	465.6	$	25.0		5.4	%
Central Region - Texas
Central Region Totals
Dollars	$	225,679	$	206,907	$	18,772		9.1	%	$	451,089	$	400,388	$	50,701		12.7	%
Homes closed	610		556		54			9.7	%	1,283		1,105		178			16.1	%
Average sales price	$	370.0	$	372.1	$	(2.1	)	(0.6	)%	$	351.6	$	362.3	$	(10.8	)	(3.0	)%
East Region
Florida
Dollars	$	82,448	$	103,342	$	(20,894	)	(20.2	)%	$	223,254	$	148,022	$	75,232		50.8	%
Homes closed	187		257		(70		)	(27.2	)%	512		333		179			53.8	%
Average sales price	$	440.9	$	402.1	$	38.8		9.6	%	$	436.0	$	444.5	$	(8.5	)	(1.9	)%
Georgia
Dollars	$	25,366	$	27,383	$	(2,017	)	(7.4	)%	$	59,808	$	45,841	$	13,967		30.5	%
Homes closed	73		81		(8		)	(9.9	)%	177		128		49			38.3	%
Average sales price	$	347.5	$	338.1	$	9.4		2.8	%	$	337.9	$	358.1	$	(20.2	)	(5.6	)%
North Carolina
Dollars	$	59,560	$	76,507	$	(16,947	)	(22.2	)%	$	127,748	$	116,467	$	11,281		9.7	%
Homes closed	132		179		(47		)	(26.3	)%	323		263		60			22.8	%
Average sales price	$	451.2	$	427.4	$	23.8		5.6	%	$	395.5	$	442.8	$	(47.3	)	(10.7	)%
South Carolina
Dollars	$	23,866	$	27,748	$	(3,882	)	(14.0	)%	$	49,006	$	49,921	$	(915	)	(1.8	)%
Homes closed	70		88		(18		)	(20.5	)%	142		143		(1		)	(0.7	)%
Average sales price	$	340.9	$	315.3	$	25.6		8.1	%	$	345.1	$	349.1	$	(4.0	)	(1.1	)%
Tennessee
Dollars	$	11,287	$	21,380	$	(10,093	)	(47.2	)%	$	35,525	$	28,180	$	7,345		26.1	%
Homes closed	30		61		(31		)	(50.8	)%	93		77		16			20.8	%
Average sales price	$	376.2	$	350.5	$	25.7		7.3	%	$	382.0	$	366.0	$	16.0		4.4	%
East Region Totals
Dollars	$	202,527	$	256,360	$	(53,833	)	(21.0	)%	$	495,341	$	388,431	$	106,910		27.5	%
Homes closed	492		666		(174		)	(26.1	)%	1,247		944		303			32.1	%
Average sales price	$	411.6	$	384.9	$	26.7		6.9	%	$	397.2	$	411.5	$	(14.2	)	(3.5	)%


	Six Months Ended June 30,				Quarter over Quarter					Three Months Ended June 30,				Quarter over Quarter
	2017		2016		Chg $			Chg %		2018		2017		Change $			Change %
Home Closing Revenue
Home Orders ⁽¹⁾
Total
Dollars	$	1,458,397	$	1,391,462	$	66,935		4.8	%	$	917,996	$	878,718	$	39,278		4.5	%
Homes closed	3,487		3,438		49			1.4	%
Homes ordered										2,250		2,153		97			4.5	%
Average sales price	$	418.2	$	404.7	$	13.5		3.3	%	$	408.0	$	408.1	$	(0.1	)	—	%
West Region
Arizona
Dollars	$	241,565	$	169,047	$	72,518		42.9	%	$	135,717	$	129,870	$	5,847		4.5	%
Homes closed	715		496		219			44.2	%
Homes ordered										416		397		19			4.8	%
Average sales price	$	337.9	$	340.8	$	(2.9	)	(0.9	)%	$	326.2	$	327.1	$	(0.9	)	(0.3	)%
California
Dollars	$	272,364	$	276,778	$	(4,414	)	(1.6	)%	$	131,699	$	162,597	$	(30,898	)	(19.0	)%
Homes closed	441		487		(46		)	(9.4	)%
Homes ordered										190		274		(84		)	(30.7	)%
Average sales price	$	617.6	$	568.3	$	49.3		8.7	%	$	693.2	$	593.4	$	99.7		16.8	%
Colorado
Dollars	$	155,649	$	147,799	$	7,850		5.3	%	$	89,818	$	76,978	$	12,840		16.7	%
Homes closed	282		307		(25		)	(8.1	)%
Homes ordered										166		133		33			24.8	%
Average sales price	$	551.9	$	481.4	$	70.5		14.6	%	$	541.1	$	578.8	$	(37.7	)	(6.5	)%
West Region Totals
Dollars	$	669,578	$	593,624	$	75,954		12.8	%	$	357,234	$	369,445	$	(12,211	)	(3.3	)%
Homes closed	1,438		1,290		148			11.5	%
Homes ordered										772		804		(32		)	(4.0	)%
Average sales price	$	465.6	$	460.2	$	5.4		1.2	%	$	462.7	$	459.5	$	3.2		0.7	%
Central Region - Texas
Central Region Totals
Dollars	$	400,388	$	366,878	$	33,510		9.1	%	$	277,556	$	254,642	$	22,914		9.0	%
Homes closed	1,105		1,021		84			8.2	%
Homes ordered										766		714		52			7.3	%
Average sales price	$	362.3	$	359.3	$	3.0		0.8	%	$	362.3	$	356.6	$	5.7		1.6	%
East Region
Florida
Dollars	$	148,022	$	166,664	$	(18,642	)	(11.2	)%	$	136,534	$	120,951	$	15,583		12.9	%
Homes closed	333		413		(80		)	(19.4	)%
Homes ordered										320		283		37			13.1	%
Average sales price	$	444.5	$	403.5	$	41.0		10.2	%	$	426.7	$	427.4	$	(0.7	)	(0.2	)%
Georgia
Dollars	$	45,841	$	49,397	$	(3,556	)	(7.2	)%	$	41,964	$	32,865	$	9,099		27.7	%
Homes closed	128		146		(18		)	(12.3	)%
Homes ordered										109		99		10			10.1	%
Average sales price	$	358.1	$	338.3	$	19.8		5.9	%	$	385.0	$	332.0	$	53.0		16.0	%
North Carolina
Dollars	$	116,467	$	126,884	$	(10,417	)	(8.2	)%	$	54,704	$	61,375	$	(6,671	)	(10.9	)%
Homes closed	263		297		(34		)	(11.4	)%
Homes ordered										143		143		—			—	%
Average sales price	$	442.8	$	427.2	$	15.6		3.7	%	$	382.5	$	429.2	$	(46.7	)	(10.9	)%
South Carolina
Dollars	$	49,921	$	48,919	$	1,002		2.0	%	$	30,652	$	22,840	$	7,812		34.2	%
Homes closed	143		155		(12		)	(7.7	)%
Homes ordered										88		66		22			33.3	%
Average sales price	$	349.1	$	315.6	$	33.5		10.6	%	$	348.3	$	346.1	$	2.3		0.7	%
Tennessee
Dollars	$	28,180	$	39,096	$	(10,916	)	(27.9	)%	$	19,352	$	16,600	$	2,752		16.6	%
Homes closed	77		116		(39		)	(33.6	)%
Homes ordered										52		44		8			18.2	%
Average sales price	$	366.0	$	337.0	$	29.0		8.6	%	$	372.2	$	377.3	$	(5.1	)	(1.4	)%
East Region Totals
Dollars	$	388,431	$	430,960	$	(42,529	)	(9.9	)%	$	283,206	$	254,631	$	28,575		11.2	%
Homes closed	944		1,127		(183		)	(16.2	)%
Homes ordered										712		635		77			12.1	%
Average sales price	$	411.5	$	382.4	$	29.1		7.6	%	$	397.8	$	401.0	$	(3.2	)	(0.8	)%

Three Months Ended June 30, Quarter over Quarter
2017 2016 Change $ Change %
Home Orders ⁽¹⁾

Total
Dollars $ 878,718
$ 845,346
$ 33,372
3.9 %
Homes ordered 2,153
2,073
80
3.9 %
Average sales price $ 408.1
$ 407.8
$ 0.3
0.1 %
West Region
Arizona
Dollars $ 129,870
$ 115,812
$ 14,058
12.1 %
Homes ordered 397
331
66
19.9 %
Average sales price $ 327.1
$ 349.9
$ (22.8 ) (6.5 )%
California
Dollars $ 162,597
$ 165,931
$ (3,334 ) (2.0 )%
Homes ordered 274
289
(15 ) (5.2 )%
Average sales price $ 593.4
$ 574.2
$ 19.2
3.3 %
Colorado
Dollars $ 76,978
$ 84,398
$ (7,420 ) (8.8 )%
Homes ordered 133
169
(36 ) (21.3 )%
Average sales price $ 578.8
$ 499.4
$ 79.4
15.9 %
West Region Totals
Dollars $ 369,445
$ 366,141
$ 3,304
0.9 %
Homes ordered 804
789
15
1.9 %
Average sales price $ 459.5
$ 464.1
$ (4.6 ) (1.0 )%
Central Region - Texas
Central Region Totals
Dollars $ 254,642
$ 202,948
$ 51,694
25.5 %
Homes ordered 714
550
164
29.8 %
Average sales price $ 356.6
$ 369.0
$ (12.4 ) (3.4 )%
East Region
Florida
Dollars $ 120,951
$ 106,913
$ 14,038
13.1 %
Homes ordered 283
267
16
6.0 %
Average sales price $ 427.4
$ 400.4
$ 27.0
6.7 %
Georgia
Dollars $ 32,865
$ 38,356
$ (5,491 ) (14.3 )%
Homes ordered 99
115
(16 ) (13.9 )%
Average sales price $ 332.0
$ 333.5
$ (1.5 ) (0.4 )%
North Carolina
Dollars $ 61,375
$ 66,944
$ (5,569 ) (8.3 )%
Homes ordered 143
159
(16 ) (10.1 )%
Average sales price $ 429.2
$ 421.0
$ 8.2
1.9 %
South Carolina
Dollars $ 22,840
$ 38,468
$ (15,628 ) (40.6 )%
Homes ordered 66
118
(52 ) (44.1 )%
Average sales price $ 346.1
$ 326.0
$ 20.1
6.2 %
Tennessee
Dollars $ 16,600
$ 25,576
$ (8,976 ) (35.1 )%
Homes ordered 44
75
(31 ) (41.3 )%
Average sales price $ 377.3
$ 341.0
$ 36.3
10.6 %
East Region Totals
Dollars $ 254,631
$ 276,257
$ (21,626 ) (7.8 )%
Homes ordered 635
734
(99 ) (13.5 )%
Average sales price $ 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.


	Six Months Ended June 30,				Quarter over Quarter					Six Months Ended June 30,				Quarter over Quarter
	2017		2016		Chg $			Chg %		2018		2017		Chg $			Chg %
Home Orders ⁽¹⁾
Total
Dollars	$	1,771,421	$	1,649,946	$	121,475		7.4	%	$	1,880,792	$	1,771,421	$	109,371		6.2	%
Homes ordered	4,288		4,060		228			5.6	%	4,608		4,288		320			7.5	%
Average sales price	$	413.1	$	406.4	$	6.7		1.6	%	$	408.2	$	413.1	$	(5.0	)	(1.2	)%
West Region
Arizona
Dollars	$	263,702	$	205,992	$	57,710		28.0	%	$	288,878	$	263,702	$	25,176		9.5	%
Homes ordered	800		590		210			35.6	%	875		800		75			9.4	%
Average sales price	$	329.6	$	349.1	$	(19.5	)	(5.6	)%	$	330.1	$	329.6	$	0.5		0.2	%
California
Dollars	$	356,355	$	316,943	$	39,412		12.4	%	$	292,097	$	356,355	$	(64,258	)	(18.0	)%
Homes ordered	602		559		43			7.7	%	409		602		(193		)	(32.1	)%
Average sales price	$	592.0	$	567.0	$	25.0		4.4	%	$	714.2	$	592.0	$	122.2		20.6	%
Colorado
Dollars	$	159,073	$	171,024	$	(11,951	)	(7.0	)%	$	186,913	$	159,073	$	27,840		17.5	%
Homes ordered	276		338		(62		)	(18.3	)%	341		276		65			23.6	%
Average sales price	$	576.4	$	506.0	$	70.4		13.9	%	$	548.1	$	576.4	$	(28.2	)	(4.9	)%
West Region Totals
Dollars	$	779,130	$	693,959	$	85,171		12.3	%	$	767,888	$	779,130	$	(11,242	)	(1.4	)%
Homes ordered	1,678		1,487		191			12.8	%	1,625		1,678		(53		)	(3.2	)%
Average sales price	$	464.3	$	466.7	$	(2.4	)	(0.5	)%	$	472.5	$	464.3	$	8.2		1.8	%
Central Region - Texas
Central Region Totals
Dollars	$	506,415	$	419,013	$	87,402		20.9	%	$	557,059	$	506,415	$	50,644		10.0	%
Homes ordered	1,407		1,141		266			23.3	%	1,575		1,407		168			11.9	%
Average sales price	$	359.9	$	367.2	$	(7.3	)	(2.0	)%	$	353.7	$	359.9	$	(6.2	)	(1.7	)%
East Region
Florida
Dollars	$	222,511	$	199,507	$	23,004		11.5	%	$	249,204	$	222,511	$	26,693		12.0	%
Homes ordered	522		494		28			5.7	%	583		522		61			11.7	%
Average sales price	$	426.3	$	403.9	$	22.4		5.5	%	$	427.5	$	426.3	$	1.2		0.3	%
Georgia
Dollars	$	55,267	$	73,551	$	(18,284	)	(24.9	)%	$	92,834	$	55,267	$	37,567		68.0	%
Homes ordered	168		220		(52		)	(23.6	)%	257		168		89			53.0	%
Average sales price	$	329.0	$	334.3	$	(5.3	)	(1.6	)%	$	361.2	$	329.0	$	32.3		9.8	%
North Carolina
Dollars	$	127,707	$	144,025	$	(16,318	)	(11.3	)%	$	116,189	$	127,707	$	(11,518	)	(9.0	)%
Homes ordered	293		348		(55		)	(15.8	)%	300		293		7			2.4	%
Average sales price	$	435.9	$	413.9	$	22.0		5.3	%	$	387.3	$	435.9	$	(48.6	)	(11.1	)%
South Carolina
Dollars	$	48,378	$	72,689	$	(24,311	)	(33.4	)%	$	59,326	$	48,378	$	10,948		22.6	%
Homes ordered	138		225		(87		)	(38.7	)%	168		138		30			21.7	%
Average sales price	$	350.6	$	323.1	$	27.5		8.5	%	$	353.1	$	350.6	$	2.6		0.7	%
Tennessee
Dollars	$	32,013	$	47,202	$	(15,189	)	(32.2	)%	$	38,292	$	32,013	$	6,279		19.6	%
Homes ordered	82		145		(63		)	(43.4	)%	100		82		18			22.0	%
Average sales price	$	390.4	$	325.5	$	64.9		19.9	%	$	382.9	$	390.4	$	(7.5	)	(1.9	)%
East Region Totals
Dollars	$	485,876	$	536,974	$	(51,098	)	(9.5	)%	$	555,845	$	485,876	$	69,969		14.4	%
Homes ordered	1,203		1,432		(229		)	(16.0	)%	1,408		1,203		205			17.0	%
Average sales price	$	403.9	$	375.0	$	28.9		7.7	%	$	394.8	$	403.9	$	(9.1	)	(2.3	)%


	Three Months Ended June 30,				Three Months Ended June 30,
	2017		2016		2018		2017
	Ending	Average	Ending	Average	Ending	Average	Ending	Average
Active Communities
Total	257	256.5	241	242.0	253	253.0	257	256.5
West Region
Arizona	39	40.5	43	42.5	40	38.5	39	40.5
California	26	27.5	25	24.5	15	15.0	26	27.5
Colorado	10	10.0	12	13.0	19	18.0	10	10.0
West Region Totals	75	78.0	80	80.0	74	71.5	75	78.0
Central Region - Texas
Central Region Totals	92	88.5	73	71.5	90	93.5	92	88.5
East Region
Florida	30	31.0	26	26.0	30	29.0	30	31.0
Georgia	19	18.0	17	17.5	20	20.5	19	18.0
North Carolina	20	19.0	22	23.0	20	20.0	20	19.0
South Carolina	14	14.5	16	16.0	11	11.5	14	14.5
Tennessee	7	7.5	7	8.0	8	7.0	7	7.5
East Region Totals	90	90.0	88	90.5	89	88.0	90	90.0


	Six Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2018		2017
	Ending	Average	Ending	Average	Ending	Average	Ending	Average
Active Communities
Total	257	250.0	241	247.5	253	248.5	257	250.0
West Region
Arizona	39	40.5	43	42.0	40	39.0	39	40.5
California	26	27.0	25	24.5	15	17.5	26	27.0
Colorado	10	10.0	12	14.0	19	15.0	10	10.0
West Region Totals	75	77.5	80	80.5	74	71.5	75	77.5
Central Region - Texas
Central Region Totals	92	86.0	73	72.5	90	91.0	92	86.0
East Region
Florida	30	28.5	26	28.5	30	29.0	30	28.5
Georgia	19	18.0	17	17.0	20	19.5	19	18.0
North Carolina	20	18.5	22	24.0	20	18.5	20	18.5
South Carolina	14	14.5	16	17.0	11	12.0	14	14.5
Tennessee	7	7.0	7	8.0	8	7.0	7	7.0
East Region Totals	90	86.5	88	94.5	89	86.0	90	86.5


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Cancellation Rates ⁽¹⁾
Total	13	%	11	%	13	%	11	%	12	%	13	%	13	%	13	%
West Region
Arizona	12	%	12	%	13	%	12	%	12	%	12	%	12	%	13	%
California	15	%	9	%	13	%	10	%	12	%	15	%	16	%	13	%
Colorado	8	%	8	%	10	%	9	%	13	%	8	%	10	%	10	%
West Region Totals	13	%	10	%	12	%	10	%	12	%	13	%	13	%	12	%
Central Region - Texas
Central Region Totals	15	%	16	%	14	%	14	%	13	%	15	%	15	%	14	%
East Region
Florida	11	%	9	%	12	%	10	%	9	%	11	%	10	%	12	%
Georgia	18	%	12	%	18	%	13	%	22	%	18	%	16	%	18	%
North Carolina	9	%	9	%	8	%	7	%	12	%	9	%	14	%	8	%
South Carolina	14	%	7	%	11	%	5	%	10	%	14	%	10	%	11	%
Tennessee	8	%	10	%	13	%	9	%	7	%	8	%	5	%	13	%
East Region Totals	12	%	9	%	12	%	9	%	12	%	12	%	12	%	12	%


(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 June 30,				Quarter over Quarter					At June 30,				Quarter over Quarter
	2017		2016		Change $			Change %		2018		2017		Change $			Change %
Order Backlog ⁽¹⁾
Total
Dollars	$	1,448,782	$	1,396,165	$	52,617		3.8	%	$	1,528,756	$	1,448,782	$	79,974		5.5	%
Homes in backlog	3,428		3,314		114			3.4	%	3,619		3,428		191			5.6	%
Average sales price	$	422.6	$	421.3	$	1.3		0.3	%	$	422.4	$	422.6	$	(0.2	)	—	%
West Region
Arizona
Dollars	$	183,480	$	154,851	$	28,629		18.5	%	$	199,508	$	183,480	$	16,028		8.7	%
Homes in backlog	529		411		118			28.7	%	560		529		31			5.9	%
Average sales price	$	346.8	$	376.8	$	(30.0	)	(8.0	)%	$	356.3	$	346.8	$	9.4		2.7	%
California
Dollars	$	237,629	$	224,311	$	13,318		5.9	%	$	213,761	$	237,629	$	(23,868	)	(10.0	)%
Homes in backlog	392		361		31			8.6	%	290		392		(102		)	(26.0	)%
Average sales price	$	606.2	$	621.4	$	(15.2	)	(2.4	)%	$	737.1	$	606.2	$	130.9		21.6	%
Colorado
Dollars	$	157,508	$	185,376	$	(27,868	)	(15.0	)%	$	158,019	$	157,508	$	511		0.3	%
Homes in backlog	267		363		(96		)	(26.4	)%	284		267		17			6.4	%
Average sales price	$	589.9	$	510.7	$	79.2		15.5	%	$	556.4	$	589.9	$	(33.5	)	(5.7	)%
West Region Totals
Dollars	$	578,617	$	564,538	$	14,079		2.5	%	$	571,288	$	578,617	$	(7,329	)	(1.3	)%
Homes in backlog	1,188		1,135		53			4.7	%	1,134		1,188		(54		)	(4.5	)%
Average sales price	$	487.1	$	497.4	$	(10.3	)	(2.1	)%	$	503.8	$	487.1	$	16.7		3.4	%
Central Region - Texas
Central Region Totals
Dollars	$	460,761	$	402,329	$	58,432		14.5	%	$	489,106	$	460,761	$	28,345		6.2	%
Homes in backlog	1,233		1,062		171			16.1	%	1,312		1,233		79			6.4	%
Average sales price	$	373.7	$	378.8	$	(5.1	)	(1.3	)%	$	372.8	$	373.7	$	(0.9	)	(0.2	)%
East Region
Florida
Dollars	$	190,943	$	150,849	$	40,094		26.6	%	$	222,653	$	190,943	$	31,710		16.6	%
Homes in backlog	442		368		74			20.1	%	517		442		75			17.0	%
Average sales price	$	432.0	$	409.9	$	22.1		5.4	%	$	430.7	$	432.0	$	(1.3	)	(0.3	)%
Georgia
Dollars	$	42,789	$	57,580	$	(14,791	)	(25.7	)%	$	83,505	$	42,789	$	40,716		95.2	%
Homes in backlog	131		169		(38		)	(22.5	)%	231		131		100			76.3	%
Average sales price	$	326.6	$	340.7	$	(14.1	)	(4.1	)%	$	361.5	$	326.6	$	34.9		10.7	%
North Carolina
Dollars	$	98,492	$	128,619	$	(30,127	)	(23.4	)%	$	85,273	$	98,492	$	(13,219	)	(13.4	)%
Homes in backlog	223		311		(88		)	(28.3	)%	220		223		(3		)	(1.3	)%
Average sales price	$	441.7	$	413.6	$	28.1		6.8	%	$	387.6	$	441.7	$	(54.1	)	(12.2	)%
South Carolina
Dollars	$	39,093	$	53,881	$	(14,788	)	(27.4	)%	$	45,805	$	39,093	$	6,712		17.2	%
Homes in backlog	111		158		(47		)	(29.7	)%	125		111		14			12.6	%
Average sales price	$	352.2	$	341.0	$	11.2		3.3	%	$	366.4	$	352.2	$	14.3		4.0	%
Tennessee
Dollars	$	38,087	$	38,369	$	(282	)	(0.7	)%	$	31,126	$	38,087	$	(6,961	)	(18.3	)%
Homes in backlog	100		111		(11		)	(9.9	)%	80		100		(20		)	(20.0	)%
Average sales price	$	380.9	$	345.7	$	35.2		10.2	%	$	389.1	$	380.9	$	8.2		2.2	%
East Region Totals
Dollars	$	409,404	$	429,298	$	(19,894	)	(4.6	)%	$	468,362	$	409,404	$	58,958		14.4	%
Homes in backlog	1,007		1,117		(110		)	(9.8	)%	1,173		1,007		166			16.5	%
Average sales price	$	406.6	$	384.3	$	22.3		5.8	%	$	399.3	$	406.6	$	(7.3	)	(1.8	)%


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

Operating Results

Companywide. Home closing revenue increased by 9.4% to $872.4 million from 2,139 closings for the three months ended June 30, ~~2017 was up nominally from prior year, increasing 0.2%~~2018 compared to $797.8 million ~~despite 2.3% lower~~from 1,906 closings during the same quarter of the prior year, driven by a 12.2% increase in closing volume aspartially offset by a ~~result of higher~~2.6% decrease in average sales price. Average sales prices on home closings are beginning to decline with a higher percentage of ~~$10,500, or 2.6%.~~entry-level homes in our closing mix that is offsetting average sales price increases in some markets. Home orders ~~volume~~also improved ~~year over year, with order value growing~~ by ~~3.9%~~4.5% to ~~$878.7~~2,250 homes valued at $918.0 million ~~on 2,153 homes~~ in the second quarter of ~~2017~~2018 as compared to ~~$845.3~~2,153 homes valued at $878.7 million ~~on 2,073 homes~~ in the second quarter of 2016. We maintained a relatively flat ending community count, opening 26 new communities and closing out 25 communities during the second quarter of 2017 for an ending count of 257 actively selling communities. Our2017. Order improvement was driven by our company-wide orders pace ~~of 8.4~~growing by 6.0% to 8.9 homes ordered per average community in the second quarter of ~~2017 is relatively consistent with 8.6~~2018 compared to 8.4 in the ~~prior year.~~ comparable 2017 quarter.We ended the quarter with ~~3,428 homes in backlog, up 114 units or 3.4% from 2016 and~~253 actively selling communities, consistent with the first quarter of 2018, but a ~~higher backlog value of $52.6 million, up 3.8%.~~ slight decline year-over-year.

For the six months ended June 30, ~~2017,~~2018, home closing units and revenue grew by 49377 units and ~~$66.9~~$142.5 million for ending home closing revenue of ~~$1.5~~$1.6 billion ~~4.8%~~on 3,864 closings, 9.8% and 10.8% higher than the six month period in ~~2016.~~2017, respectively. Orders increased by 320 units and $109.4 million to 4,608 orders valued at $1.9 billion for the six months ended June 30, ~~2017 were up 5.6%~~2018, 7.5% and 6.2% increases, respectively. We ended the quarter with 3,619 homes in backlog valued at $1.5 billion, reflecting an $80.0 million, or 5.5%, increase from the ~~prior year and, coupled with~~second quarter of 2017 driven entirely by volume as average sales ~~price increases, order value rose 7.4%.~~prices are beginning to temper as we shift toward a higher percentage of entry-level homes in backlog.

West. During the ~~three months ended June 30, 2017,~~second quarter of 2018, the West ~~region led the company~~Region closed 734 homes and generated $349.7 million in home closing ~~volume~~revenue compared to 804 homes and ~~revenue, as well as year-over-year growth~~$369.6 million in ~~these metrics. Home~~the second quarter of 2017. The decrease in home closing revenue ~~rose 11.1% over~~is due to a 8.7% decrease in homes closed, partially offset by a 3.6% increase in average sales price. The reduction in closing volume reflected 8.3% fewer communities open on average during the ~~2016 period, primarily~~second quarter of 2018 compared to 2017. Despite a strong shift to first-time buyers in the Region, the higher average sales price in the second quarter of 2018 is the result of a larger percentage of closings from several high-priced communities in California contributing to the ~~76 additional units closed, resulting in 804 closings~~closing mix compared to the prior year.The Region ended the second quarter of 2018 with 772 orders valued at ~~$369.6~~$357.2 million ~~for~~versus 804 homes valued at $369.4 million in the ~~three months ended June 30,~~second quarter of 2017. ~~Order units and value~~Orders per average community in the West Region improved by ~~1.9% and 0.9%, respectively, ending~~4.9% partially offsetting the ~~quarter with 804 orders valued at $369.4 million. Community~~impact of the decline in community count. Strong demand has resulted in many communities selling out faster than anticipated driving the decline in community count, particularly in ~~the West was down, although orders pace improved with 10.3 for the quarter ended June 30, 2017 as compared to 9.9 in 2016. Arizona drove the improvements in home closings and orders in~~California. We opened 14 communities throughout the Region ~~during~~in the second quarter ~~as well as the rising orders pace, although demand is high throughout the entire region. Colorado~~of 2018 and ~~California boast our highest orders pace~~we anticipate opening 20 new communities in the ~~company and we are actively working to open additional communities, as~~next several quarters, with half of those targeted toward the 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 Arizona is contributing a larger percentage to the Region's results and is shifting to a higher number of lower priced, faster selling communities aimed to first-time ~~buyers.~~homebuyer.

Year-to-date results in the West Region were similar to that of the second quarter of ~~2017.~~2018. The number and value of ~~units~~homes closed versus prior year declined by 7.2% and 2.3%, respectively, partially offset by a 5.4% increase in average sales price. Orders for the Region declined 3.2% year-to-date which resulted in a 1.4% decline in order value, partially offset by a $8,200 increase in average sales price. Orders pace improved by ~~11.5% and 12.8%, respectively, driven by significant growth~~4.6% in ~~Arizona. Orders in Arizona were also~~ the ~~driver~~Region for the ~~Region's 12.8% higher~~six months ended June 30, 2018, however both closings and orders ~~year to date.~~were impacted by a 7.7% decline in average community count. The Region ended the ~~six-month period~~quarter with ~~overall growth~~1,134 homes in ~~order value of $85.2~~backlog valued at $571.3 million, ~~on 191 more units~~4.5% and ~~ending backlog of $578.6 million on 1,188 units.~~1.3% declines from prior year, respectively, offset slightly by a $16,700 increase in average sales price.

Central. In the second quarter of ~~2017,~~2018, the Central Region, made up of our Texas markets, closed ~~610~~741 homes and generated ~~$225.7~~$259.3 million in home closing revenue, improvements of ~~9.7%~~21.5% and ~~9.1%~~14.9%, respectively, leading to ~~overall year over year~~year-over-year home closing revenue growth of ~~$18.8~~$33.7 million. The Region ended the quarter with 766 orders valued at $277.6 million compared to 714 units valued at $254.6 million in the prior year, 7.3% and 9.0% increases, respectively. We continue to see ~~improved~~solid demand trends in the Central Region, evidenced by the ~~improved~~year-over-year growth in orders ~~and orders pace~~ in the second quarter of 2018 when compared to a strong second quarter in 2017. The improved order volume is the result of a 5.6% increase in average communities during the second quarter of 2018 and a relatively flat orders pace of 8.2 homes per average community compared to 8.1 homes in the prior year quarter. We are ~~answering~~responding to the entry-level demand in this Region with a strong transition to first-time ~~buyers, as evidenced~~buyer product offerings. The resulting marginal net increase in ~~the moderately decreasing~~ average sales ~~prices year~~price year-over-year on orders is due to lower priced entry-level product offsetting price increases in some markets. Throughout the remainder of 2018, we anticipate opening over ~~year. Orders grew by 29.8%~~20 new communities in our Central region, the majority of which will be targeted to ~~a total of 714 units valued at $254.6 million as compared to 550 units valued at $202.9 million in~~ the ~~prior year. Average community count and orders pace increased by 23.8% and 5.2%, respectively, in the second quarter, directly resulting in the higher orders year over year.~~first-time buyer.

~~Year-to-date~~We also saw overall improvements in the Region ~~as well.~~for the six months ended June 30, 2018. Home closings and home closing revenue were up ~~8.2%~~16.1% and ~~9.1%~~12.7%, respectively, and orders and order value were up ~~year over year~~year-over-year by ~~23.3%~~11.9% and ~~20.9%~~10.0%, respectively. ~~The~~Orders pace and average active communities increased by 5.5% and 5.8%, respectively, helping the Region ~~ended~~end the quarter with ~~1,233~~1,312 homes in backlog valued at ~~$460.8~~$489.1 million, ~~16.1%~~6.4% and ~~14.5%~~6.2% improvements over prior year, respectively.

East. ~~Our~~During the three months ended June 30, 2018, the East ~~region~~Region generated ~~492~~the largest increase in closing volume and revenue compared to the same period in the prior year. The Region contributed 664 closings and $263.3 million in home closing revenue in the second quarter of ~~2017, a decline~~2018, improvements of ~~26.1%~~35.0% and 30.0%, respectively, from the ~~prior year.~~same period in 2017. The ~~decline~~increase in closing volume was partially offset ~~with~~by a ~~6.9%~~3.7%, or ~~$26,700 increase~~$15,100, decrease in average sales price ~~as all~~resulting from our pivot to the first-time buyer segment. In the second quarter of 2018, orders pace in the East Region improved by 14.1% compared to the 2017 second quarter with increases in the majority of our markets in the Region experienced higher average sales prices on their second quarter closings versus prior year. 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 closingRegion. This demand led to order volume and ~~associated revenues in~~value increasing by 12.1% and 11.2%, respectively, compared to the second quarter of 2017 ~~versus 2016. The delay of certain community openings in 2017~~to 712 units valued at $283.2 million for the three months ended June 30, 2018. Simplifying our business and improving our buyers' experiences through a strategic shift to product and communities that appeal to the ~~transition to updated product offerings~~first-time buyer has ~~also had an impact on our results on orders. Community count growth in high-demand sub-markets is~~been a key strategic focus for us ~~in the East Region~~ and ~~has been intentionally timed to coincide with the roll-out~~we believe our improvements are reflective 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 demand and provide improved orders and orders pace in the future.that.

The year-to-date results of the East Region were similar to those of the second quarter, with ~~944 units closed,~~32.1% and 27.5% improvements in closing volume and revenue, respectively, compared to 2017 providing ~~$388.4~~1,247 closings and $495.3 million in home closing revenue ~~16.2% and 9.9% lower than~~for the ~~2016~~six month period ~~respectively.~~ending June 30, 2018. The number and value of orders also ~~declined~~improved by ~~229 units~~17.0% and ~~$51.1 million, contributing~~14.4%, respectively, due to an 18.0% increase in orders pace for the six months ended June 30, 2018 compared to prior year. These improvements contributed to a year-over-year ~~decline~~increase in backlog units and value of ~~110 units,~~16.5% and 14.4%, respectively, ending the second quarter of 2018 with ~~1,007~~1,173 units valued at ~~$409.4~~$468.4 million.

Land Closing Revenue and Gross (Loss)/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 ~~$4.2~~$5.1 million and ~~$2.1~~$4.2 million for the three months ending June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~$16.4~~$19.1 and ~~$4.2~~$16.4 million for the six months ended June 30, 2018 and 2017, respectively. We recognized a loss of $0.7 million as a combined result of gains and ~~2016, respectively.~~losses on various land sales throughout the country in the second quarter of 2018 compared to break-even results in 2017. Year to date land sales in 2018 resulted in a $1.9 million loss as compared to a $2.5 million gain in the prior year.

Other Operating Information (dollars in thousands)


	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended June 30,								Six Months Ended June 30,
	2017				2016				2017				2016				2018				2017				2018				2017
	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	$	140,910	17.7	%	$	137,746	17.3	%	$	248,178	17.0	%	$	241,093	17.3	%	$	159,515	18.3	%	$	140,910	17.7	%	$	283,845	17.7	%	$	248,178	17.0	%

West	$	65,962	17.8	%	$	57,184	17.2	%	$	114,467	17.1	%	$	100,498	16.9	%	$	63,630	18.2	%	$	65,962	17.8	%	$	113,835	17.4	%	$	114,467	17.1	%

Central	$	45,856	20.3	%	$	41,016	19.8	%	$	79,132	19.8	%	$	73,118	19.9	%	$	52,496	20.2	%	$	45,856	20.3	%	$	88,772	19.7	%	$	79,132	19.8	%

East	$	29,092	14.4	%	$	39,546	15.4	%	$	54,579	14.1	%	$	67,477	15.7	%	$	43,389	16.5	%	$	29,092	14.4	%	$	81,238	16.4	%	$	54,579	14.1	%

(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~~margin for the ~~three months ended June 30, 2017 increased $3.2 million versus~~second quarter of 2018 improved 60 basis points over the ~~respective~~same prior year period, ~~in 2016 as a result of~~and combined with higher home closing revenue, ~~and~~resulted in a ~~40-basis-point improvement~~$18.6 million increase in home closing gross ~~margin year over year.~~ profit.With improved demand and pricing power and the introduction of new, efficient product in the East region where our most notable improvements are, we have been successful ~~in some markets~~ in minimizing the impact of rising labor and commodity costs. ~~Charges incurred on asset write-offs~~Margin growth has been a key initiative for us and we have been largely successful in ~~the second quarter~~managing price and pace in order to improve margins while also ensuring we are competitively priced to appeal to homebuyers. Increased revenues have also enabled us to maintain or improve our leverage of ~~2017 of approximately $1.2 million~~construction overhead costs in most markets which has positively impacted gross margin by 20 basis points in the 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 period home closing gross margin, as well.margins. For the six months ended June 30, ~~2017,~~2018, home closing gross margin improved by 70 basis points which increased home closing gross profit ~~increased~~ by ~~$7.1~~$35.7 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, creating a drag on year-to-date margins.~~period.

West. Our West Region reported higher year-over-year home closing gross margin for the second quarter of ~~2017~~2018 of ~~17.8%~~18.2% compared to ~~17.2%~~17.8% in ~~2016,~~2017 and ~~17.1%~~17.4% versus ~~16.9%~~17.1% for the six months ended June 30, 2018 and 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 to offset ~~land and labor~~ cost increases. ~~Higher~~We also have benefited from the pivot to entry-level product which simplifies our product, generating construction and cost efficiencies. We anticipate continued margin improvement in the Region as closing volume ~~has also helped~~rebounds with ~~the improved home closing gross margin as~~community count growth and we are better able to leverage our 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 three and six months ended June 30, 2017, respectively. 2016 asset write-offs had a 10-basis-point impact for both the three- and six-month periods.

Central. The Central Region produced the highest home closing gross margin in the company ~~and improved 50 basis points year over year, with~~during the second quarter of 2018. Home closing gross margin of 20.2% for the quarter ending June 30, 2018 was relatively flat compared to 20.3% in ~~2017 versus 19.8% in 2016.~~the prior year. Year to date, the ~~Region's margins were~~Region experienced similar results with relatively flat ~~declining year over year by 10 basis points.~~closing gross margin. We ~~believe~~were largely successful in maintaining pricing in alignment with labor, construction and land cost increases. We continue to respond to the ~~volatility from oil price uncertainty has recently started to stabilize. This stability coupled~~first-time buyer demand in the Region and our margins are reflective of the product for this segment that combines a streamlined construction process enabling cost control with the ~~improving demand trends across the Region, is resulting in pricing power, which combined~~opportunity to leverage overhead costs with ~~increasing volume translates to solid margins in this Region.~~increased absorptions.

East. The East Region experienced a 210 basis point improvement in year-over-year home closing gross ~~margins~~margin in the ~~second quarter~~three months ended June 30, 2018 of 16.5% versus 14.4% for the comparable 2017 period. As a direct result of ~~14.4% declined from 15.4% in the 2016 period. Year-to-date~~our strategic initiatives to improve profitability, we are experiencing margin ~~had similar year-over-year fluctuations, declining 160 basis points to 14.1% in 2017 versus 15.7% in 2016. Lower margins in~~improvement throughout the Region ~~are largely attributed to the mix of closings from~~as communities ~~with older product 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 begin to contribute more materially to the closing mix. In addition, closings in ~~high demand areas will provide us with pricing power opportunities as well as greater~~newer communities in our Florida markets are achieving higher margins than the communities that contributed to the closing mix in the prior year. The higher volume of closings and associated revenue in the Region helped leverage ofconstruction overhead ~~costs.~~costs to further improve margins. Similar to second quarter results, year-to-date home closing gross margin also achieved significant growth, improving by 230 basis points to 16.4% in 2018 versus 14.1% in 2017.

Financial Services Profit (in thousands)

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Financial services profit	$	5,651	$	5,557	$	9,871	$	9,847

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. Financial services profit remained relatively flat year over year despite a higher closing volume due to a decline in the capture rate of homebuyers by our mortgage joint venture.

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


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Commissions and Other Sales Costs
Commissions and other sales costs
Dollars	$	(54,701	)	$	(56,379	)	$	(103,021	)	$	(102,556	)	$	(60,823	)	$	(54,701	)	$	(113,575	)	$	(103,021	)
Percent of home closing revenue	6.9		%	7.1		%	7.1		%	7.4		%	7.0		%	6.9		%	7.1		%	7.1		%
General and Administrative Expenses
General and administrative expenses
Dollars	$	(29,591	)	$	(28,898	)	$	(59,213	)	$	(58,516	)	$	(34,205	)	$	(29,591	)	$	(65,098	)	$	(59,213	)
Percent of total closing revenue	3.7		%	3.6		%	4.0		%	4.2		%
Earnings from Other Unconsolidated Entities, Net
Percent of home closing revenue													3.9		%	3.7		%	4.1		%	4.1		%
(Loss)/earnings from other unconsolidated entities, net
Dollars	$	570		$	573		$	943		$	416		$	(156	)	$	570		$	(202	)	$	943
Interest Expense
Interest expense
Dollars	$	(1,620	)	$	(1,672	)	$	(2,445	)	$	(4,960	)	$	(44	)	$	(1,620	)	$	(180	)	$	(2,445	)
Other Income, Net
Other income, net
Dollars	$	2,080		$	1,545		$	3,190		$	1,828		$	1,934		$	2,080		$	7,305		$	3,190
Provision for Income Taxes
Provision for income taxes
Dollars	$	(21,625	)	$	(19,158	)	$	(34,822	)	$	(27,074	)	$	(17,347	)	$	(21,625	)	$	(22,357	)	$	(34,822	)

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. These costs ~~decreased~~increased by ~~$1.7~~$6.1 million for the three months ended June 30, ~~2017~~2018 versus ~~2016~~2017 and increased ~~$0.5~~$10.6 million year to ~~date.~~date as a result of increased closing volume. As a percentage of home closing revenue, commissions and other sales costs ~~declined by 20~~increased 10 basis points to ~~6.9%~~7.0% during the three months ended June 30, ~~2017,~~2018 as compared to the prior year period. This was due to a higher volume of closings with international homebuyers, which typically have a higher percentage of external brokers representing the buyers, resulting in higher overall commission expense. Commissions and ~~declined by 30 basis points to~~other sales costs as a percent of revenue remained flat at 7.1% for the six months ended June 30, ~~2017. This is the result of improved overhead leverage~~2018 and ~~the revised commission structure we implemented in the latter half of 2016 and other cost-cutting measures.~~2017.

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 June 30, ~~2017,~~2018, general and administrative expenses were ~~$29.6~~$34.2 million as compared to ~~$28.9~~$29.6 million for the ~~2016~~2017 period. As a percentage of home closing revenue, these costs increased 20 basis points for the three month period ending June 30, 2018 to 3.9%, partially the result of recognition of stock compensation expense at June 30, 2018 for the probable achievement of performance targets for certain equity awards. There was no comparable expense for the prior year period, as our equity compensation program for certain executives was adjusted to all performance based effective in 2017. For the six months ended June 30, 2018 and 2017, ~~these~~general and administrative costs were ~~$59.2 million versus $58.5 million in 2016. As a percentage~~flat at 4.1% of ~~total~~home closing revenue, these costs were relatively flat, increasing by 10 basis points for the three-month period ending June 30, 2017 to 3.7%, while decreasing by 20 basis points year to date. The improved leverage year to date is mainly attributable to the additional closing revenue in 2017 over 2016.revenue. We continually strive to optimize overhead leverage through cost control efforts at both the corporate and divisional levels.

(Loss)/Earnings from Other Unconsolidated Entities, Net. 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-month~~three and six-month periods ended June 30, ~~2017~~2018 reported a slight loss of $0.2 million due to general and ~~2016 both reported~~administrative expenses in a recently formed joint venture compared to earnings of $0.6 ~~million. The six-month period ended June 30, 2017 reported earnings of~~million and $0.9 ~~million as compared to $0.4~~ million in the ~~2016 period.~~respective three and six-month periods in 2017 period related to land sales recorded in our land joint ventures.

Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, ~~convertible senior notes,~~prior Convertible Notes, other borrowings, and our amended and restated unsecured revolving credit facility ("Credit ~~Facility.~~Facility"). Interest expense decreased year over year ~~for both~~in the ~~three- and six-~~

~~month periods, as we have more~~second quarter to $44,000 in 2018 compared to $1.6 million in 2017 due to a higher balance of inventory ~~under development~~ that qualifies for interest capitalization. ~~Our non-capitalizable~~We experienced similar declines in year to date interest expense ~~was $1.6 million and~~with $180,000 in 2018 compared to $2.4 million ~~for~~in the ~~three and six months ended June 30, 2017, respectively, and was $1.7 million and $5.0 million, respectively, for the 2016 periods.~~prior year.

Other Income, Net. Other income, net, primarily consists of (i) ~~forfeited deposits from potential homebuyers who canceled their purchase contracts with us, (ii)~~ sublease income, ~~(iii)~~(ii) interest earned on our cash and cash equivalents, and ~~(iv)~~(iii) payments and awards related to legal settlements. ~~For~~Beginning in 2018, forfeited homebuyer deposits are reflected in Home closing revenue resulting from the ~~three-month period,~~adoption of ASU 2014-09. These are reflected as Other income, net ~~includes $0.3~~in 2017 results. For the three months ended June 30, 2018, Other income, net was flat with the prior year at $1.9 million versus $2.1 million in ~~charges~~2017. For the six months ended June 30, 2018, Other income, net was $7.3 million compared to $3.2 million in the 2017 period. Other income, net was favorably impacted year to date in 2018 as a result of receiving a $4.8 million settlement from long-standing litigation related to ~~the early repurchase of~~ a ~~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 increase over the prior year.~~previous joint venture in Nevada.

Income Taxes. Our effective tax rate was ~~34.2%~~24.4% and ~~32.5%~~34.2% for the three months ended June 30, ~~2017~~2018 and ~~2016,~~2017, respectively, and ~~34.8%~~18.6% and ~~30.8%~~34.8% for the six months ended June 30, 2018 and 2017, ~~and 2016,~~ respectively. The reduced rates in 2018 are due to lower corporate rates under tax reform. In addition, the year-to-date rate was favorably impacted by the enactment of the Bipartisan Budget Act of 2018 in February 2018, which included a retroactive extension of the Internal Revenue Code §45L new energy efficient homes credit, which had previously expired in 2016. This extension provision provides for a single year extension of energy tax credits for homes sold in 2017 that meet the qualification criteria. In accordance with ASC 740, the effects of these tax credits were recorded in the first quarter of 2018, based on the date of enactment, regardless of the retroactive treatment. Our tax rate ~~has been~~was favorably impacted in ~~both years~~2017 by the homebuilding manufacturing ~~deduction. Due to expiration of legislation related to federal energy~~deduction, which was eliminated under tax ~~credits~~reform for ~~tax years after 2016, only the 2016 effective tax rate reflects the benefit of federal energy credits.~~ 2018.

Liquidity and Capital Resources

Overview

Our principal uses of capital in the first six months of ~~2017~~2018 were acquisition and development of new and strategic lot positions, operating expenses, home construction and the payment of routine liabilities. We used funds generated by operations, and borrowings under our Credit Facility to meet our short-term working capital requirements. In addition, in the first six months of 2018 we used the net proceeds of our new senior notes to pay off our maturing senior notes. 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 six months ended June 30, ~~2017~~2018 and June 30, ~~2016,~~2017, net cash used in operations totaled ~~$130.7~~$10.5 million and ~~$110.6~~$130.7 million, respectively. Operating cash flows in ~~both~~2018 and 2017 ~~and 2016~~ benefited from cash generated by net earnings of ~~$65.2~~$97.7 million and ~~$60.8~~$65.2 million, respectively, offset mainly by increases in real estate of ~~$211.4~~$155.8 million and ~~$194.0~~$211.4 million, respectively, reflecting ~~increased land and land development spending.~~home construction spending as we have more homes under construction in both backlog as well as in our spec home inventory.

Investing Cash Flow Activities

During the six months ended June 30, ~~2017,~~2018, net cash used in investing activities totaled ~~$7.4~~$16.1 million as compared to ~~$7.6~~$7.4 million for the same period in ~~2016.~~2017. Cash used in investing activities in ~~2017~~the first six months of 2018 and ~~2016~~2017 is mainly attributable to the purchases of property and equipment of ~~$8.3~~$15.7 million and ~~$7.6~~$8.3 million for the 2018 and 2017 ~~and 2016,~~periods, respectively.

Financing Cash Flow Activities

During the six months ended June 30, ~~2017,~~2018, net cash provided by financing activities totaled ~~$223.2~~$25.2 million as compared to ~~net cash used in financing activities of $15.8~~$223.2 million for the same period in ~~2016.~~2017. The net cash provided by financing activities in ~~2017~~2018 is primarily the result of $202.7 million in net proceeds received from our 6.00% bond issuance offset partially by the $175.0 million repayment of our 4.50% senior notes. Our 2017 results were mainly attributable to $296.0 million in net proceeds received from our 5.125% bond issuance offset partially by repayments of our Credit Facility ~~and $52.1~~of $15.0 million ofand repurchases of a portion of our Convertible Senior ~~Notes. Our 2016 results were mainly attributable to $15.5 million in payments~~Notes of ~~notes payable and other borrowings.~~$52.1 million.

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~~we have spent the last several years building a pipeline of desirable land positions to position us for ~~new homes improves~~growth in an improving homebuilding environment and ~~we continue~~ to ~~expand~~replenish a depleted supply of lots, our ~~business, we expect~~ cash outlays ~~for land purchases, land development and home construction will continue to exceed~~have exceeded our cash generated from operations. We expect future cash needs to begin to moderate and for cash generated from on-going operations ~~in the near term.~~

to support our expected growth.

During the six months ended June 30, ~~2017,~~2018, we closed ~~3,487~~3,864 homes, purchased about ~~5,000~~5,400 lots for ~~$335.2~~$223.6 million, spent ~~$150.4~~$186.6 million on land development ~~paid $35.7 million in lot purchase and option deposits,~~ and started construction on ~~4,261~~4,867 homes. ~~The opportunity to~~We primarily 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~~or partially-finished lots ~~than in recent years and subsequently incurring~~requiring 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 second quarter of ~~2017~~2018 with ~~$216.7~~$169.4 million of cash and cash equivalents, ~~an $85.0~~a slight decrease of $1.3 million ~~increase~~ from December 31, ~~2016, primarily the result of the net proceeds from our June 2017 bond issuance.~~2017.

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,~~June 2018, we entered into an amendment to our Credit Facility, which among other things, increased the total commitments available from ~~from $540.0~~$625.0 million to ~~$625.0~~$780.0 million and ~~extends~~extended the maturity date of ~~a substantial portion of~~ the Credit ~~Facility. Of~~Facility from July 2021 to July 2022. In addition, in March 2018, the ~~total commitments, $60.0 million matures in July 2019 and the remaining $565.0 million matures in July 2021. In June 2017, we~~Company completed an offering of ~~$300~~$200.0 million aggregate principal amount of 6.00% Senior Notes due ~~2027, bearing interest at 5.125%~~2025 (the "Additional Notes"). ~~In addition,~~The Additional Notes were issued as an add-on to the existing $200.0 million of 6.00% Senior Notes due 2025 that were issued in June ~~2017 we redeemed $51.9~~2015 which resulted in a combined $400.0 million of aggregate principal amount of ~~our Convertible~~6.00% Senior Notes ~~in privately negotiated transactions. Our Convertible~~due 2025 outstanding at June 30, 2018. The Additional 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 Noteswere issued at a ~~redemption price equal to 100%~~premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemption of the ~~notes being redeemed, plus accrued and unpaid interest~~Company's 4.50% Senior Notes that were due 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)mature on ~~September 20, 2017.~~March 1, 2018. 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
	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017
Notes payable and other borrowings	$	1,357,530		$	1,127,314		$	1,311,257		$	1,283,804
Stockholders’ equity	1,492,439			1,421,495			1,682,940			1,576,825
Total capital	$	2,849,969		$	2,548,809		$	2,994,197		$	2,860,629
Debt-to-capital ⁽¹⁾	47.6		%	44.2		%	43.8		%	44.9		%
Notes payable and other borrowings	$	1,357,530		$	1,127,314		$	1,311,257		$	1,283,804
Less: cash and cash equivalents	(216,739		)	(131,702		)	(169,426		)	(170,746		)
Net debt	1,140,791			995,612			1,141,831			1,113,058
Stockholders’ equity	1,492,439			1,421,495			1,682,940			1,576,825
Total net capital	$	2,633,230		$	2,417,107		$	2,824,771		$	2,689,883
Net debt-to-capital ⁽²⁾	43.3		%	41.2		%	40.4		%	41.4		%


(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.

Issuer Purchases of Equity Securities

On July 25, 2018, we announced that the Board of Directors approved a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock, subject to certain price parameters. This program replaces the previously authorized program that was in place as of June 30, 2018. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as the market price of the Company's common stock, corporate and contractual

requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased.

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 ~~$987.4 million~~$1.1 billion (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 June 30, ~~2017.~~2018. Our actual financial covenant calculations as of June 30, ~~2017~~2018 are reflected in the table below.



Financial Covenant (dollars in thousands):	Covenant Requirement	Actual
Minimum Tangible Net Worth	> ~~$1,008,197~~$1,137,354	$~~1,452,661~~1,642,782
Leverage Ratio	< 60%	~~41%~~39%
Interest Coverage Ratio ⁽¹⁾	> 1.50	~~4.51~~4.57
Minimum Liquidity ⁽¹⁾	> ~~$72,251~~$84,113	$~~783,097~~871,422
Investments other than defined permitted investments	< ~~$435,798~~$492,835	$~~16,678~~16,639


(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, 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~~$1.3 billion 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 $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 and access the capital markets to issue new debt. Our Credit Facility is subject to interest rate changes as the borrowing rates are based on LIBOR or ~~PRIME~~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, 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~~We have approximately $401,000 of total reserves related to non-warranty or construction defect matters. See Note 1 and Note 15 of the unaudited consolidated financial statements for additional information related to construction defect and warranty related reserves.With respect to the majority of pending ~~legal proceedings,~~litigation matters, 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.~~ litigation.

We believe there are ~~not any~~no pending legal or warranty matters that could have a material adverse impact upon our unaudited 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 below and as discussed in Part I, Item ~~1A.~~IA. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, which could materially affect our business, financial condition or future results. The risks described below and 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.

Legislation related to tariffs could increase the cost to construct our homes.

Government imposed tariffs on imported building supplies such as lumber could significantly increase the cost to construct our homes. Such cost increases limit our ability to control costs, potentially reducing margins on the homes we build if we are not able to successfully offset the increased costs through higher sales prices.



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

~~Issuer Purchases of Equity Securities:~~

~~A summary of the Company's repurchase activity for the three months ended June 30, 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.

As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Issuer Purchases of Equity Securities", on July 25, 2018, we announced that the Board of Directors approved a stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. This new program replaces the previously authorized program that was in place as of June 30, 2018 (originally adopted in February 2006) under which there was $130.2 million available to repurchase shares at the time it was replaced with the new program described above.



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

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

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

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

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

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

~~4.1~~10.1*	~~Indenture for 5.125% Senior Notes due 2027, and Form of Note~~Meritage Homes 2018 Stock Incentive Plan	Incorporated by reference to ~~Exhibit 4.1~~Appendix A of ~~Form 8-K dated June 6, 2017~~

~~10.1~~	~~Amendment to Phillippe Lord Employment Agreement~~	~~Incorporated by reference to Exhibit 10.1~~the Proxy Statement for the Registrant's 2018 Annual Meeting of ~~Form 8-K dated May 15, 2017~~Stockholders

10.2	~~Third~~Fourth 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~~filed on June ~~6, 2017~~29, 2018

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

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

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

101.0	The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q for the three and six months ended June 30, ~~2017,~~2018 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.

* Indicates a management contract or compensation plan

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.




	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~~July 30, 2018

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~~Meritage Homes 2018 Stock Incentive Plan

10.2		~~Third~~Fourth 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 three and six months ended June 30, ~~2017,~~2018 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.



	At June 30, 2017
	West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	20,491		$	23,788		$	30,471		$	—	$	—		$	74,750
Real estate	1,179,257			671,392			787,758			—		—			2,638,407
Investments in unconsolidated entities	7,708			7,205			—			—		1,765			16,678
Other assets	46,699		(1)	89,947		(2)	73,315		(3)	689		260,207		(4)	470,857
Total assets	$	1,254,155		$	792,332		$	891,544		$	689	$	261,972		$	3,200,692



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	—			—