Meritage Homes Corporation (MTH) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Meritage Homes Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn over the conference to Mr. Hilton. Please go ahead. Larry W. Seay - Chief Financial Officer & Executive Vice President: Yeah. Actually, this is Larry Seay. I'm going to read Brent's information here since he hasn't been able to get back into the line. So, turning to slide one. First of all, we apologize for the technical difficulties, but we'll get rolling here and catch you back up. So, turning to slide one. Thanks Dino. Good morning to everyone, and we welcome you to our analyst call to discuss our third quarter results, which we issued in our press release before the market opened today. If you need to copy of the release or the slides accompanying this webcast, you can find them on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Turning to slide two, I'll refer you to slide two of our presentation for the customary cautionary language. Our statements during this call and the accompanying materials containing projections and forward-looking statements reflecting the current opinions of management which are subject to change. We undertake no obligation to update these projections or opinions and our actual results may be materially different than our projections due to various risk factors. Those risk factors are listed and explained in our press release and in our most recent filings with the Securities and Exchange Commission, specifically our 2014 Annual Report on Form 10-K and our subsequent reports on Form 10-Q. Today's presentation also includes certain non-GAAP financial measures as defined by the SEC. We have provided a reconciliation of these non-GAAP measures to the closest GAAP figures within our earnings press release. Referring to slide three, with me today are Steve Hilton, Chairman and CEO; and Phillippe Lord, our Chief Operating Officer, as well as me, Chief Financial Officer. We expect this call to run about an hour and a replay will be available on our website approximately one hour after we conclude the call. It will remain active for 30 days. With that I'll turn it over to Mr. Hilton to review our third quarter results. Steven J. Hilton - Chairman & Chief Executive Officer: Thank you, Larry. I'd like to welcome everyone listening to our call today and thank you for your interest in Meritage Homes and again we apologize for the technical difficulties. Starting on slide four, market conditions remained generally positive through most of the third quarter. Job growth is still strong, household formations are up, interest rates remain low, and the inventory of homes for sale is tight. So, pent-up demand for new housing units has been largely unmet. Rents are high and continue to rise, so owning is still financially advantageous to renting in many markets. And first-time homebuyers appear to be returning in greater numbers than they during the early part of the recovery, all which is encouraging for the long-term outlook for homebuilders. We produced year-over-year growth across many of our key metrics, though others reflected the challenges we faced during the quarter. Closings and home closing revenues were up year-over-year in all but two of our states. Orders and total order value increased in all but three states. Backlog grew in both units and value everywhere but Texas, where the growth in Dallas and San Antonio partially offset the declines in Houston and Austin. We also had a record high number of actively selling communities, finishing with 250 at September 30th. We did see cost continue to rise due to labor shortages on top of significant land price inflation over the last several years. While we're still able to increase prices in many communities where demand is strongest, those cost increases are constraining our gross margin, expansion, and earnings to some degree. We maintain our positive outlook and expect continued growth based on a healthy economy and stable to modestly increasing interest rates and our positions in some of the best markets in the country. Turning to slide five. Our third quarter results reflect the strong growth in orders that we generated earlier this year, especially in our East and West regions. Our total closings were up 12% over the third quarter of 2014. Closing revenue was up 21%, with an 8% increase in average prices. We grew orders by 4% and total order value was up 10% with a 5% increase in ASPs though our absorption pace was down 15% year-over-year due to several primary factors. Our year-over-year comparisons became more difficult this quarter as we eclipsed the first year anniversary of our acquisition of Legendary Communities in early August last year. The absorption pace in those markets averaged approximately 4.5% in the third quarter of 2015 compared to our average of 6.6% in other markets. We've made some operational adjustments that we believe will improve these results over time. We have seen some slowing in orders in the last couple of months. Our July orders were up 22% over last year, August was up 8% and September was down 12%. Last year we had a sales promotion in September and opened some very successful new communities that had a positive impact on our orders; however, October this year looks better and should be up 10% to 15% over last year. Houston and Austin have slowed for different reasons, Houston due to lower oil prices and Austin due to the fact that we have fewer communities opened and home prices have gotten quite high there. The communities in our pipeline that we'll be opening in Austin next year and later this year are at lower price points. Colorado has been impacted by tight labor that has resulted in longer delivery schedules and the gap between new home prices and used home prices has widened relative to historical averages, both of which are discouraging some buyers. Overall, we believe that we have identified and are addressing the issues within our control and the demand is improving in some markets, so we are not overly concerned with the year-over-year decline in our third quarter absorption pace. We ended the quarter with a backlog that was 21% greater in value than a year ago, with 21% top line growth and 19% home closing gross margin, our home closing gross profit was up 13% over the third quarter of 2014. The land and labor increases offset most of the increases in home prices we were able to capture, reducing our expected margin improvement. Additionally, our newer divisions in the East have not yet achieved the performance levels we anticipated and we are working diligently to improve their product positioning, sales pace, trade relations and margins to better leverage their sales overhead and expand our earnings. We took an impairment of $2 million during the third quarter to terminate a couple of options in Southeast, which also reduced our home closing gross margin by approximately 30 basis points. Net earnings for the third quarter reduced by $4.1 million charge from an unfavorable judgment on litigation related to a Nevada-based joint venture that dates back to 2008, resulting in a $0.06 decrease in our diluted earnings per share. Turning to slide six, our strategy to grow and diversify with the entry into new markets is paying dividends, even though we are not firing on all cylinders yet. The East region where our newest markets are, grew home closing revenues by 47% in the third quarter of 2015 over 2014, leading our three regions in year-over-year growth and offsetting some softening in Texas, our Central region. Our gross profit and home closing margins grew in five of our seven divisions in the East region for the third quarter of 2015 over 2014. So despite of the fact that the margins aren't yet as high as the more established divisions, we are making positive progress and expect that trend to continue. We made some operating adjustments in the third quarter that should provide a meaningful improvement in our results over the next 12 months to 18 months. I would like to now turn it over to Phillippe Lord, our COO, to review our trends by market. Phillippe? Phillippe Lord - Chief Operating Officer & Executive Vice President: Thank you, Steve. Hello, everybody. We continue to see decent demand in the third quarter across most of our markets, though not necessarily as robust as we had expected based on the first half of the year. In the West, Arizona continued to improve over last year's sluggish sales with strong increases in orders per community, total orders, and order value. While we wouldn't call it a strong market yet with only 6.5 average orders per community for the quarter, our pace of sales in Arizona were 38% higher than a year ago and the largest increase in the company for the quarter. We have some great new floor plans in communities opened in Phoenix that are gaining traction early and we've been able to increase prices there, so we're excited about the potential growth. Our active adult business has also been much stronger this year that will represent a small percentage of our total revenue. California still has the strongest orders per community across the company and benefited from a 24% increase in average active communities in the third quarter compared to last year, so our orders there were up 29%. Both Northern and Southern California grew significantly over last year's third quarter, but Northern California is still the stronger of the two this year. Colorado was weak during the third quarter and our orders per community slowed to 5.4 for the quarter compared to last year, when they led the Company with 10.6 orders per community in the third quarter. The extremely wet spring took a toll on the Denver market and labor is in short supply, making it difficult to catch up. Sale-to-close cycle times have stretched out by weeks or months discouraging some buyers who are not willing to wait that long for a new home to be delivered. In Texas, Dallas/Fort Worth and San Antonio are doing well this year, while Austin and Houston have slowed from the high demand they enjoyed last year. Dallas is still one of the strongest markets in the country, but like Denver is also playing catch-up after a very wet spring. While we believe demand in Houston will return as oil prices recover, buyer seemed to be sitting on the sidelines for the time being, waiting to see how that unfolds. Our net orders for the Central region were down 16% year-over-year, but only 9% in terms of value, since our ASP increased 8% for the quarter. Our East region's orders increased 22% in the third quarter compared to last year and higher ASPs added another 3% growth on top of that. Florida is our anchor and most established market in the East with relatively solid growth in nearly all metrics and the second highest absorption pace in the company after California. Georgia and South Carolina produced the largest percentage increase in orders and order value year-over-year, but we still have a lot of room for improvement there as they produce the lowest average orders per community in the third quarter. The average orders per community for Georgia and South Carolina are not comparable to last year due to the mid-quarter timing of the Legendary acquisition in 2014. As we continue our integration plans, we have begun to introduce some of our better selling plans from Meritage library that are more efficient to build. Those plans should help improve our sales, construction cost and margins in those markets. We also adopted more of Meritage's successful sales processes and organizational structure to facilitate our ability to capture more of the market. Rounding out the East region, Tennessee and North Carolina are right in the middle of the decent results, but also have room for additional improvement. Overall, our order growth was not as robust in the third quarter as it had been in the previous four quarters. Those sales were stronger in July and August than they were in September. The total value of orders exceeded our unit growth due to a higher average sales price. Looking forward into 2016, we have more communities to sell from than we have ever had. So, we have a lot of upside as the changes we made recently begins to deliver improved results. While our average sales prices have continued to rise with customers choosing larger homes and better locations, we're preparing for the return of the entry-level buyer by offering homes at lower price points in every single market. We are focused on completing and delivering as many homes as we can during the fourth quarter, especially those that have been delayed due to weather or labor shortage. We're also managing costs as best we can in the tight labor market. I will now turn it over to Larry Seay for some additional details on our financial results. Larry W. Seay - Chief Financial Officer & Executive Vice President: Thanks, Philippe. Turning to slide eight. We gained some overhead leverage on higher volumes during the third quarter improving SG&A by approximately 100 basis points in total over the third quarter 2014. General and administrative expenses declined in absolute terms, primarily due to compensation adjustments and fell to 4.3% of total closing revenue from 5.2% last year. Commissions and other sales costs were also marginally lower at 7.3% of home closing revenue compared to 7.4% last year. Interest expenses increased due to a higher debt balance in the third quarter of this year after we issued senior notes in June. Our interest expense was up approximately $3.7 million over the third quarter of last year. Our effective tax rate increased to 35% compared to last year's 31% in the third quarter, since the energy tax credits that reduced our tax rate in 2014 have not yet been renewed for 2015. We expect that to happen in the fourth quarter and then included it in our guidance projections so there are no guarantees that Congress will approve the extension. Moving to slide nine. The first nine months of the year, the story is similar. Strong growth in closings and revenue was offset by lower margins, impairments and a litigation related charge. We increased home closing revenue 22%, total order value by 25% and ending backlog value by 21% in 2015 over 2014. Our home closing gross margin was 18.9%, down 270 basis points from 2014's 21.6% for the reasons Steve addressed relative to our third quarter and due to an approximate $4 million in impairment for this year. There was an approximate $9 million swing in litigation related expenses from 2014 to 2015 as we had a $4.6 million in favorable settlements last year through the third quarter compared to the $4.1 million charge this year. We believe that amount increases our reserve to a level which fully covers our exposure on the Nevada JV issue. Moving to slide 10. We ended the third quarter of 2015 with $235 million in cash and cash equivalents, $2.1 billion will estate, $1.1 billion in debt and $1.2 billion of shareholders equity for a net debt-to-capital ratio of 43%, essentially flat from where we ended 2014. We had nothing drawn on our $500 million revolving credit facility as of September 30, 2015. We just received our second upgrade from one of the major credit rating agencies, who upgraded our outlook to positive based on our improved results and future opportunities to further strengthen our balance sheet. Moving to slide 11. We spent a total of approximately $177 million on land and development, including option deposits during the quarter brining our total to $487 million for the first nine months of 2015. We've been more cautious in buying land this year than we originally planned due to higher land prices relative to home values and therefore have spent a little less in the first three quarters than we did through the third quarter of 2014, which was $415 million by comparison. We ended the quarter with approximately 29,000 total lots under control of which 65% were owned and 35% controlled under option contracts, which represents approximately a 4.5 year supply based on trailing 12 months closings. That does not include our work-in-process units of approximately 3,700 homes. Our spec inventory of homes at September 30, 2015 was approximately 1,350 of which two-thirds were under construction and one-third completed. That equates to an average of 5.4 specs per community compared to 5.8 a year ago. We currently control virtually all of the total lots required to meet our 2016 plan and greater than 80% of our planned 2017 closings. I'll provide a few other customary details. Our quarterly cancellation rate remained effectively flat at 15% in the third quarter of 2015 compared to 14% a year ago. 33% of our third quarter 2015 closings were from spec inventory compared to about 34% of third quarter closings in 2014. Our backlog conversion rate was 54% this year, compared to 60% last year with fewer specs per community at quarter end and the longer build times we are experiencing, we expect fourth quarter conversion rate to be somewhat lower than last year's 69%. And with that, I'll turn it back over to Steve before we begin Q&A. Steven J. Hilton - Chairman & Chief Executive Officer: Thank you, Larry. In summary, the long-term thesis for home building market remains intact and we believe we have many opportunities for growth in the coming years, even though we're exercising some caution in certain areas. I am pleased that we were able to deliver more than 1,700 homes to our customers during the quarter despite encountering headwinds from labor shortages and weather-related challenges in some of our markets. Rising construction cost driven by labor shortages have pressured our home closing gross margin this year and hampered us from reaching our target margin. However, we expect to see our margins increase over the next 12 to 18 months as margins improve in our East region. Based on our backlog and current costs, we anticipate fourth quarter home closing revenue of approximately $750 million to $800 million and diluted EPS of approximately $1.10 to $1.35 for the quarter. Our record level of actively selling communities also positions us to grow in 2016 assuming the market conditions remain healthy. Coupled with the improvements we anticipate in our home closing gross margin and SG&A leverage next year, we have the opportunity to expand our earnings dramatically in 2016 and 2017. Thank you for your support and time today. And I will look forward to taking some questions.

Thank you. We will now begin the question-and-answer session. We ask that you ask one question and one follow up only. The first question comes from Mr. Stephen East from Evercore. Please go ahead.

Thank you. Good morning Steve and Larry, and Philippe. Steve, maybe just start with the gross margin a little bit. Could you talk about how much you all are seeing both land and labor, how much they've increased year-over-year? And then, what type of gross margins are you seeing in the backlog and you talk about you expect some big improvements as we go through 2016, could you just maybe talk about what those factors would be that would show those big improvements? Steven J. Hilton - Chairman & Chief Executive Officer: Well, total construction cost which includes labor and materials have increased between 5% and 10% year-over-year, and it varies widely by market.

Sure. Steven J. Hilton - Chairman & Chief Executive Officer: We have some markets that are up 2% or 3% and some that are hovering around that 10% number. So it varies widely. Land has been accelerating at a pretty dramatic pace now for several years. It's hard to pinpoint a number. Land that's flowing through our income statement today was land we purchased maybe a year-and-a-half ago. And certainly we are underwriting for those new land prices to achieve that 20% gross margin which is what our target is. So it's hard for me to articulate what the percentage increase precisely is on land, but I can tell you, construction costs are in that 5% to 10% range year-over-year.

All right. That's helpful. And then as you look into 2016, what are you seeing that makes you feel a bit better about that? And I will go ahead and ask my second question and get back in the queue, maybe this one is for Larry. Larry, as you look at the $1.10 to $1.35, pretty wide range given a fairly tight revenue range. What else do you have some big swing factors in that fourth quarter? Steven J. Hilton - Chairman & Chief Executive Officer: Let me answer your first part of the question, then I'll turn it over to Larry.

Okay. Steven J. Hilton - Chairman & Chief Executive Officer: What makes me feel really optimistic about next year, is the operational improvements we are making in the South and in the East. Certainly, we have a low bar there and I think we're going to be able to turn things around and have that area of the country meaningfully contribute to our results based on some changes that we are making that are in process right now. And then the new communities that we've been opening over the last quarter or two and that we're going to be opening over the next several quarters in the West and throughout the rest of the country, I'm very excited about. And I think that higher-level of stores will allow us to drive our revenues and leverage our SG&A and produce some strong growth for next year. Larry W. Seay - Chief Financial Officer & Executive Vice President: Regarding the fourth quarter earnings EPS guidance, I really think we are just trying to be a bit more conservative on our guidance. We obviously have had a couple adjustments downward this year and that's not typical for us, and we are disappointed we've had to do that. So I think the wider, broader earnings guidance range really represents that. Probably the greatest risk does come from gross margins and just making sure we're controlling construction costs.

Okay. Thanks a lot. Steven J. Hilton - Chairman & Chief Executive Officer: Thanks.

The next question comes from Ivy Zelman with Zelman Associates. Please go ahead.

Good morning. Thanks for taking the questions. First, Phillippe, thank you so much for the detailed color by market, I think everyone found it very helpful. Maybe you can tell us from an operational standpoint at the MSA level how much turnover you've had in senior management at the division level? I understand there has been a lot of turnover operationally in some Southeastern markets, but I know you also had turnover in Dallas. Maybe you can talk about the one to two year turnover division level. And I think Steve, you had said at the conference that we hosted in September that probably about a half of the shortfall in your downside in earnings is related to Legendary and I think what would be really helpful is just sort of gauge with respect to where you guys are, how much of it is operational? Is it 70%, 80% of the issue as opposed to fundamental if I am looking at the backdrop relative to the entire housing market because I think it's a lot of noise. So maybe Phillippe if you could start with the local market color, that would be terrific. Phillippe Lord - Chief Operating Officer & Executive Vice President: Yes, absolutely, Ivy. Working from West to East, we're actually really stable out West. We obviously have a new Regional President that replaced me, Gordon Jones from Lennar. He's been with us for about three months. So he's getting up and running. We do not currently have a Division President in Colorado, but that's been the only major significant point of turnover. I think Colorado results are much more driven by the weather and the labor situation than it is by the market, prices are... Steven J. Hilton - Chairman & Chief Executive Officer: ...by the operations. Phillippe Lord - Chief Operating Officer & Executive Vice President: I'm sorry, by operations. The demand in the market is still very strong. It's just about getting those houses built and providing the customer experience we want. Going to the West, very stable... Steven J. Hilton - Chairman & Chief Executive Officer: You mean, Texas. Phillippe Lord - Chief Operating Officer & Executive Vice President: ...I'm sorry, Texas. Again, stable, haven't had any turnover for a while. We replaced the Dallas Division President probably two years ago, I'm thinking. That was before my time, but other than that, we've been very stable. Obviously going to the South region, we have had some turnover mostly below the Division President line although we did replace some of the Legendary leadership in Atlanta. But mostly operation level people, sales level people; et cetera, we have had some turnover there and we're getting that stabilized and going forward... Steven J. Hilton - Chairman & Chief Executive Officer: Just by our choices. Phillippe Lord - Chief Operating Officer & Executive Vice President: And again, as Steve just articulated this was mostly by our choice and not someone who left us, but felt like we weren't a good fit for them. And then going to Florida, again we're stable there. We did obviously have our Regional President leave us recently and that's been the only major point of turnover. But our Division President level people and the division people have been with us for quite some time. We did replace the Tampa position. Steven J. Hilton - Chairman & Chief Executive Officer: Yeah. And in response to the other part of your question, Ivy, I kind of stand by what I said at the conference. It's about 50% operational and it's about 50% market headwinds. Certainly September sales drop-off had a big impact on what our results are going to be for the rest of the year because we expected a much bigger month in September. I think our results for September are pretty consistent with what other builders saw in that same period. I'm not sure if it was the stock market volatility or what it was that caused buyers to pull back in that month, but it was very, very disappointing. It looks like October is rebounding from the poor activity we saw in September, but hopefully that answers your questions.

No, it does. Thank you. And if I get my follow-up question, we've heard from various builders and developers the challenges on getting lots developed and you guys are doing your own development. How much of your shortfall in margins is attributed to your missing budget because of development costs as opposed to the lots to the extent that you are buying as finished, so maybe breaking down the development costs and seeing if that's where you're coming in ahead of forecast on the cost side? Steven J. Hilton - Chairman & Chief Executive Officer: You know I can't give you a precise number there, but I can acknowledge that's an issue. We are definitely seeing some cost overruns in development although I think we are seeing less in the last quarter or two than we saw previously. But it is an issue. I think lot development costs are as high as I ever seen in my 30 years in business. It's hard for me to understand why they are so high other than the fact that there just aren't enough contractors to develop lots and they are commanding a high price. You'd think with lower fuel prices that those costs would come down, but they haven't come down. And they are extremely high and most municipalities are taking too long to process our plans and give us the permits to get new communities on track, and that's slowing down, also, the opening of some of our new communities.

Steve, you didn't always develop, so would you say that some of this is because of the change in strategy to develop and it's a learning curve part of which may be attributed to it? Steven J. Hilton - Chairman & Chief Executive Officer: No, I wouldn't say that at all. We've developed a good chunk of our land for a very, very long time. You can't buy finished lots in many parts of the country that we build homes, particularly in the West and there is very few lots that you can – even in the South and in the East that you can buy on a finished basis. So we have development people who have been with us a long time and are very capable and very strong. It's just unfortunate that the market has been more challenging to get lots developed. Phillippe Lord - Chief Operating Officer & Executive Vice President: Ivy, I would like to add that last cycle we did a lot of options but most of those options were through land bankers and we did the development work for the land banker and they reimbursed us for those expenses. And so we could take finished lots down. So we were taking the construction risk last cycle for most of the lots we build on.

Got it. Okay, thank you, guys. Good luck. Steven J. Hilton - Chairman & Chief Executive Officer: Thanks, Ivy. Okay. Next question, operator.

The next question comes from Mr. Stephen Kim from Barclays. Please go ahead.

Hi, guys. This is actually Trey on for Steve. Thanks for taking my questions. So you cited weakness in Houston during the quarter due to oil, which is something that's really been expected by everyone. At this point we expect to persist, but there has been some further inclement weather recently. Could you talk about the impact of the heavy rains from the remnants of Hurricane Patricia and how that's impacted the region's orders or at least the cycle times there? Steven J. Hilton - Chairman & Chief Executive Officer: It hasn't had a significant impact on us, but I can tell you that our cancellation rate in Houston has spiked up the last two months, and we're really starting to feel the impact of the slowdown in the market the last two or three months. We were feeling pretty good that we hadn't seen it earlier, but it's come to bear now and we have much higher cancellation rate in Houston and sales have slowed down dramatically. Phillippe Lord - Chief Operating Officer & Executive Vice President: Yes, this is Philippe. With our business, when we have prolonged rain that really starts to impact our business like we had in Texas and Dallas specifically in the spring and Colorado, but a week's worth of rain doesn't set us back too far.

All right. Got it. And then how do you feel about the duration of the cycle times and how your deliveries are being pushed out, that you mentioned, and do you think that's going to persist for the foreseeable future? Do you think it is something more in a short-term timeframe impact? And as a result, if there have been pushouts, it's going to look like it is going to be a while. Have you attempted to raise ASPs in these areas? And if so, how has that been taken? Steven J. Hilton - Chairman & Chief Executive Officer: There's two issues. There's number one are those markets that were affected by the wet spring, which would be mostly Denver and Dallas. They're just going to get caught up and they are going to be caught up I think over this next quarter and they will be back to more of a normal condition I think when we enter next year. And then just across the board, in about half to a third of our market, cycle times have just expanded two to four weeks. So we're just building that into our forecast and into our expectations. Certainly some place it's a little bit more and some place it's less than other markets cycle times are holding pretty much to normal. So, certainly in a market like Denver where we had really hot sales in the spring, we've raised our prices and the cycle times have elongated and that's why we had pretty slow sales last quarter. We're working through that on a store-by-store basis and we need to get the prize right in every community, so we can get the correct absorption level to meet our expectations and to maximize our profitability. Certainly having a high price and low absorption doesn't do that for you. So we're working through that on store-by-store basis. Phillippe Lord - Chief Operating Officer & Executive Vice President: This is Phillippe again. And obviously, as Larry pointed out, our backlog conversion number this year versus last year indicates what our cycle times have done specifically in those markets that Steve discussed. So you are seeing a backlog conversion below 60% when it was above that during the last couple years.

Got it. Thanks, guys, and good luck next quarter. Steven J. Hilton - Chairman & Chief Executive Officer: Thanks. Phillippe Lord - Chief Operating Officer & Executive Vice President: Thank you. Steven J. Hilton - Chairman & Chief Executive Officer: Next question, operator.

Yes. The next question comes from Michael Rehaut from JPMorgan. Please go ahead.

Thanks. Good morning, everyone. Can you hear me? Phillippe Lord - Chief Operating Officer & Executive Vice President: Yes. Steven J. Hilton - Chairman & Chief Executive Officer: Yes. Go ahead, Michael.

Right. Great. Thanks. I'm just dialing in from out of the office. The first question I had was just going back to the lower guidance between now and early September. Steve, you alluded to I guess that a big driver of that was September orders coming in below expectations. Typically when you think about orders being taken in a given month, you would think that that more primarily affects deliveries, let's say, not necessarily the next quarter – perhaps some in the next quarter due to spec, but more over the next couple of quarters, let's say, particularly given that it's right at the end of the preceding quarter. Just wanted to get a sense of – in terms of what happened over the last six weeks that drove that incremental lowering of guidance? Were there other factors really driving that as well in terms of perhaps again higher than expected construction costs, additional closing delays or things that are going on in the Southeast as well that maybe were a little worse than you thought at the time of early September? Steven J. Hilton - Chairman & Chief Executive Officer: No, I wouldn't say it was the Southeast. I would say it's primarily two things. Number one is sales, and specifically specs. Again like I said earlier, our sales were down 12% in September from the previous year, and the makeup of those sales was more dirt sales than specs, as we expected. So if we sell specs in September, we expect to close them this year. And then going into October, our sales are better in October, but again, more dirt sales than spec sales. We're not willing to take a bigger discount to sell spec home than a dirt home. So that's certainly a big part of it and the other part of it is just the construction cycle issue. I think when we gave guidance previously, we expected to make up some more of the delayed closings, construction issues and we haven't been able to gain ground on that. Certainly over time we'll make those up and as we get into next year, we'll be in more of a normal cycle. But for this year and this quarter coming up, the spec issue and the cycle time issues are the big obstacles that we have to try to overcome and calls us to lower our guidance.

That's helpful. And then just on Houston, your comments previously just about the cancellation rates spiking up in the last two to three months, sales have slowed down dramatically according to your words. Just trying to get a sense of when you think about other builder commentary over the last few months, the consistent commentary is that it's really more -- the softness is really more isolated to the higher end, above $350,000, above $400,000 perhaps more that higher end move up buyer. Has that perhaps changed? According to your commentary, if we extrapolate that, perhaps it's trickling down into the broader market? Perhaps the first time or entry-level still being relatively solid, but perhaps percolating more broadly across the heart of the market, which as far as we understand is still move up? Steven J. Hilton - Chairman & Chief Executive Officer: I think it absolutely has changed over the last 60 to 90 days. And I think it has moved down the price band instead of $350,000, it may be down to $250,000. And again, if you were to ask me a few months ago, I think on the previous call, I said that we hadn't seen much impact yet, but we're seeing it now. We're not seeing massive discounting going on. I think builders are being pretty disciplined about their pricing, incentives may have increased 2% or 3%, but clearly volume is down. Phillippe Lord - Chief Operating Officer & Executive Vice President: Yes. This is Philippe again. It's still absolutely is being felt most acutely above $350,000, but over the last 60 days, it absolutely is being felt down to $250,000 at this point. Below $250,000 we're still seeing really strong demand, but it is creeping into it, but still definitely being felt at the higher price points most significantly.

And if I could just sneak in, Hello? Phillippe Lord - Chief Operating Officer & Executive Vice President: Go ahead.

If I can sneak in one more real... Steven J. Hilton - Chairman & Chief Executive Officer: Yes. Go ahead.

I'm sorry, if I can just sneak in one more real quick, just on the Southeast personnel changes, obviously an important topic as well. If you could just kind of walk us through when you put in the new personnel in the Atlanta region and what gives you the confidence that you expect to see improvement there over the next 12 to 18 months. Have there been any signs yet, new systems in place, are there people that you have in place from within the company or are the new people learning your systems more from the start? Just any additional color around your confidence and what drives you to expect that solid improvement over the next 12 to 18 months? Thanks. Steven J. Hilton - Chairman & Chief Executive Officer: It is been primarily in the Atlanta. We have a new DP there. He is been onboard now for maybe about three months. We've completely overhauled the entire sales force. We have new sales leader. We beefed up the land acquisition team, the land development team. We've canceled some options on some underperforming marginal communities. We have done some better marketing. We've also beefed up our regional operation. We had a pretty thin regional team there, regional purchasing and regional human resources, regional marketing and we've strengthened that for the entire region. And so we've made a lot of operational adjustments in Atlanta particularly, but in other markets in the South region there as part of the East and we're very, very bullish that those changes that we're making and additional changes that we're making are going to pay dividends in 2016. Larry W. Seay - Chief Financial Officer & Executive Vice President: Yes, this is Larry. If I can jump in and just correct a transposition error I made in my prepared remarks. Our land purchase for the three quarters of last year was $514 million, not $415 million. I think I transposed the numbers. So it's $514 million. So just correcting the record. Steven J. Hilton - Chairman & Chief Executive Officer: Next question please.

Thank you.

The next question comes from Mike Dahl from Credit Suisse. Please go ahead. Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker): Hi, thanks for taking my questions. Wanted to ask about the sales trends in Dallas and Denver but also Austin. And so I understand that the comments about some of the Dallas and Denver sales getting – it being hard to sign a contract when you've got such a long backlog already due to the delays. But I think you also mentioned the affordability issues in both those markets and also Austin. So just, can you talk about what you've seen in the competitive environment in those markets and what specifically are you thinking about in terms of actions to mitigate these affordability problems other than using price and incentive as a lever? Phillippe Lord - Chief Operating Officer & Executive Vice President: Yes, this is Philippe. I'll work from West to East again. In Denver I do really believe that the wet spring put a lot of builders behind the eight-ball in their backlog. We've been focused on those customers that have signed up, been metering out lots in a lot of our communities. I think there still is strong demand. Prices are high and you are seeing a lot of builders start to push forward land strategies and product strategies to move down the price point, evaluate their spec strategy as far as what we're putting into houses, smaller houses, some are higher density, et cetera. So we're focused on that as well to get our price points down. As you move to Dallas, again, prices are high, but we're not seeing demand wane in Dallas even with the prices being as high as they are. All of our communities that are up – the price down with are still doing very well. That being said, we're also looking at moving down the price bandwidth with our future acquisitions in Dallas, because we realize that that can't hold on forever. And then Austin, basically above $350,000 has really slowed the last six months, very similar to Houston. But below $350,000 it is very strong. We have a few positions below $350,000 out there that we'll continue to very attractive very well and pretty in pretty much every community we purchased over the last, let's call it, 12 months is moving down below $350,000. So we're very bullish about what we have coming on in Austin to serve that affordable buyer, which we think is the strength and the heart of the market right now. Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker): That's helpful. Thank you. And then second question, Larry, to go back to the guidance, as you mentioned. This is atypical for Meritage to have these types of multiple reductions. And so I think this may have been addressed from a personnel standpoint in response to Ivy and Mike's question. But from a process standpoint, can you talk about how you're thinking about the forecasting process and the guidance just in light of what we've seen in the past few months? Larry W. Seay - Chief Financial Officer & Executive Vice President: Sure. We've taken a hard look at our process and have had several meetings with the finance folks and the division presidents talking about making sure we're being accurate. We don't want to be overly conservative, but certainly we do want to be overly optimistic. So we certainly started the year with too optimistic of a forecast. We realize that now. We've taken steps to make sure that won't happen again . We'll obviously be very cautious about providing future forecasts, and when we do we will make sure we feel very, very comfortable. So I wouldn't expect this to be an occurrence in the future. Michael G. Dahl - Credit Suisse Securities (USA) LLC (Broker): Okay, thanks.

The next question comes from John Lovallo from Bank of America Merrill Lynch. Please go ahead. John Lovallo - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Hey, guys. Thanks for taking my call as well. The first question I had was on Colorado specifically. Are you guys seeing any signs that maybe this market is just overheating given the pricing is down, more supply coming on, and you see Equity Residential pulling out of the market entirely? Just any thoughts there would be helpful. Larry W. Seay - Chief Financial Officer & Executive Vice President: Yes, certainly prices are the highest they've been in a long time in Colorado, which is certain buyers who can't get there. But I'll tell you the supply in Colorado is the tightest in our country besides maybe Northern California. So there's just such little supply and such tremendous demand with the job growth, the lack of the ability to bring lots on. So it is overheated I guess from a pricing standpoint, but it's driven by demand-supply fundamentals and you're just not seeing the supply imbalance start to occur. So I think there's a lot more runway there. I think we have to be sensitive about pushing our prices much farther. We really ought to get our costs under control, so we can maintain our margins, but I believe the demand is there for a while given the supply conditions and the job growth. John Lovallo - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. That's helpful. And then my second question would be, I think it was on the last call you had talked about possibly giving some 2016 community count outlook. Any thoughts on what we can expect in 2016 on community count? Steven J. Hilton - Chairman & Chief Executive Officer: We're not really prepared at this point to give any more specific guidance on 2016. We may be able to do that on our next call around community count, but I don't have anything new to give you right now. I apologize for that. John Lovallo - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. Thanks, guys.

The next question comes from Nishu Sood from Deutsche Bank. Please go ahead.

Thanks. It's actually Rob Hansen on for Nishu. You mentioned that you're being a little more cautious in land buying. So I just wanted to kind of figure out where on the spectrum is the cautiousness right. Is it more on the less developed land or is it developed? And basically does this mean that we should see a slightly slower organic pace of growth next year as a result of the slightly slower land buying? Steven J. Hilton - Chairman & Chief Executive Officer: You know, again, almost all the land that we're buying we have to develop. So there's very few finished lot opportunities out there for us to purchase. Secondly, of course, in those hot markets that we've been talking about today, Northern California, Denver, Dallas. That's where land is the most expensive and the disconnect between the house price and the land price is the greatest. So in those places we're certainly being the most cautious. Does this mean we're going to grow at a slower rate? Not necessarily. I think because we bought a lot of land over the last couple years and a lot of that land is coming to the forefront and these communities have been opening and are opening over the next several quarters. So I think the growth is there. And 2017 and beyond maybe at a little lower pace than some markets, but we have other markets, particularly in the South and the East that we've been talking about that are going to continue to grow at a very fast pace. So some markets are balancing out slower growth than other markets. Phillippe Lord - Chief Operating Officer & Executive Vice President: Just to reiterate, we said earlier that we have 100% of the lots or nearly 100% of the lots to do the entire 2016 business plan. So any slowing would not impact 2016 really. It would impact beyond that. Again, we are planning to be a growth company, but we do have to be cautious in these hotter markets.

Thanks. And then you mentioned in the more expensive areas, I would assume that's probably the kind of A and B locations where prices are pretty high. So does that mean that we can – with the return of the first time buyer too, right, should we start to see you kind of step out a little bit more into kind of like the C type locations where it would make more sense? Steven J. Hilton - Chairman & Chief Executive Officer: Well, yes, certainly as we gravitate to more of our entry-level plus strategy to try to expand that part of our business, we're going to have to go a little farther out. And we recognize that, but we're going to be careful not to go too far out. Larry W. Seay - Chief Financial Officer & Executive Vice President: Yeah, or there will be – it will be a little bit more of attach product orientation, so it will be a closer and smaller lot attached product orientation too for that entry-level plus. So, it's not necessarily always a little further out, it could be closer in, but smaller lots, smaller product.

Got it. Okay, one just last quick one is just on the Southeast, you guys gave a lot of great color in terms of how you're going to turn that around and the management changes. You kind of mentioned that you're feeling pretty confident on the business overall for next year, and I guess I just wanted to make sure how long do you think it's going to take to get the – kind of, the Southeast back on track, right? Like should we be kind of expecting back half of next year we start to see kind of things more normal? Is that how we should kind of look at that? Steven J. Hilton - Chairman & Chief Executive Officer: I think, our results will gradually improve in the Southeast over the next 12 months to 18 months.

Thanks. Got it. Steven J. Hilton - Chairman & Chief Executive Officer: Thanks.

The next question comes from Jade Rahmani from JBW (sic) [KBW] (51:59). Please go ahead. Ryan J. Tomasello - Keefe, Bruyette & Woods, Inc.: Hi. This is actually Ryan Tomasello on for Jade. Thanks for taking my questions. Regarding labor cost, can you discuss which trades in particular are in greater shortage? And also outside of Colorado what other markets are you seeing the largest impacts in? Phillippe Lord - Chief Operating Officer & Executive Vice President: Yeah, this is Philippe. To answer the first question, framing and concrete have been particularly acute for us, but we've seen different things in a lot of places. I mean, sometimes its electricians, sometimes its drywall guys, so – but I'd say framing and concrete have been the biggest challenges. The frontend trades versus the backend trades. Outside of Colorado, I would tell you Dallas was – has been particularly concerning. A little bit in the North, the Carolinas and a little bit in NorCal, those would be the ones where we're seeing the most significant challenges, although we've had challenges in a number of places depending on the state of the business. Ryan J. Tomasello - Keefe, Bruyette & Woods, Inc.: And then for my second question regarding the land market, you noted the pricing pressures there. Can you provide any color on what markets there may still be more attractive opportunities? And if these labor market constraints have been causing you to change any of your underwriting approaches? Thank you. Steven J. Hilton - Chairman & Chief Executive Officer: Well, we're seeing attractive opportunities certainly in Atlanta, certainly in Carolinas, in Florida. We feel really good about our land position in Orlando, continuing to expand upon that, buying more lots in Tampa. Phoenix, we're starting to buy lots again, and certainly we have a strategy to grow our business in California, or we're seeing opportunities in certain places in California that we're pursuing. So, it's not all doom and gloom on the land side, there's still a lot of great land out there to buy that we can still under-write to a 20% gross margin. So, we're definitely pursuing those.

The next question comes from Susan Maklari from UBS. Please go ahead.

Thank you. Larry, in one of your earlier comments you've mentioned that in some situations you are doing things or perhaps you're doing higher density products for your entry-level buyer or things that are perhaps a little bit different. Can you talk more broadly about what you're seeing in terms of that entry-level demand as it comes back and how it's perhaps different than it's been in the past, and what you are doing in response to that? Larry W. Seay - Chief Financial Officer & Executive Vice President: Well, we are certainly starting to see an improvement in a little bit of the lower end market. It's not – clearly not back to where it should be, and it's the initial stages of seeing higher demand, but we're definitely seeing people asking for either a lower priced product that are first time buyers or some millennials are asking for a closer end product that's still affordable. Steven J. Hilton - Chairman & Chief Executive Officer: We don't have that many entry-level communities, but as we rotate out of some of our higher-priced communities they're going to be replaced with more entry-level plus communities in 2016 and that's going to become a bigger percentage of our business. We are targeting more of a 30% to 35% piece of our overall business to be in the entry-level niche. Phillippe Lord - Chief Operating Officer & Executive Vice President: Yeah. This is Phillippe. Clearly there's two parts to the entry-level buyer that's coming back. There's the affordable – affordability driven one and there's a big group of buyers out there that have chosen to rent over own, and it's more location driven and they desire to live closer in, in a town home versus going out to a single family detached, there is strength in both those segments depending on the market. So we are attacking both of those depending on the market.

Okay, great. Thanks. Steven J. Hilton - Chairman & Chief Executive Officer: We've got to wrap things up. Is there any more – one more question or we've got done, operator?

Yes. We have to one further question that's from Will Randow from Citi. Steven J. Hilton - Chairman & Chief Executive Officer: Okay.

I guess, I'll only get one question today. Steven J. Hilton - Chairman & Chief Executive Officer: Sorry.

Sorry. Will Randow is on the line right now. Steven J. Hilton - Chairman & Chief Executive Officer: Okay. Will?

Hey, good morning. Just two quick follow-ups. I guess one on Arizona and Colorado. The order ASPs materially outperformed the closing ASPs. Is that evidence that you are pushing price, and if so, how much is price and how much of it is mix? Steven J. Hilton - Chairman & Chief Executive Officer: In Colorado, it's been price – we've raised our prices quite a bit in the first half of this year. We have a longer cycle time, you're starting to see that come through. In Arizona, it's more mix related. We haven't had the opportunity to push our prices as much in Arizona, although we're starting to see a little bit opportunity depending on our better located communities.

And just as a follow-up, I believe last quarter you talked about stepping your position back up in terms of active communities in Texas. It looks like they've declined again. What's your view on that today and how are land prices in the Southern Texas market looking like? Steven J. Hilton - Chairman & Chief Executive Officer: The community count is going to go back up in Texas in the next couple of quarters. And we're not buying much land in Houston right now and land prices are very healthy, very strong in Dallas and in Austin. So, I think, we've made quite a few comments on that already. Larry W. Seay - Chief Financial Officer & Executive Vice President: Yeah. Obviously, the communities that are coming online are already controlled. They've just taken a month or two months longer to get to selling, so that's why we continue to say that they will be coming. Steven J. Hilton - Chairman & Chief Executive Officer: Yeah.

Okay, thanks, guys and good luck for next quarter. Steven J. Hilton - Chairman & Chief Executive Officer: Thanks. I think, we have one last question from Alex Barron, if he's out there.

Yeah. That's correct, just one last question. Alex Barron from Housing Research Center. Please go ahead.

Okay. Thank you very much, Steve. I guess I was just trying to understand your thought process in terms of strategy to handle the labor constraints. So the question I have is, is it better to go ahead and sell a home, and lock in the price of the home and risk that the labor cost goes up over time or is it better to not do that? The other question I guess related to the same issue is are you having to pay up more for subs to retain them or how often are those contracts negotiated? In other words how stickier the labor costs or how often do those guys try to re-trade you to get more money? Steven J. Hilton - Chairman & Chief Executive Officer: You know, Alex, that's a complicated question to answer. I would say it would be a bad policy, a bad strategy to sell a house and not have your cost locked in. So we try not to sell a lot of houses that we can't get in the ground right away. Even though we have some long-term contracts with a lot of subcontractors that doesn't prevent them from coming back to renegotiate with us on a quarterly basis, but it varies widely by market and by trade and what we are trying to do is, we are trying to broaden our trade base. So we have more options and we have more competition amongst the trades and so if we do get a price increase that is hard to stomach from one trade that has a big part of our business, we have a go to option to another trade. So, that's really what we're working hard to do in every market that we're in because we don't want to be held hostage by any one particular trade. But it's a challenge we face and it's a challenge that everybody is facing in this industry right now. There's just not enough labor out there to meet even the small increase in demand that we've seen over the last year or two years. Phillippe Lord - Chief Operating Officer & Executive Vice President: Yeah. This is Philippe. That clearly states the challenge we had in Colorado, in Dallas. You know, we sold a bunch of houses and then it rained. And we couldn't get the starts out in the ground and the trade couldn't support us, and we had to manage through that which you're seeing in our results. But like Steve said, we have a three-pronged approach of trying to get our cost under control and we are getting after it.

Okay. Thanks and then the other question was on the slightly lower 4Q guidance. Was that more influenced by the lower expectation of deliveries, and is this change in the mortgage rules having any impact on the number of closings you might be able to get done or is it more labor related challenges...? Steven J. Hilton - Chairman & Chief Executive Officer: No, it's not the mortgage rules, that's not impacting us. It's like I said earlier, it's the fewer spec sales particularly in September and into October, the mix has moved more to dirt sales than spec sales, and we're not going to be able to close those homes that we haven't sold. And then it's the cycle times that we've been talking about now several points throughout the call. Those are the two primary reasons for lowering of our guidance in the fourth quarter. Phillippe Lord - Chief Operating Officer & Executive Vice President: And, of course, we aren't expecting, we were projecting margins to be going up through the year, we haven't seen that, so our margins are obviously not going to be increasing as we had anticipated or at least as much. Steven J. Hilton - Chairman & Chief Executive Officer: Yeah.

Okay. Thanks very much, guys. Steven J. Hilton - Chairman & Chief Executive Officer: Okay, thanks. Steven J. Hilton - Chairman & Chief Executive Officer: Thank you everybody for joining us for our third quarter call, and we'll look forward to talking to you again in January. Have a great day.

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