Good morning, and welcome to Taylor Morrison's Fourth Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Jason Lenderman, Vice President, Investor Relations and Treasury.

Thank you, and welcome everyone to Taylor Morrison's fourth quarter 2017 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results, along with our guidance. Then Sheryl will conclude with the outlook for the business, after which we will be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session includes forward-looking statements that are subject to the Safe Harbor statement for forward-looking information that you will find in today's news release. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission and we do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer.

Thank you, Jason, and good morning everyone. We appreciate you joining us today as we discuss our most recent equity offerings, share our 2017 results and provide guidance regarding our expectations for 2018. Needless to say, Dave and I excited to dive into each of these topics. As I reflect on 2017, and the first few weeks of 2018, I am delighted with what Taylor Morrison was able to accomplish. We set aspirational 2017 goals and once again the teams across the organization found ways to deliver and deliver big. What makes me exceedingly proud is how we responded to several curveballs thrown our way. Instead of allowing these challenges to limit us, we turned them into opportunities that ultimately to find our year. I'll get into some of the specifics and resulting accomplishments in just a bit, but before I do that, let me begin by sharing my thought on the recent exit of our private equity sponsors TPG and Oaktree Capital. As you know in January of last year, we conducted our first secondary equity offering since the 2013 IPO, which began the monetization process for our private equity sponsors to divest first stake in the company. In a not coincidental symmetry, we were able to complete that process in January of this year through the final equity offering that fully monetized their investment. In just under 12 months we completed seven equity offerings and reduced our private equity sponsor's ownership from over 70% to being fully divested from the company. As you can imagine, there was a lot of effort involved in each of these offerings and our teams were able to make each one very successful. I want to thank all of those involved that help make this happen. I also want to thank Oaktree and…

Thanks, Sheryl, and hello everyone. For 2017 net income on a GAAP basis was $176 million and earnings per share was $1.47. These numbers include the expenses incurred as a result of the new tax reform package passed at the end of 2017. As Sheryl mentioned in her remarks, when excluding the impact of tax reform, we finished the year with $238 million in net income and $1.98 in earnings per share. Total revenues for the year were $3.9 billion, including homebuilding revenues of $3.8 billion or about a 11% higher than in 2016. Home closings gross margin inclusive of capitalized interest was 18.6%, representing an increase of 40 basis points when compared to last year. The year-over-year improvement is driven by product mix shifts across the organization, operational enhancements that offset rising costs and lower capitalized interest. On a gross margin basis, we came in at 19% and down just a bit year-over-year, which as I mentioned in last quarter's call, is driven by a higher margin land sales that happened in Q3 of 2016. As you may recall, we sold these long-term strategic assets as the tax holding period expired allowing for favorable monetization. Moving to financial services, we generated just over $69 million in revenue for the year, representing growth of more than 15% over the prior year. Gross profit was about $27.5 million with a margin rate of nearly 40%. Our mortgage company capture rate for the year came in at 75% and we continue to focus on ways to drive this metric higher. I think it's important to acknowledge this team's effort throughout the year, which was highlighted at year end when they supported the business seamlessly even with the highest volume that we've ever seen in our company history. SG&A as a percentage of…

Thank you, Dave. Let me emphasize something Dave mentioned near the end of his remarks. For the last few quarters, we've talked about our shift in focus to really drive returns and that remains the ultimate goal for 2018. Over the last many years, we’ve engaged in a multi-phase journey to put our company in the best position possible for our stakeholders. During that time, we’ve been methodical in our approach, vision and expectations. We started by reconfiguring our footprint by opportunistically selling our Canadian business for purposes of growing our U.S. presence. We then aggressively pursued markets that made sense for us and adjusted the structure of the organization to meet those new demands. Next, we made investments in the organization that allowed us to responsibly assimilate our impressive growth as evidenced in the multi-year growth rates I sighted earlier and develop a new normal in standards of execution. Now we find ourselves in a place where we can take advantage of this point in the cycle and continue to drive returns. In short, we’ve achieved outsized growth and have been able to digest that growth with a mindfulness to returns. This balanced approach will serve us well as we progress through the cycle and continued to pursue strategic growth. In order to ensure the entire organization is on the same page, I kicked off 2018 with a company-wide communication outlining our three priorities for this year. I’d like to take some time and share those priorities with you. First, we’re going to pursue smart strategic growth to deliver benefits of scale. We have seen this pay dividends for us on a first-hand basis in our markets where we have strategically advantageous scale. For those markets where we do have that lead, we’ll continue to invest to stay at…

Thank you, ma'am. [Operator Instructions] And our first question will come from the line of Nishu Sood from Deutsche Bank. Your line is now open.

Hey, this is actually Tim Daley on for Nishu. Thanks for the question. So, I just wanted to first touch on the share count guidance and the discussion around the buybacks. So, the $100 million repurchase program would imply basically on yesterday's closing price that that's kind of where you're guiding to for the share count. So, are you guys basically using the $100 million as a, I guess the way I'm trying to ask it is basically, are you -- is that $100 million are you thinking of maybe getting that increased if you were to hit that? Is the share count guidance based off of some sort of share price assumption and would that change if this -- you were to see some sort of rally or strength in the stock price? Thank you.

Hey Tim. Yeah, let me let me clarify. So, the diluted share count guidance that contemplates the share repurchase, the $200 million or the $7.6 million that we did in early January. So that is -- we’re just trying to give you guys the number since that's coming through in the first quarter and it's a big number to give you for the diluted share count for the year. As far as the $100 million that's remaining, that's just the authorization for any future purchases that we may or may not make predicated on market conditions and that authorization is good until the end of 2018.

All right. That's helpful. And then I guess, the second question quickly is the West – the communities in the West were down a lot year-over-year, you guys talked about early sell outs and delays from the hurricanes. So, was the West where most sell outs were kind of focused this quarter? And then as well, Sheryl you mentioned, the core pillars including kind of balancing pace first price. So just trying to think about the Western gross margins year-over-year, would you maybe – is that why the there’d be a bit of not as great of gains in the absorption pace this year trying to kind of stabilize gross margins in the face of cost inflation? Thank you.

Yeah. No problem, Tim. Let me make sure I get both questions there for you. As far as community count, you're absolutely right. We saw the greatest decline in our West community count. We've talked about that in the last couple of quarters, couple of things at play. One was really the pull forward from early in the year. Second was the opening of new communities, most of that is actually happening in our Southern California markets, that's probably really seeing a reduction in community count. As I look forward on the investments we've made in the last 18 months, you'll see that start to move its way up. From a margin standpoint, I just want to make sure we get the question, probably flip back to you Dave.

Yeah. Maybe one other thing on the order if you look at the pace for the West, in the fourth quarter year-over-year, that was up in the mid-20% range, so I think more to that pull forward of closing out communities early, it's just such a strong pace.

It's really our highest pace right, in the company.

Yes. And then Tim from a margin perspective, we're looking at guidance for the 2018 year. I'm going to kind of lump them all together, but we're leaning towards a mid to high 18% range as we said which would be a creative year-over-year. We have strong visibility into our margins through Q2 be our backlog and we expect to see some improvement across the board just some modest benefits from our strategic procurement and construction efficiency and initiatives. In addition, lower capitalized interest, our debt levels will remain in the same, but we have more units to spread that cap interest over. And then we continue to believe pricing will stay ahead of cost. From a pressure standpoint, we're going to have some higher land costs rolling through as the lower land basis continues to burn off. We'll continue to see some labor pressures and obviously commodities will play a factor and then not particular to the west, but the probably the hurricane impacts, some of those costs may linger a little bit in the Central region. So overall, we're guiding to you in a creative margin. I think what you might see throughout the year where it will kind of go up and down a little bit, it’s going to be more mix driven and California will play a heavy role in that. Depending on the level of penetration in California that does play a factor in the overall mix.

Yeah.

Great. Thank you so much.

Thank you.

Thank you. And our next question will come from the line of Ivy Zelman with Zelman Associates. Your line is now open.

Thank you and congratulations on a strong quarter and strong year.

Thanks Ivy.

Sheryl, so you spoke about the strategic initiative to both grow organically and inorganic and talked about leveraging scale and with 38,000, I believe you said lots in total under control. When you think about what we've seen in the industry is really that same strategy to build scale, what's your appetite and what do you think the industry's appetite is right now for further consolidation, post the Lennar CalAtlantic deal? And do you think there's likely for continued public to public M&A or would you say that your inorganic is going to be more geared to smaller sort of bolt on acquisitions?

Good question, Ivy, I think especially when you look at the condition of our balance sheet. I think we’ve put ourselves in a position of readiness for the right opportunities. I don't know that anything is dramatically changed from the prior conversations we've had. I think when we look at M&A, we look at the best use of cash and you know that we spend a lot of time as a management team and a board really reviewing those opportunities and the values around acquisition. When you use acquisitions versus that organic growth. I think we look at all those opportunities we look all those opportunities, we look at new markets, we look at the depth within existing market. We studied the dynamics for what's really best market by market for our long-term success. I think it's a long way of saying you should expect to see both from us, we're absolutely going to continue to grow the company organically. And if the right opportunities exist for M&A, you can plan on seeing those. We've been very patient, we look at opportunities every year, I can take you back to three years where we did three in a very short time. And then a couple of years candidly we didn't see the opportunities. As we look forward most holistically, I do think there will likely be some more public to public, but I don’t think it’s going to be a lot, but I think those opportunities do exist, and I think they exist because of your point around the scale, certainly the ability to leverage production and scale in today's environment is key when we look at the infrastructure we have from a from a labor standpoint. And I also think when you think about the cycle and where we are, and the runway we have in front of us, I think I have a strong vote of confidence in what's ahead. And if the right opportunity is there, we will take advantage of them.

Thank you. And my second question relates to the portfolio and the mix of price points, you talked about sticking to your strategy core growth – growth in the core markets. Maybe you could just talk about where and if there is any markets where you're seeing the overall absorptions below where you'd like them to be? There has been some note of more competition and to move up product, and maybe remind everyone sort of your exposure to the first time and first time move up, etcetera. So that's a lot, but I'd appreciate any color on the markets and your overall thoughts there? Thanks so much.

Thanks, Ivy. Okay, there's a lot. So, let me hit it from a couple different fronts. Let me just start on most globally the sales front. In my prepared comments, we talked a lot about January, and how strong January was, but I probably neglected to mention and show that how strong February has started out. In fact, last week was one of the company's all-time record weeks, I think it's a top three weeks for the company. When I think about that, given what traditionally we would see around Super Bowl, generally we start to see that demand move up, it's strong. So, I feel very good about just globally how the markets are feeling. When I think about kind of generational demand and as I also said, I think we're at a point where at the 55 plus piece of our portfolio, we are very encouraged, we're seeing strong demand even generally a little sooner in the season than we would. When we're looking at the traffic, when we're looking at actually what they're buying and we're looking at the margin of those with the 55 plus, feel very, very strong – very good about the condition of this consumer group, their balance sheets are strong. And I think if I look out over the next many years, they probably have the greatest likelihood to buy than any other cohort. When I think about the affordable segment, it's about a third of our sales, Ivy, obviously that's very market specific for us. Our greatest penetrations and the first-time buyer are in Sacramento Chicago, Tampa, Atlanta, Charlotte, Raleigh and we're starting to see some growth there in the -- on Texas markets as well. We've talked a lot over the last many years and articulated our strategy around the consistency of protecting the business through core locations. I think you'll continue to see us have a very balanced approach with core locations and where it makes sense and the land is available that yields affordable housing will be all over it. We can debate A, B, C, locations, but I think as long as we stay in the path of growth and focus on where there is truly emerging submarket and ones that won't screech to a halt, when the market shows sign of weakness, I think we'll continue to operate that way. Simply, when I look at just the overall demographic trends, I think you should expect to see us stay balanced in that third first time buyer, third – first second time move up buyer, third for second time move up buyer, and third that 50 plus buyer. If I were to do a...

So…

Yeah.

Go ahead. Sorry.

No. Go ahead, Ivy.

No. I was just going to say obviously the demographics are very strong across all of the various age groups that you mentioned. Would you say that when your sales people meet with prospective customers that the reason there they feel confident about their personnel balance sheet and overall employment. And how much of the inflow of demand could be just people jumping off the fence because they're worried about interest rates and therefore concerned it might be a short lived – short-lived temporary bump. So just understanding, are they there because they feel good and confident and its lifestyle driven versus they talk about, hey, I want to jump in because rates are moving higher in that various segments that you mentioned?

Yeah.

And I promise, no more questions.

Okay. No problem. I'll hit that one, and then, I'll just give a quick tour around the country, Ivy. I’d say it's a little bit of both. Obviously, whenever there is discussion around mortgage around interest rate movement, it's going to create some traffic and some demand in the business. And I think that's really, really good. At the same time, we're seeing that consumer confidence and what we're hearing in our sales office is completely different than the volatility we're seeing in the market over these last couple weeks. I would say since tax reform, at the -- I mean, I go back 12 months, I go back since tax reform, consumer confidence is continuing to build and that's actually more important as certainly amongst our consumer group than actual interest rates slight movement. We've seen about 50 basis points of movement since December, and it hasn't impacted the buyer group really one bit. Interestingly enough and we've talked about this before, but we test our markets every quarter, and we look at our customers’ qualification ability. And we see today that our customers on average can probably handle somewhere in the range of 400 bps of an increase in rates before within any way affect their ability to qualify, and actually that would be your FHA customers, or conforming customers, or even in a better place than that. So specifically, to the question, Ivy, I think it's a little bit of both, I think people want it are wondering. I think people believe rates aren't going down anymore, and so that will move some folks off the sidelines. But most important, I think generally confidence around the economy around their personal balance sheets around their jobs is very, very strong.

And I think even with the last couple of days of volatility, specifically we've seen in the market, we've been very pleased with both the traffic and sales results that we're seeing. So…

Particular.

Yeah. The matter of the cause if it's just a lifestyle change or the fear of rates, we are seeing a fair amount of activity.

And then I think the last -- the last question just for thoroughness was just how are we feeling around the market. I'll spend two minutes and run around the country. Phoenix is consistent with what we've told you in the past quarters, it's very, very strong, it's running our strongest paces in the company. We've heard a lot of people described the strength at lower price points. Quite honestly, we're seeing it across all consumer groups. Location matters and we feel very good about our land positions. If you look at the overall market, closings are up at nearly 20% year-over-year, inventories very low, we've been very aggressive on the land side. Making progress on construction cycle times compared to last year, although workforce development is still a significant issue in Arizona. California, all three markets continue to demonstrate very strong demand characteristics continued to demonstrate very strong demand characteristics, ridiculously low supply both new and resale is very tight. As I mentioned earlier, our issue is really store count in Southern California. And that’s really the greatest impact on your-over-your west paces. We’ve had some delays getting a couple of stores open there, but I do think we’ll see some movement in the back half of 2018 in preparation for 2019. And the Bay continues, sales continued to be very impressive. Denver strong across all metrics, all market dynamics remained strong. We’ve talked about labor pressures, they are I think particularly difficult. And I would expect to see appreciation moderate with the pace we’ve seen for the last year there. I think only about a quarter of the new home starts in Denver are priced under $400,000. So, I think we’re going to see pricing moderate there. Texas, I think we’re pleased with success across the state. Our…

Great, Sheryl. Good luck. Thanks, guys.

Thank you, Ivy.

Thank you. And our next question will come from the line of Stephen East with Wells Fargo. Your line is now open.

Thank you, and good morning and congratulations Sheryl and Dave.

Thank you.

I guess I'll start with returns. You all mentioned you're focusing on asset turnover trying to drive that further. Could you elaborate maybe a little bit more on what you all are trying to do? How you're changing the way you run your business there? And then any targets and timeline that you might be willing to share with us?

Yeah, Stephen, a couple of things. We’re obviously, trying to drive both the numerator and denominator of the equation and it’s really the things we’ve been doing over the last couple of years, so starting with getting the balance sheet right, getting our debt profile in a place that we were comfortable with. And then moving on inventory terms, so a lot of the investments we’ve made over the last 18 months have really been to – we focused on pace through enhancing CRM or our strategic procurement capabilities or just around production efficiency, so putting all that together we’re trying to drive the top line of the equation. From my guidance perspective, we don’t have specific targets that we’re necessarily sharing externally, but we kind of remained the same. We’re very focused on driving accretion year-over-year. We feel like we have room to continue to grow this. A lot of the investments that we’ve made they’re paying off right now. We saw that through margin accretion in 2017. As we said we expect to see margin accretion in 2018, so it’s going to come together and I think you should expect to see us be accretive year-over-year for the next few years.

Okay. And one other question on that, just your owned versus optioned, we’re seeing a fair number of builders starting to option more, is that in your thought process there? And then going back to the capital allocation and you’ve already got close to $600 million on the balance sheet, a lot more than you normally carry, you are ramping up your land a bit, but it looks like you’re still going to be absent in acquisition, you're still going to have a significant amount of cash as we get to the end of the year. So, wondering how you feel about sitting on cash like that and along with that, Sheryl, I guess I would ask you, you've talked about looking at trying to gain scale with now Horton and Leonard, both in a lot of markets controlling anywhere from probably 15% to 40% of market share. Does that change the way you all think about markets or do you think it changes the way competitors go to market against those two?

Well, that was one great very large question Stephen. Maybe…

I'll do my best.

And then I'll turn it over Dave for the balance sheet.

Yeah.

So, on the land, yeah, you're seeing our option at a higher level than you've seen in the last many years and certainly that's always our priority and where we can get sellers to carry, that's going to be our first preference. I mean that's a little bit specific to markets and very driven in certain parts of the country. But yeah, if we could stay in this 65%, 35%, that would be our preference. I think equally important, Stephen is, just the kind of land we're buying and how the structure of our deals is different and the size of the deals is different. If I look at our acquisition spend in 2017 over 2016, our acquisition spend was up about 80%. And if you guys, if you recall going back to 2016, we underspend as we relate and find the opportunities. So, our acquisition spend is up 80%, but the duration of the types of land deals we're buying is down about 22%. And so, we're buying more smaller deals and obviously that's to complement some of the Dave's comments earlier on our returns. So yeah, we certainly have dry powder on the balance sheet because as we said our expectations is to spend about 1.1 all-in in 2018. As far as the scale, Stephen, has it changed our strategy? No, not at all. I mean we compete, we like the way we compete in each of those -- in each of our markets, we tend to carry a top 10 market share and in many of our markets, the top five and you really look at what you’re trying to achieve at a scale and it’s are we getting to look at the right land deals for us, and we are. We’re getting a first look. Are we attracting and retaining good people? And I’d say we are. And do we have the scale to make hay with our trade base? And we are and we’re making progress each and every day. You also have to look at this – our market share amongst our price point. And even when you look at Horton or Lennar and the way we compete with them, we actually don’t go head-to-head with someone like Horton very often based on our price point. And when we look at Lennar, our strategy is quite different. I’m very happy to compete with anyone that has a different inclusion, for example, on using their EI, their value proposition would be very different than at our price point than ours, so they’re both good, they’re just different. So, the short answer is, no, it really hasn’t changed our strategy.

And then lastly, Stephen, on the cash, I’d start with the $575 million, I’d start with that number and just remind everyone that we spent $200 million of that within the first two weeks on the share repurchase, so that number is automatically lower. And then as we move through the year, we’ll be using that cash to invest back into the business through land and development and we as I mentioned on the call, the prepared remarks. We’ll probably be on the revolver at some point, so the cash balance will probably be more at a minimal level, but we will build that up as we get towards the end of the year. And our philosophy is going to stay the same around capital allocation, we’ll look to be opportunistic in growing our existing markets, that Sheryl discovered on the M&A side. And then we’ll always maintain that ability to return excess cash to shareholders. Our ultimate goal here is driving ROE and that that plays a factor.

And I think you've seen us be able to use all of this tactic.

All right. Thank you. I appreciate it.

Thanks, Stephen.

Thank you. And our next question will come from the line of Mike Dahl with Barclays. Your line is now open.

Hi. This is Matthew Belay on for Mike today. Thank you for taking my questions. I just wanted to follow up on some of the early commentary that you made on the strength of your sales pace through January and here into February. Obviously, we have your guidance for pace and communities into 2018. So, I just -- I guess with pace I guess improving to these levels, so what are your updated thoughts on managing that pace through the year and really kind of the resulting cadence of community openings and closings through 2018?

So obviously in first quarter, you should expect to see a stronger pace from us and as we mentioned on the call, we have very difficult comps when we look at 2017. So, if we can end the first quarter approaching anything near flat, I would say that would be a tremendous feat. Dave gave community count guidance for 2018 and basically, we plan on being flat, but I think what we equally important is as I look at the trajectory of how our communities open through the year, and we really do see that ramp up. And when I look at active communities at the end of the year compared to the end of 2017, I expect that we'll be up high-single digits. And so even though our average community counts kind of be flat for the year, you're going to see that continue to pick up as we move through the year and in preparation for 2019. We guided to a 2.4 to 2.5 pace for 2018 that's coming off of a 2.4 in 2017. It's early in the year, so I couldn't be more pleased with how we've started. And you know, I think as we move through the first quarter as you've seen us do in the past, if the market stays strong as we expect then you'll see us update them in the next quarter.

Okay. That's very helpful. Thank you. Second question is just on the SG&A side. The guidance, you know, implies, you know, I guess a relatively modest level of leverage in 2018. But just a question on and is there conservatism baked into that number or kind of what are the puts and takes on the SG&A side? Thank you.

I think some of it is just where we are, it's February, it's a long year. It is in line with our closing guidance. As far as the puts and takes, we do think we're going to be able to leverage, that leverage is going to come through top-line growth. We run a pretty lean organization, so we don't necessarily out costs that we can continue to pull out of the business. In fact, we're going to continue to invest back into the business to ensure that we have the capabilities in place to continue to grow in the most efficient way possible.

Got it. Thank you very much.

Thank you.

Thank you. And our next question will come from the line of Michael Rehaut with JPMorgan. Your line is now open.

Thanks. Excuse me, good morning everyone and nice quarter. Looking at, I think you know the previous questions kind of hit on this a little bit in terms of perhaps, you know potentially a little bit of conservatism in sales pace guidance obviously, you’re getting off to a strong point so far in the year, but obviously a lot to go. And you also mentioned the community count accelerating as you know off of the first quarter guidance would imply -- would imply the up high-single digits as you noted earlier Sheryl. So, when you think about the 5% to 10% guidance in closings growth. And the increased land spend that you expect to do this year. I mean is a mid to high single-digit volume growth for the next two or three years, something that we should be expecting particularly given your comments before about increasing scale in certain markets, perhaps enhancing in others?

So good questions, Michael. I guess I say a couple of things. First of all, you know it’s a little early for us to give guidance you know beyond 2018. I think most specially, I’m happy to say that where we are in the cycle and how we feel. We feel very optimistic. So, you know the opportunity certainly seems to be there, to settle in to something to mid to high single-digit growth. I mean that doesn’t in anyway concern me, but obviously, there is a, you know we’re talking a few we're talking a few years out, so we need to see what the macro market feel, but generally, I would agree with that. As far as the conservatism in our guidance, I'll say it again Michael, it's very early in the year. We are off to a very strong start and then we came out of December with a very strong start, and we need a strong start given our difficult comps. We did have some wind to our face with the hurricanes with closing out of communities sooner than expected, and we can't underestimate the impact of the labor environment and really what it takes to get communities open. When I look at our community openings for 2018, we're going to open about 135 communities. The timing of it though is making sure they all hit appropriately is probably the hardest piece of guidance we can give I think for the industry, because there's so much out of our control. So, if it's conservative, then I think we'll be back to you next quarter and if things are lining up and there is an opportunity to increase that we absolutely are, we absolutely will. And as I said here today, I can't with confidence give you anything, but I'm not 100% certain we can deliver on.

No, that's fair. And I think I was more focusing on maybe strategically or conceptually 2019 and 2020 on the volume growth. So, I appreciate your comments there Sheryl. On the -- on the gross margin and SG&A front, maybe it's -- maybe this is perhaps more a question for Dave. But the gross margins you said accretive to 2017 is 18.6%, you also said mid-to-high 18% range, so it would seem almost equal that, perhaps you're targeting slightly towards the high end of that mid-to-high, but I was just perhaps you're targeting slightly towards the high-end of that mid-to-high. But I was just interested in you know, I think you alluded to perhaps getting a little bit more leverage on the interest amortization, I don't know if that's 10 bps or 20 bps, would that be the entirety of the driver of the gross margin expansion or are there any things pre-interest that would also allow the pre-interest gross margin to drift up? And then I just have one quick one on SG&A.

Yeah, Michael. You're definitely going to see gap interests providing a benefit, it’s hard to say from a – it is going to be 50%, 40% whatever that is. But we're also going to see what we anticipate on the rate side again to reiterate some of the things that we've been working around are working on related to strategic procurement and construction, those investments are starting to pay off for us. So, we actually think that we have rate benefit there all things being equal in the market.

Okay. I guess then just lastly on SG&A, you mentioned, your guidance has a low 10% type number, you did 10.3% in 2017 and you did mention it's obviously in some ways dependent on revenue leverage, but you're also doing some investments, continued investments in the platform as well. I mean is it 10% number kind of a steady state number for you guys or typically we think about incremental SG&A or the variable piece something in the 6% to 8% range. So, if the investment kind of stabilizes and I know that there's been a lot of work there in the last couple of years, all else equal, could we see or should we see that number go you know the next year or two below 10% as revenues continue to grow?

Well, we’re going to kind of hold to the 2018 guidance right now, as Sheryl said 2019, 2020 a little bit harder, but what I would suggest from a modeling perspective, what I feel works is if you take total SG&A and take half that and grow it by call it 3% to 3.5%, while you take the other 50%, and put that up against homebuilding revenue as a variable cost. If you put in your top-line assumptions, that will drive you to the SG&A leverage.

And I think, the only other comment I’d add Michael is when we talked a lot about scale and taking our smaller businesses and scaling them up. Obviously, it’s a quicker we do that, the more leverage we get, that will help the overall business.

Thank you. And our next question will come from the line of Will Randow with Citi. Your line is now open.

Hey, good morning and congratulations on the progress.

Thank you, Will.

This has been touched on a few different ways, but I would just like to circle back on specifically some of the comments you made suggested where your year-over-year community count being somewhat flattish was more of a strategic decision. And I guess looking beyond 2018, you talked about a ramping through 2018. Is there longer-term goal to grow the footprint of the business or is it ultimately if the returns aren’t there, stop growth and focus on things like buying back stock, optimizing the balance sheet et cetera?

So, I don’t want to be redundant, but let me try to hit it from a different angle. If you guys go back to our 2016 land spend, where we underspent probably $350 million from what we had planned, we working force land into the business 350 million from what we have planned to be more on a foreign land into business. We knew at that point that that was going to moderate our community count growth, as we looked into 2018 and 2019. In 2017, we turned around and we actually I think did a very nice job on the acquisition side. And so, when I look forward to 2019 and the fact that we're almost already bought out for 2019, and making here on 2020, I feel very good. So, yes, it was a strategic decision to moderate, as we weren’t going to put land on the books that we didn't feel would be creative to the business. But I wouldn't look too much further beyond that. Obviously, we're always going to look at the markets and the best use of cash, as we've talked about with our focus on returns. And we'll continue to drive the operational piece of the business as well to make us more efficient. So, I don't think you should really expect to see anything change there unless we see real differences in the market.

Thanks for that. And then also circling back on the gross margin guidance for 2018, it sounded like you guys implied pricing net of inflation could add a bit, I don't know if that's 50 basis points or 100 basis points to margin in terms of your assumption. Could you also mention what’s your expectation for lumber prices is for 2018 and any other related drivers we should be thinking about for the gross margin guide?

Yeah. From a cost perspective, as we're looking out into 2018, I think, a couple of things. One, we anticipate some continued increases probably on the labor front. As Sheryl mentioned, labor still tight out there. Lumber could play a factor. We've taken that into account from a guidance perspective. But we do believe ASP growth can keep pace in many of our markets. So, it's a combination of things. One on the ASP side, and then there are things that we're doing on the cost side to at least help offset some of the rising costs. So, it's just -- it's not one lever will, it's several things that gives us the confidence around our guidance for margin.

Thank you. And our next question will come from the line of Jack Micenko. [Operator Instructions] Mr. Micenko, your line is now open.

Hi, good morning. Dave, you had mentioned in the prepared comments your 26% net debt to cap as a position of strengthening. I guess, so that incremental focus on returns, where do we see that number going? I mean, I guess you could argue it both ways. Some of your peers are deleveraging aggressively, some are taking of your hay, some leverage is good on the return side. And maybe in the Q&A came out maybe you're going to grow a little bit more prospectively. How do we think about debt levels going forward?

I would say all things being equal as there is not necessarily favorable growth conditions, that number obviously will continue to decline. For us, we see that basically as this powder for us, for the right growth opportunity and then it is on the right growth opportunity. So, we're going to be patient, we're going to deploy that capital in a way that we think is going to drive the best long-term shareholder value and if the opportunity is not there, then we are going to see that number go down a little bit.

Yeah. So, we’re also not worried to see it gallop a little bit from the right opportunities as we have stated our long-term goals are much more in the 30s. So, for the right opportunities you will see that move up. So that will take us a little time on that.

That’s helpful. And then I guess the tax rate guide came in a little higher than we were thinking. I think Arizona came in from almost 7% to a 4.9%, is there something else in your tax rate that would push it to that 26%, 27% range?

Only nuance to us is we still have a Canadian entity, and that creates a little bit of a drag, but again we're guiding to 25% to 27%. The bills brand new, so there are some still some things that we want to see how it plays out. So, could the real opportunity there, maybe, but I'm comfortable with the 25% to 27%.

Okay. Great. Thank you.

Thank you. And our next question will come from the line of Carl Reichardt with BTIG. Your line is now open.

Thanks. Good morning, guys. Could you talk maybe Dave or Sheryl about what you see is the lowest hanging fruit from a vertical cost -- constructions perspective, and you've been working hard on whether it's rationalizing plans or looking using less material per house. I'm just trying to get a sense beyond the input costs, land costs, et cetera, what can help drive the gross margin inherently lower over time from a vertical class construction perspective?

Yeah. We certainly can, I mean obviously as we have talked about for the last 18 months, two years, we've spent a lot of time on really the efficiency of our plans making sure that we're value engineering our plans, our shared costings, we challenge ourselves every day to explore more efficient options. And I'm actually pretty pleased with the work the teams have done on both the national purchasing, the supply chain, value engineering. There's a lot of discussion right now around prefab walls, steel construction, manufactured efficiencies. And we are doing some of that work in some of our markets, it's very market specific. But I would tell you that there's not one silver bullet there. I think so far, our success to date has really been around the scheduling, the product efficiency, truly planned production and partnering with our suppliers in trades, and getting efficiency in the field, one trade at a time. But I would say all of that collectively is going to be more impactful than any one trade enhancement.

Okay. Thanks. And just second, just looking at the community count guide for 2018, can you maybe mention what openings versus closings would be to get to that that flat overall number, Dave?

It's about 135 new openings, and communities I think is going to be somewhere in one -- mid-115 to 120 range.

That’s right.

Once again timing of those is not -- it's definitely an art not a science.

Of course. Thanks.

Okay. Well, thank you for sticking with us so long today. I appreciate everyone joining our call and wish you a very good day and nice week. See you next quarter.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program, and we may all disconnect. Everybody have a wonderful day.