Good morning and welcome to the Meritage Homes Second Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Brent Anderson, VP of Investor Relations. Please go ahead.

Thank you, Amoine. Good morning everyone. I would like to welcome you to our analyst conference call today. Our second quarter of 2013 ended June 30th and we issued our press release with results before the market opened today. If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com or by selecting the Investor Relations link on the bottom-left side of our home page. If you turn to slide two of our presentation, our statements during this call and the accompanying materials contain projections and forward-looking statements, which are the current opinions of management and subject to change. We undertake no obligation to update these projections or opinions. Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding those risk factors, please see our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2012 Annual Report on Form 10-K and our first quarter 2013 report on Form 10-Q. Today’s presentation also includes non-GAAP financial measures as defined by the SEC to comply with SEC rules we have provided a reconciliation of these non-GAAP measures in our earnings press release. Turn to slide three, with me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes; and Larry Seay, our Executive Vice President and CFO. We expect our call to run about an hour. A replay of the call will be available on our website within an hour or so after we conclude the call. It will remain active for 15 days. I will now turn it over to Mr. Hilton to review our second quarter results. Steve?

Thank you, Brent and welcome to our call today. Second quarter 2013 was another quarter of strong growth with continued significant improvements across our operating metrics. We earned $0.74 per diluted share, more than three times our second quarter 2012 earnings per share. Our net earnings were up 252% year-over-year on a 27% increase in home closings and a 55% increase in home closing revenue. This was our seventh consecutive quarter of year-over-year growth in home closing revenue. We continue to raise prices which improved our home closing gross margin by 300 basis points and leveraged our overhead expenses to drive earnings growth at a faster pace than our closing or revenue growth. The margin expansion highlights our shift to focus more on increasing pricings and margins over volume growth as demand continued to be strong. We saw the reflected and our year-over-year price and volume comparisons for the second quarter relative to our first quarter year-over-year comparisons. Average closing prices were up 22% in the second quarter, higher than the 17% increase we saw in the first quarter. Our closing volumes in were up 27% in the second quarter, less than the 39% increase in the first quarter. While our increases in average prices are partially due to our mix shifting towards higher price communities, the price increases that we took generated much of the 21.5% home closing gross margin in the second quarter, a 200 basis point improvement over the first quarter. Turning to slide five. This was our ninth consecutive quarter of positive year-over-year growth in orders, and we ended the quarter with a backlog value, 76% higher than a year ago. However, our year-over-year order comparisons are becoming more difficult as seeing with this quarter’s 21% growth in orders compared to our 49% order growth in…

Thanks, Steve. Turning to slide eight. The vast majority of our increased profit for the second quarter was due to higher home closing revenue and gross margins. In addition to the $42 million increase in home closing gross profit over the prior year second quarter, we added approximately $2 million of land closing gross profit from the sale of excess lots in certain areas and another $2 million from financial services profit, primarily from increased closing volume through our mortgage joint ventures. We leveraged our overhead to generate a $36 million increase in pretax earnings on the $45 million increase in total profit before overhead expenses resulting in a 750 basis point improvement in pretax margin which increased 8.5% in the second quarter of this year. Commissions and other selling costs were down 100 basis points as a percent of home closing revenue. General and administrative expenses were down 90 points as a percent of total closing revenue. Interest expense was also down 120 basis points. Together, these accounted for 310 basis points of the total improvement in our pretax margin. As we indicated on our April call, we incurred a $3 million loss on early extinguishment of debt in the second quarter of this year and had a similar type loss of approximately $6 million last year. The second quarter 2012 net earnings also included a $5 million benefit resulting in a $6 million swing from last year to this year’s quarterly net earnings due to tax changes. Our effective tax rate was 27% for the second quarter due mainly to energy tax credits and a parcel reversal of our deferred tax asset valuation allowance in California. We now project that our effective tax rate for the year could be in the 31% to 32% range. Moving to slide…

Thank you, Larry. We were pleased with our results for the second quarter, particularly our 300 basis point improvement in home closing gross margin and our operating leverage that drove our earnings growth far higher than our growth in revenue. We are expecting to continue to grow and increase our earnings throughout the remainder of 2013. Most housing metrics have been moving in a positive direction over last year, albeit from historically depressed levels, as the US economy improves and creates jobs, demand for new homes should remain strong, especially in light of the shortage of used home business for sale. Nearly every major housing market is experiencing price depreciation which is good for both existing home owners and home builders and it’s helping to drive our revenue growth well in excess of our growth in orders and closings, while buyers may conclude that they missed the absolute bottom of the market in terms of price and interest rates, they also recognize that both are still a bargain in terms of the amount of house you can buy at a given income level. Assuming continued growth in the market due to those factors and based on our better than expected performance year-to-date in 2013 we are now projecting approximately $1.7 billion to $1.8 billion in home closing revenue for 2013 and are increasing our guidance for projected earnings per diluted share to $2.65 to $2.85 for the year. I thank you for your attention and now open it up for questions. The operator will remind you of instructions. Operator? Michael Rehaut – JP Morgan: Thanks. Good morning everyone and congrats on a great quarter and particularly all the progress on the gross margins. The first question I had was, I think what’s kind of on everyone’s minds today is the impact of rising rates and Steve, I know you mentioned in the press release, in your prepared remarks that despite the rise in rates, demand remained strong in your markets. But I was hoping you can give us a little more granularity, particularly as the quarter progressed, how do you saw trends? If you are able to give us some color, April versus May versus June, if you saw any slowing momentum in terms of sales pace or price increases for that matter and if any markets stood out in particular?

No, I’d say, we finished June strong and we had – May was the peak for the quarter obviously due to seasonality. As we roll into summer demand does start to wane a bit. But I didn’t see demand really retreating due to interest rates. We have seen a little bit of cooling in July. Again it’s hard to tell whether that’s from the summer seasonality or from demand, I mean, our traffic remains significantly stronger than it was than last July. But I’ve heard anecdotally from some people that, some of our customers that they may sit out for a month or two thinking that rates may actually go back down. I think people were a bit surprised by the speed of the increasing rates and took a little people, shocked a few people. But I don’t think those people are not going to buy home, it’s just a function nor they buy this month or next month or the month after that they are going to buy a house. So, we don’t have a lot of concern particularly in the short-term from the rising rates. Michael Rehaut – JP Morgan: Okay, that’s helpful. I appreciate that. I guess, the second question kind of following on in terms of pricing trends and as it particularly relates to gross margins, I believe you said that, most of the sequential improvement was due to the price increases you were able implement over the last couple of quarters. The level of gross margins, I assume that the raised guidance, maybe you could correct me if I am wrong, is baking in a gross margin kind of similar to what 2Q demonstrated and I guess, the question is, is that correct? And to the extent that you had some price increases, even perhaps throughout the second quarter, maybe they moderated as rates went up. But, would you expect the gross margins to more or less hold or would there be a little bit more upside or even downside if the pace of increase perhaps has slowed a little bit?

Well, I don’t want to get too granular on that. But I can tell you that we don’t bake a lot of appreciation into our internal forecasting. So, I do think the pace of price increases will start to decline. I think we still have pricing power, but I am not expecting a 300 basis point increase in gross margins over the next twelve months like we saw over the last twelve months. But that said, certainly, there is a possibility that we can improve upon those numbers. But I don’t want to stick on that right now and promise that. It’s very hard to tell what we are going to see over the next several months as far as pricing. I mean, pricing is particularly strong in the west, it’s strong in other markets, but we have a lot of new communities opening up in the back half of the year and want to set to see how those are accepted and how well they do. Michael Rehaut – JP Morgan: Right, right, so, just lastly, to finish this off, last quarter you said, by the end of the year gross margins should exceed 20% against those previous comments in terms of the guidance, again is it safe to say that, it’s hard to persist, but that 21.5% is kind of what’s the new year-end type of goal or should we not draw that conclusion?

Larry, come let’s – I’m sticking my neck out too far here, but I think roughly, 21% for the year.

Yeah, I guess, I would add that, we see sales prices continue to increase. We probably don’t see them increasing at the same rate of increase that we’ve seen in the last couple of quarters. But, and that would imply that we really don’t expect margins to go down. We expect them to continue to increase, but at a more moderate rate than maybe you saw the last quarter. So that the average that Steve is talking about is certainly higher than that 20% maybe in the more 21% range. But we expect the back quarter’s margins to continue to be strong and hold at least where they are now or around that point and maybe increase a bit. Michael Rehaut – JP Morgan: Great, very, very helpful, thanks guys.

Thank you.

Our next question comes from Stephen East of ISI Group. Please go ahead. Stephen East – ISI Group: Thanks, nice quarter guys. Steve, if I can just follow-on that line of questioning a little bit, when you talk about pricing will moderate, is it more you all will take what the market gives you or will this be more of the strategy change for you. I know, in the past, you had talked about you worried about in rising rates that the consumer might try to trade down in a product that type of thing. So I am curious about how the strategy might change and along with that whether you consciously change your mix even more away from entry level to move up, second move up et cetera?

Well, over the last couple of years, we have certainly changed – tried to focus more on the move up market. We were never a big entry-level builder. But we became even more of a move up builder over the last couple of years. I still believe over time, buyers will slide down the price band as rates go up. You certainly can’t buy as much houses at 4.5% as you could at 3.5%. But in answering your first part of the question, we just take what the market gives us. We want to achieve an absorption of three to sales per moths in every one of our communities to the extent that we can maintain that volume and push prices. That’s what we’ll do and that’s what we’ve been doing. So, I don’t see any change going forward. Stephen East – ISI Group: Okay, and then if we look at your land acquisition strategy, a couple different things here, one, when you look forward on your buying, what percentage of your land do you want to bring on to the balance sheet versus putting into land banking. And then of course, we’ve heard a lot over the last several months that, in the harder markets like California that, most builders are having to build in price appreciation to make the deals work. Just sort of your commentary and thoughts on that.

Well, the land banking doors opened up albeit in a small way. There have been a few land bankers of significance that have entered the market. I think we did over the last four months or so about $50 million in land bank deals. Does that sound right Larry?

Yep, about a handful.

But, acquitted of about $50 million which is significant and we are going to continue to do those to the extent that they are available because we think that allows us to grow quicker and leverage our balance sheet and minimize our risk. So, we will keep land banking.

Stephen, if I could add the percent of what we have under contract versus owned has been increasing and it was hovering around 15%. But over the last couple of quarters, it’s bumped up to around 25% and I think we can have an internal goal of maybe land – trying to land bank 20%, 25%, 30% of the going forward acquisitions, of course it depends on availability of land banking.

Okay, that’s great. That’s helpful. And what you all are seeing in the markets like California for the pricing of the deals, etcetera?

Pricing of land? Stephen East – ISI Group: Yeah, whether, we’ve heard a lot over the last six months where the builders are having to put in price appreciation to make the deals work and just what you are seeing, what you all are doing and what you think about that market from a land perspective?

Yeah, I mean, certainly, deals in the west and particularly not so much in the other half of the country; you are going to have to put a low price appreciation to make it more. But, I’d be naïve I just think there is not going to be any price appreciation. We just want to be conservative about that and not be too aggressive. But, yeah, if you want to buy a land today in California, it’s not going to pence what today’s house price. Stephen East – ISI Group: Okay, thanks a lot.

Our next question is from Alan Ratner of Zelman & Associates. Please go ahead. Alan Ratner – Zelman & Associates: Hi, good morning guys. Congrats on the quarter. Steve, just kind of adding on to your comment about the absorption pace and targeting that three to four sales a month pace. You are at about 3.3 sales a month in the second quarter and I know you have plans to increase your community count sequentially in the back half of the year. So, kind of reading through your comments on July the fact that it softened all a bit and understanding that it may not be clear at this point whether that’s normal seasonality or the impact from higher rates. At what point do you see that absorption rate and decide that you need to either increase incentives, slow down the price increases, stop price increases in order to get that rate back up. Or are you comfortable for the next several months that absorption pace maybe dropping below that three to four month range if you do think that this is more of a temporary blip?

It’s too hard to tell right now, it’s still early and again we are in the middle of summer time. So, it’s hard to gauge demand when a lot of people are way out of vacation. But, that said, I don’t expect, maybe in the third quarter we are closer to three versus closer to four and because the seasonality and then I expect things to continue to be strong into the fourth quarter. So, it’s a community-by-community strategy, market-by-market strategy. Some communities will be pushing prices harder, particularly in California and some better located communities in Arizona and we won’t retreat that strategy. In other places we’ll have to give a little bit to keep demand up. So, I am hesitant to paint with a broad brush and I think in other factors we have a lot of new communities opening up in the next couple quarters and I think that will help us to maintain a pretty healthy absorption rate. Alan Ratner – Zelman & Associates: So just to be clear than based on your comments on July, it would be your expectation that even with that season slowing, you would still be pretty close to the low-end of that range. We are not talking about absorption is going again kind of half or anything like that – not a seasonal falloff, okay?

No absolutely not. Alan Ratner – Zelman & Associates: And then if I could just ask one more, a number that you provided in the past, do you have at your fingertips, sort of the quarter the change in apples-to-apples pricing versus what your cost inflation was? I think you provided that previously.

Larry, do you have that handy?

Sure. We haven’t updated that real recently, but we have made general comments. We haven’t been real specific about that, but our general comments come from last quarter remain this quarter will just – we think about half to a little more than a half, maybe as much as two-thirds as are the price increase we are seeing is a real price increase and not mix or other kinds of changes. Pricing during the quarter and our ability to increase pricing remain pretty strong.

But I think Alan is asking more on the cost side. Alan Ratner – Zelman & Associates: I was asking both, but, yes, so that’s helpful on the price versus mix, but if you have the cost increases as well, that would be helpful.

Yes, I guess… Alan Ratner – Zelman & Associates: Go ahead Steve.

Go ahead Larry.

No, I was going to say, so that’s the revenue side of it. And I think we’ve done a better job in the last couple of quarters or three quarters managing construction cost increases. So our construction cost increases have been more moderate down in the as far eating up as a percent of sales price maybe only eating up a third of the sales price. So the difference there is the margin expansion you are saying. Alan Ratner – Zelman & Associates: Does that already reflect the relief we’ve seen on lumber costs or do you expect a lag there in terms of that flowing through in the margin?

I can’t answer that question. I am not involved in that details enough to answer a specific question about a particular component.

Yeah, certainly the lumber price declines we’ve experienced haven’t flown through the income statement yet to much of a degree. So, we’ll see some of that in the third quarter. And that will mitigate through only some of the other price increases that we are taking. Alan Ratner – Zelman & Associates: Great, thanks a lot guys.

Thank you.

Our next question is from Stephen Kim of Barclays. Please go ahead. Stephen Kim – Barclays Capital: Thanks, guys. Yes, strong quarter and that’s encouraging about the lumber margin benefit maybe in the future. You made a comment about California, 30% fewer communities; you hope to replenish that by year end. Just, with all the attention in California we’ve gotten and how strong a market that’s been. I was just wondering if you could be a little bit more specific about, to what degree you think that may represent a little bit of a drag to your – both your average price as well as your orders? Is that something that we think it’s measurable enough for us to talk about today?

No, I am not concerned that it’s going to drag our orders or our earnings growth down, because we have – I don’t know the exact number but probably six or seven new communities opening up. Particularly in Northern California in the next several months and we have a strong interest lifts in all of those communities. A lot of them are focused over towards Sacramento. And the market is very strong there and we expect to get a pretty good pop in those communities in the third and fourth quarters to mitigate the decline in community count that we’ve seen there in California. Stephen Kim – Barclays Capital: Sure, okay. That’s great. Good to hear. Secondly with respect to the interest rates, it was interesting, Realogy made a comment on their call that basically they were not seeing an increase in cancellations in the existing home sales that are pending. And I would imagine that maybe the most forward-looking indicator for rate impact for you guys might be a change in the way buyers are upgrading their homes. Can you comment at all about what you are seeing, sort of real-time on the willingness of folks to spend on upgrades?

Haven’t seen any change yet. Absolutely haven’t seen anything – any change in behavior there. Stephen Kim – Barclays Capital: All right, well that’s very encouraging. One just data point, finished lot counts, do you have that number?

Larry, you got that?

The finished lot count versus the total lot count? Stephen Kim – Barclays Capital: Correct, or versus your own, so of the own, what percent of finished or how much that?

Yeah, that number, I don’t have the exact number, but it’s around about maybe 40% now of finished lots, maybe a little less. We bought a lot of lots that were undeveloped lots. So we have a lot of lots that are under development and are developed enough to be building houses on, but they aren’t completely finished. So, our percentage of finished lots has decreased. So it’s down in the kind of 30% to 40% range, because so much of it is under development although. Again I want to emphasize we are able to build lots or houses on a lot of those lots that are still technically under development, because they are complete enough to do so. Stephen Kim – Barclays Capital: Okay, great. Well, thanks very much guys, great quarter.

Our next question comes from Dan Oppenheim of Credit Suisse. Please go ahead. Dan Oppenheim – Credit Suisse: Great, thanks very much. I was wondering you talked about some of the trends and there was a bit of cooling there. Wondering how much of that you are seeing in terms of differences at price points? Anymore in terms that customers sitting out were its more rate sensitive in terms of the first-hand buyers at the lower-end or relatively consistent across price points there?

Again, we just don’t have that many first time communities. I think we only really count about those number of communities that’s first time. So, we are not really good gauging in what’s happening there. But, again in the move up market where we play, we just haven’t seen that much change other than hearing from in a few instances the buyers are taking a little bit of a pause, just to see if rates may go back down, before they go up. Dan Oppenheim – Credit Suisse: Sure and then, in terms of the some of the communities coming on in California talked a lot about the Sacramento, are you focusing a bit more inland just in terms of trying to focus on the slightly more affordable and where you haven’t seen land prices escalate as quite as much as they have sort of on the really along the coast there? How are you thinking about where you are looking at new communities that will be coming on over the next year or so?

Well, two things. Number one, we don’t really operate on the coast very much. Most of our communities are inland, either in Northern California, the East Bay of San Francisco or in Sacramento and in Southern California we’re primarily in the inland part although we have one community in Orange County and down in Ocean. So we are primarily an inland builder. But, I’d also say that prices have gone up just as much inland as they have on the coast. So, the pricing pressure is pretty consistent across the whole state. Dan Oppenheim – Credit Suisse: Great, Thank you.

Our next question comes from Will Randall with Citigroup. Please go ahead. Will Randall – Citigroup: Hi, good morning and thanks for taking my question. On the Texas market, we’ve seen acceleration and I apologize if this has already been asked in the DFW market, I realize you are showing all of Texas in your order numbers as well as your price numbers. Could you kind of talk about pricing per square foot and your orders that you are seeing in DFW area?

Well, our business in DFW has strengthened every month throughout the entire year. So every month has been better than the previous month and July is looking like a very strong month in DFW as well and right up there was what we saw in May and June. So, we’ve been pushing prices there. And absorptions have continued to remain strong. So, I am very bullish on DFW. Will Randall – Citigroup: Thanks for that. And just one last one, when I am thinking about the Phoenix market, how control are you with current land prices? Do you think, that’s potential that you maybe overhanging and lastly, are you purposely augmenting your footprint to kind of hedge that risk by growing in the Carolinas?

Well, land prices in Phoenix have gotten pretty high and, but I’d say that we have not been buying much land in Phoenix over the last few quarters because we bought a lot of land in Phoenix in 2011 and early in 2012. So our land position here is pretty solid and we don’t see how compelled that we have to pay up for a lot of these positions that people are buying right now and that’s not to say we are not buying anything. We are just buying few and been very selective. But the land price certainly has gotten pretty frosty here. Will Randall – Citigroup: Thanks for that. Good quarter guys.

Our next question is from Nishu Sood of Deutsche Bank. Please go ahead. Rob Hansen – Deutsche Bank: Thanks this is Rob Hansen on for Nishu. I just wanted to ask about mortgage rates again in terms of – you mentioned limiting the pricing power and Larry, I think at our conference you mentioned that it would have a real impact when mortgage rates hit the 5.5% to 6.5%. So, I wonder just if you could kind of talk about what actions you would take if that were to happen and then really how quickly it would take you take those actions, so what would be the impact on your results?

Well, as rates rise, we will endeavor to purchase more land that accommodates smaller products and we’ll probably purchasing smaller lot sizes and we’ll start to design more products that in the smaller end of the band than we are operating at now. I don’t have our average square footage, but I would eventually say that it’s probably close to 3000 feet right now and historically it’s been 10% to 15% less than that. So, I expect that we will – as rates rise, and I think it’s too early to change strategies on this that we will be focused more on smaller products. Rob Hansen – Deutsche Bank: Okay. And then, you mentioned also you are managing the direct cost this quarter, just kind of to have your gross margins there and I think you mentioned lumber prices, but that’s going to roll in the future. What other costs this quarter were you able to kind of keep a lot lower to help provide a lot of that upside in the gross margin this quarter?

Well I think we talked about SG&A and those costs leveraging our interest expense all those cost that we are focused on and that we continue to be very focused on construction cost and try to mitigate to the extent that we can. The price increases that we are seeing in markets by building relationships with more vendors and more contractors to get our homes built to keep that competitive pricing pressure in the market. So, I think we are doing a much better job this year than we did last year. And I think the margins speak to that that you see in the second quarter. It’s not just about price increasing; it’s about managing all of our costs. Rob Hansen – Deutsche Bank: All right, thank you very much.

Our next question IS from Eli Hackel of Goldman Sachs. Please go ahead. Eli Hackel – Goldman Sachs: Thank you good morning. Just wanted to talk about the Carolinas market. Obviously you mentioned some of your communities having a hatful stride there. Clearly a growth point for you. Just wanted if you can give some more oversight, or just overview in terms of what’s going on in those border markets and the strength of those markets as you grow into them? Thank you.

Well, we are still relatively new in the Carolinas, I mean, a little more seasoned in Raleigh. We’ve got a good platform in Raleigh. We are very profitable there. We are continuing to grow. We are going to be building our first town house community there. And in Charlotte we are still in our first full year of operation right now. So it’s really too early give too much color. But we are continuing to buy land in both of those cities and we feel very confident in the long term prospects for those markets. Eli Hackel – Goldman Sachs: Okay, thank you.

Our next question is from Joel Locker of FBN Securities. Please go ahead. Joel Locker – FBN Securities: Hi guys. Nice quarter. Just wanted to, I guess I can read 11% and obviously it’s historically well and wanted to see if you see any signs of that July getting back to more normalized level, say 20% more rents?

No, it hasn’t changed really at all in July. Joel Locker – FBN Securities: Not changed at all? And just, I guess going to absorptions, going from the second and third quarter, it used to be 10% to 15% and maybe less than the last couple of years and just with the softening in July that you mentioned do you expect that to return to more of a seasonal – historical seasonal basis or do you expect it to still be less – near second quarter levels like it’s been in the last couple of years?

I think over time, it’s going to become more seasonal. I don’t know if we are going to see that much of that this year. But, certainly there is seasonality on our business. I don’t want to read too much into my comments about softening in July. I am not saying that we are seeing widespread softening. We just noticed in some communities, we’ve seen a little bit of a pause from buyers postponing their decisions potentially a month or two to see what happens with rates. But, in no way shape or form do I think these people are not buying houses. So, I don’t see it as concern for us. Joel Locker – FBN Securities: Right and just last one on the specs. What was your total spec count in finish backs at the end of the quarter?

Yeah, we had total specs as a percent of work in process as around 24% and about a third of those were completed and about two-thirds of those were under construction. Joel Locker – FBN Securities: Right, all right. Thanks a lot guys.

Our next question is Jade Rahmani of Keefe Bruyette & Woods. Please go ahead. Jade Rahmani – Keefe Bruyette & Woods: Thank you for taking the question. You commented on the focus on price over volume. Do you expect backlog conversion to moderate going forward or stay similar to the level that we have seen in this quarter?

I expect it to – what’s your backlog conversion, Larry?

It’s about 67%, 68% this quarter.

I’d like to try to keep it above 70%. It was actually a little bit lot lower than we thought. But with the strong increase in sales, it’s been hard to keep that up. But I am not expecting it to decline from here. Jade Rahmani – Keefe Bruyette & Woods: Okay, great. And just on the G&A side, commission costs continue to decline as a percent of revenue. Can you speak to what’s driving that? And if there is any permanent changes that you’ve made or if you were to expect that ratio to pick up as volume competition picks up?

No, I think, I expect it stays at this against pretty much where is that right around here. Obviously we don’t have to incentivize specs as much as we did previously when the market gets stronger the commission costs generally decline. I think our co-broke rate has remained relatively constant. So, I am not foreseeing any real change there.

There is about two-thirds of that commissions number you see as actual commissions and the other third is like model office cost and project marketing, advertising and SG&A. So there is a bit of a fixed component to that other one-third. So that’s more of the leverage you are seeing in that number than actual commissions. Jade Rahmani – Keefe Bruyette & Woods: Okay, thanks for that. Just a final clarification, I think, on your balance sheet the mothball communities balance modestly increased quarter-over-quarter. Can you just explain that?

Steve, do you want to take that? You want me to take?

Go ahead, Larry.

We had one small community in outlying area in Tucson that we decided to mothball. But it’s not a community, but it’s a slight increase. Jade Rahmani – Keefe Bruyette & Woods: Thanks a lot.

Our next question is from David Goldberg of UBS. Please go ahead. David Goldberg – UBS: Thanks, good morning. Thanks for taking the call. I wanted to follow-up on one of the earlier questions. I think it might have been from Mike earlier. But it was about what happens to margins as home price appreciation growth rates moderate. So not go down but just moderate in terms of growth and if I understood, you guys said that, in the short-term margins would still expand at a slower rate. I wonder if we think about a little bit longer term, it’s not going to make sense for the next six months or nine months. But if you think about a little bit longer term, as the rate of price appreciation moderates, is there a reason to think that margin, it’s your margin pressure or would margins kind of plateau or do you think they would expand further and maybe give us some color on that?

Well, I mean, early obvious that trees don’t grow to the sky and you can’t continue to raise prices. It’s certainly at the rates that were raised them now forever. To pinpoint exactly when these price increases are going to moderate, it’s pretty hard to do. But it’s certainly tied to interest rates and tied to growth in the economy and jobs and all the other macroeconomic factors. But, we still have a lot of land on our books that we got at very nice prices and as one of that land flows through over the next several years, it should allow us to keep margins pretty high. So, I am expecting very good margins for quite some time. But certainly, it’s going to be hard to keep them this high on this trajectory forever. Your guess is as good as mine there I think. David Goldberg – UBS: I appreciate the color. My other question was on land banking and you mentioned trying to increase amount lot here you are taking on through land banking as we kind of look forward, maybe talk about the cost of land banking today kind of where that is relative to last cycle and margin impact. If you guys decide to take land on balance sheet and develop that yourself and go through the process yourself versus using a land banker and what you have to pay for that. So, just some more color I think would be helpful as we kind of look forward?

Without getting too specific, the cost is very much in line with where it was last cycle. We made an internal decision not do land banking if the cost was not reasonable. But it’s very much in line with what we paid last time and we think it’s a smart strategy. It allow us to grow our earnings quicker. We get a higher ROA and ROE when we use land banking and as I said earlier, to the extent that it’s available we are going to continue to pursue it. David Goldberg – UBS: And in terms of the margin impact, you maybe give us an idea what the spread will look like if you guys develop something internally versus using a land banker?

It’s a couple points to the margin. But again, that’s a small piece of our land acquisition strategy right now and impact margins really at all. David Goldberg – UBS: Okay, that’s great. Thank you for the color. I appreciate it.

And we do have two more questions in the queue if you would like to take them now.

Sure.

The next question is from Jay Mccanless of Sterne Agee. Please go ahead. Jay Mccanless – Sterne Agee: Good morning everyone. First question is on direct labor cost. Could you talk about how that trended during the quarter and what you are expecting going into the year-end?

I don’t have specific numbers on that, but from my understanding, they remain steady through the quarter and I don’t see much of a change for the rest of the year. Jay Mccanless – Sterne Agee: Okay and then on cycle terms, where do you estimate cycle terms are now and with the new communities that you are bringing online, where do you think those to go?

Well, they’ve been increasing just primarily due to the fact that we are doing more land developments and it’s taking longer to get land developed and it’s been more difficult over the last year to get labor to get these houses built. So as we talked about on previous call, that our conversion rate went below 70% and I think that’s primarily due to the fact that we are building less spec homes as we have more demand for we call dirt sales. So cycles have certainly increased, but I don’t have any specific numbers as to exactly where they are and where they are going

Steve, our cycle times now are generally from sale to close, generally running in the 150 day range, maybe a little bit higher and that’s a small increase maybe a 5% or 10% increase from the last – over the last few quarters. But it’s not a large increase. We’ve been keeping a pretty good handle on cycle times although it has expanded a bit. Jay Mccanless – Sterne Agee: Okay. Great, thank you.

Our next question is from Alex Barron of Housing Research Center. Please go ahead. Alex Barron – Housing Research Center: Hey guys, thanks a lot. I wanted to ask if you can quantify what incentives were a year ago versus this year. That’s my first question. Second question was, just kind of your thoughts on maybe issuing some debt here versus issuing some equity?

Larry, do you want to take the incentives?

Incentives really haven’t been increasing at all. In fact, they’ve been going down. So, we are at the point now where our incentives are running about where they should be on a normalized basis. So we don’t have any concern on incentives affecting margins if anything we’ve been having a positive impact on margins by continuing to reduce them a bit. Steve, may I handle the debt question too?

Sure.

We look at kind of managing the net debt-to-capital ratio and we’ve said many times that we are looking at kind of a 40%, 45% net debt-to-capital ratio as a target where we’ve been operating below that in the high 30s. So I don’t really see the need to be issuing debt in the near future. Who knows what maybe farther out? And on the equity side, we’ve been opportunistic about that and could do something, but again at the current leverage ratio we are at. It’s certainly not something we need to do. So, that’s something that we would do just on an opportunistic basis. Alex Barron – Housing Research Center: Okay, got it. But I guess on the incentive question, I know incentives have been going down. I was just trying to get like a feeling for what the impact to the gross margin has been from the benefit of declining incentives?

We look at that on a net basis, but, Steve, go ahead.

It’s a mix of reducing the incentive and raising the price. So, in some communities, the price increase will be smaller, but the incentive decrease will be greater and vice versa in other communities. So we really look at as one and the same. Alex Barron – Housing Research Center: Got it. Okay and thanks a lot guys.

Thank you, I think that. I am sorry, operator, go ahead.

I am showing no further questions. This concludes our question and answer session. I’d like to turn it over back to Mr. Hilton for any closing remarks.

Well, thank you very much for your participation and attention this quarter and we look forward to talking to you next quarter. Have a great day.

Thank you.

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