Brent Anderson - VP of IR Steve Hilton - Chairman and CEO Larry Seay - EVP and CFO.

Michael Rehaut - JPMorgan Will Randow - Citigroup Nishu Sood - Deutsche Bank Freda Zhuo - Barclays Capital Joey Matthews - Wells Fargo Securities Paul Przybylski - ISI Group Michael Roxland - Bank of America/Merrill Lynch Alan Ratner - Zelman & Associates Jade Rahmani - KBW Joel Locker - FBN Securities Jay McCanless - Sterne, Agee & Leach, Inc.

David Goldberg - UBS.

Good morning and welcome to the Meritage Homes Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Brent Anderson. Mr. Anderson, please go ahead. .

Thank you, Jessica. Good morning everyone, welcome to our conference call today. We issued our press release this morning with the second quarter results before the market opened.

If you need a copy of the release or the slides that will accompany our webcast, you can find them on our website at investors.meritagehomes.com or you can go to the main webpage and select the Investor Relations link at the bottom. If you turn to Slide 2, I’ll refer you to the customary, cautionary language.

Our statements during the call and the accompanying materials contain projections and forward-looking statements which are the current opinions of management and are subject to change. We undertake no obligation to update these projections or opinions.

Our actual results may be materially different than our expectations due to various risk factors listed and explained in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2013 Annual Report on Form 10-K and our First Quarter report on Form 10-Q.

Today’s presentation also includes certain non-GAAP financial measures as defined by the SEC, so we’ve provided a reconciliation of those non-GAAP measures to the closest GAAP figures within our earnings press release. With me today to discuss our results are Steve Hilton, Chairman and CEO; and Larry Seay, Executive VP and CFO of Meritage Homes.

We expect the call to run about an hour and a replay will be available on our website approximately an hour after we conclude the call. It will remain active for 30 days. I’d now like to turn the call over to Mr. Hilton to review our second quarter results, Steve. .

Thank you, Brent. I’d like to welcome everyone to our call today, we announced our agreement to acquire Legendary Communities a couple of weeks ago and I’m anxious to talk more about that.

But it’s after the end of the quarter it hasn’t closed yet, we’ll discuss our results from the quarter before getting into the acquisition and why we’re so excited about it. Start on Slide 4.

As evidenced by the recently reported starts and permits data, the US Housing recovery has entered a more stable slower growth phase than we saw in 2012 and the first half of 2013. However total starts and permits are still well below their historical levels, so we expect to see many years of growth to get back to more normal levels.

We were quite pleased to show year over year growth across nearly every key operating metric in the second quarter of 2014. In addition to sequential growth over the first quarter, considering that market conditions were generally not as strong in the second quarter this year as they were a year ago.

We increased net earnings by 25% through a combination of higher revenues, margins and operating leverage, our home closings increased by 4% and home closing revenue by 15% for a 11th consecutive quarter of year over year growth in home closing revenue.

Average closing prices were up 12% mainly due to mix which helped drive our revenue growth in a 40 basis point improvement in our home closing gross margin to 21.9% for the quarter. With some modest operating leverage we achieved a healthy pretax margin of 10.9%, a 240 basis point improvement over 8.5% in last year’s second quarter.

Those are respectable results against difficult comparisons to last year’s strong second quarter. Turning to Slide 5, our new home orders and backlog grew over the prior year on both units and total value which is impressive considering our orders and backlog in the second quarter of 2013 were at their highest levels in more than five years.

With modest growth in total orders and average sales prices our company wide backlog grew 12% in unit and 18% in total value. Our average community count during the second quarter was up 9% year over year despite a 6% decline in average community count in the first quarter.

We opened 13 new communities during the quarter or removed 27 from our active community count. The decline during the quarter was primarily due to administrative delays in getting approvals from municipal authorities to complete land development on schedule.

We were working hard to catch up and expect our total community count to rebound significantly in the third quarter as delayed communities come online. We anticipate we’ll end the quarter at approximate 190 actively selling communities which we expect to continue to grow to the end of the year to approximately 205 to 215 communities.

Those estimates are before taking into account the Legendary acquisition. Turning to Slide 6, our average sales per community during the second quarter increased over 2013 in every state except California and Arizona, though California sale space was still the strongest in the company for the quarter at 12.8.

Texas and the Carolinas generated the highest order growth in the second quarter, demand in our Texas market increased, with orders up 12% over last year, I’m sorry, while orders were up 12% over last year, our orders grew 32% in the Carolinas.

When combined with increases in their average sales prices, total order value grew 31% in Texas and 36% in the Carolinas. Colorado also grew orders by 16% and total order value by 21% year over year. Arizona orders were down 28% in the second quarter 2013 and demand had softened there despite a healthy economy.

Total orders were also down the same quarter which was entirely due to fewer communities opened in the quarter, our average sales per community increased there. We are expecting to add more than 10 new communities, 10 net new communities in Florida during the third quarter.

Our backlog value in Texas increased 67% over the second quarter of 2013 followed by a 45% increase in the Carolinas and a 31% increase in Colorado. Turning to Slide 7, now I'd like to talk about our agreement to require legendary communities.

Legendary communities will be our second acquisition in the last 12 months following our acquisition of Philips builders in Nashville last year. We have been looking for additional growth opportunities in the South East and United States after having successfully entered the Raleigh, Charlotte, Tampa and national markets in just the last few years.

With the acquisition of Legendary we pick up two new markets with significant operations and excellent growth potential. Legendary Permian builds in Atlanta and the Greenville Spartanburg markets, where we don’t actually, where we don’t currently operate and additionally of our operations in Charlotte that we rolled into our existing division there.

They build primarily from mover buyers as we do and closed approximately 500 homes in 2013 for approximately $156 million in home closing revenue. At June 30, they had approximately 200 orders in backlog and 40 active selling communities, which we expect to add to our active community count at the end of the third quarter.

Legendary controls more than 4,000 lots today mostly through auction contracts and many which were acquired at distress prices. In addition they have a robust pipeline of opportunities to acquire additional loss in Atlanta and the other markets. Turning to Slide 8, we are enthusiastic about the markets will gain Legendary.

Atlanta was the second largest home builder market in the U.S. based on permit activity in 2013 which means Meritage will be in 14 of the top 20 markets in the U.S. In addition to be in the second largest market for single family home building permits in 2013.

Atlanta permit activity; especially grow approximately 75% by 2015 and meaning the home prices have been increasing. The market is home to 16 Fortune 500 companies and is expected to add 140,000 jobs between 2014 and 2015.

Turning to Slide 10, Greenville-Spartanburg is also a growing market it’s been flying under the radar so it represents an attractive opportunity for us. The Greenville Spartanburg quarter is the second largest urban region in South Carolina and serves with the economic and political center of the state's 10 County upstate region.

The market has a diverse mix of professional and multi manufacturing jobs is expected to add 12,000 jobs by the end of 2015. Legendary has been very successful in this market and is the largest private builder with the dominate position there.

We expect the acquisition to close in August and establish a new southern region, so we initially include Georgia and South Carolina as well as Tennessee with our regional offices to be in Atlanta.

James Thrower will be our region President based in Atlanta, James has a successfully track record as a home builder in these markets, under his leadership and with the support of our high quality experienced management team and employee base of Legendary communities, we expect this region to grow significantly faster than the company as a whole in access of 20% annual growth, in closings of revenue in 2014 and 2015, a meaningful accretion to our future earnings.

With the additional growth potential that represents for Meritage, you can see why I am excited about this acquisition. Now I’ll turn it over to Larry to review few other highlights for the second quarter. Larry. .

Thanks, Steve. Turning to Slide 11, I’ll provide some additional details to explain our second quarter operating results.

We held commission and other sales cost steady at 7.2% of home closing revenue in the second quarters of 2014 and 2013 are reducing our general administrative expenses to 4.9% from 5.0% up total closing revenue in 2014 compared to 2013.

Our interest expense dropped to 1.4 million from 4.5 million in the last year second quarter as we capitalized approximately 13 million of interest incurred to homes and lots under development. We were quickly approaching the point where we will capitalize all of our interest incurred and have zero interest directly expensed.

Other income included net income increase of approximately 3 million related to various legal settlements in the second quarter of 2014. Our effective tax rate was 36.5% in the second quarter of 2014 compared to 27.0% for the same period last year.

The second quarter of 2013 included a tax benefit of approximately 2.6 million primarily due to federal energy tax credits and the partial reversal of our deferred tax asset valuation allowance in California. The 36.5% is closer to a normal accepted tax rate for 2014 assuming there is no extension other federal energy credit for 2014.

Moving to Slide 12, for the first half of the year, we generated a 50% increase in net earnings on an 18% increase in home closing revenue demonstrating our earnings power, far exceeding our top line growth.

Our home closing gross margin of 22.3% year-to-date was up 170 basis points over 2013 reflecting higher selling prices for our homes, better direct cost control and contraction overhead leverage.

Commissions and other sales cost year-to-date were constant 7.4% of home closing revenue while general and administrative expenses were down 30 basis points as a percent of total closing revenue. Our pre-tax margin for this first six months of 2014 improved 330 basis points to 10.3% from 7.0% in 2013.

Moving to slide 13, we put approximately 2,200 new lots under contract in the second quarter which exceeded our activity in each of the two previous quarters and ended the quarter with approximately 25,800 total lots under control, an increase of approximately 14% compared to a year ago.

That maintains approximately a 4.8 year supply of lots relative to our trailing 12 months closings. I will note, that we have added no new oppositions in Phoenix this year. We invested approximately 146 million in land and development during the second quarter of 2014 bringing our total land spend for the first half of the year to about 310 million.

As Steve mentioned, Legendary controls over 4000 lots and has a robust pipeline for addition lots in Atlanta. We will include their lots in our reported total of lot supply at the end of the third quarter assuming we close during the quarter.

Moving to slide 14, we ended the quarter with 291 million in cash, cash equivalence and securities compared to 364 million at year end 2013 as we deployed capital for additional growth primarily in work-in-process inventory and lots controlled.

Our homes under contract under construction increased 108 million and our home sites either finished or in development increased by 77 million over our year end 2013 balances. Our net debt to capital ratio at June 30, 2014 was 37.6% compared to 39.1% at December 31, 2013 and 37.2% a year ago at June 30, 2013.

We do not plan to do any capital market transactions to complete the acquisition of Legendary communities, assuming approximately 130 million of cash outlet for legendary our proforma net debt to capital ratio for June 30, 2014 would be approximately 42.2%.

We are very pleased to be upgraded by all three major rating agencies during the first half of this year. And with that, I will turn it back over to Steve before we begin the Q&A. .

Thank you, Larry. Overall we are pleased with our results for the second quarter and expect to continue to grow and increase our earnings for the remainder of 2014.

We are looking forward to completing our acquisition of Legendary communities next month are continuing to look for additional opportunities to grow within our current markets and potentially expanded to new markets for Meritage.

Our successful track record of growth and earnings expansion through 14 previous acquisitions start ups give us confidence in our ability to grow profitably, and we are well capitalized to finance additional growth. I thank you for your attention. We will now open it up for questions; the operator will remind you with instructions.

Operator?.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Rehaut with JP Morgan. .

Thanks good morning everyone, and congrats on the acquisition. The first question I had was on gross margins and I'm sorry if you covered this before but gross margins came down a little bit sequentially.

I think you'd been pretty upfront with the street in terms of your expectations for gross margins maybe to come out in -- come down on sorry a little bit into the back half.

Do you see any further kind of, you know, gradual downward movement? And perhaps you could also talk about how you're thinking about gross margins a little bit past the second-half given some of the comments by one of your competitors this morning regarding their own approach to gross margins and incentives and sales pace. .

No, I think we have stand by what we said last quarter, it’s kind of to point out exactly as we expected and we expect this year to finish up pretty flattish to what we saw last year and I don't have much more to say on that Larry, you want to add to that?.

Yes, I think we'll see just a little bit of additional margin decrease via capital here but it should be much less substantial than this last quarter’s decrease. So on average we can still wind up around that 22% we had last year to be a little below could be a little above, we just don’t know yet. .

Okay. Secondly, on the SG&A you had a little bit of leverage versus a year ago, on 15% top line growth, you're taking in Legendary and you're obviously, you're continuing to grow the business.

How are you thinking about SG&A for the next six, eight, twelve quarters, where do you think that should fall out on a more steady state basis perhaps as following perhaps some upfront costs that you might incur in terms of, you know, the community ramp up?.

SG&A has been higher than we desire and it’s been a bit frustrating for us but take into account that we have four pretty small markets that we’ve entered, I mean pretty small operations and you know looking at Charlotte, Raleigh, Tampa and Nashville where we have a you know, a whole team in place in every market and the volumes really haven’t gotten to the level you know yet to be able to leverage that overhead and the fact that we’re going to be opening up a lot of new communities and we're ramping up is really, kind of kept our SG&A kind of stubbornly high, but we think over time it’s going to come down, we don’t expect to add a much corporate overhead or high level management overhead for the Legendary acquisition so we do think that will help us to some degree bring the number down a little bit.

But meaningful decline is probably still a year away. .

You’ll probably seeing some modest continued decline as we go through the year and have higher revenue but not significant decline. .

One last quick one Larry, any sense of what the purchase accounting impact might be as you close out Legendary? I guess if you're doing it in August it might have a limited impact in third-quarter but maybe you know 3Q, 4Q what that might be?.

We’re not going to get a lot of earnings accretion for Legendary in ’14; it will come in ’15. We only have a five months that it’s going to be impacting the full year in addition as you know when purchase accounting the whip under construction in presold whip winds up being written up so you don’t realize the full gross margin benefit.

So that’s going to decrease the ability to add meaningful accretion in ’14 so it’s mainly going to come in ’15.

I guess I would also add that we do expect to book a little bit of goodwill in the transaction, maybe 20 or 25 million of goodwill, not a meaningful number for the company as a whole but we will have a little, just a little bit of goodwill booked. .

And any sense of that purchasing accounting, Larry, what that number might be?.

The write up in whip or…. .

Yes. .

You know it’s -- but the whip generally gets written down to a margin of anywhere from fairly normal if it’s just started backlog to if it’s finished backlog, it could half of the normal gross margin.

So it’s hard to say but I don’t think from a -- for the company as a whole it’s going to have a meaningful impact on our total gross margin percentage, just slightly, so I guess I wouldn’t worry about it too much from a total company projected margin standpoint. .

(Operator Instructions) The next question comes from Will Randow with Citigroup. .

Hey, good morning and thank you for taking my questions. On last quarter's call you talked about Phoenix slowing quite a bit adding incentives.

Can you talk about how that's influenced your margin in the quarter and where Phoenix sales are at kind of for the month of June and if you have a July look?.

So you know Phoenix sales, let’s see, in April they averaged about 2.5 sales per community, we had pretty big dip in May it went down to like 1.5 and then it rebounded to about 2.5 again June. Incentives have increased probably on average about 5% in Phoenix so our margins have come down subsequently here.

Can’t really tell you about July yet, you know the last week of the month is always the most important week and we have a lot of things pending so I certainly July’s going to be better than it was in May, will it equal June? I can’t tell you.

So, I think the market here has bottomed out and if we kind of found the bottom of the market then we just go -- see it start to improve and get back to where it was before. .

Thanks for that. And then on kind of a for-demand pace, where are you seeing things tracking and I apologize if I didn't hear it the first few weeks. .

I’m sorry, the first few weeks of July you mean. .

July, yes, sorry. .

Yes, you know I don’t want to give too much commentary on July like I said because I just don’t know yet what’s going to happen in the last week. You know it’s probably on pace with what we did last July, maybe a touch better but it’s too early to make that prediction. .

Okay, thanks. .

One important thing to point out is, you know as Phoenix has been slower, Texas has really been coming back, both in volume and margin so that’s helping a bit of the slowness and Phoenix and the rest of our business in the Southeast and in California still remains pretty darned good too, so fortunately that’s offsetting the Phoenix slowing. .

Yes, I mean just to pile on what Larry said, I mean our business in Houston has been really strong, we had four months in a row we sold more than a 100 homes so really excited about that and our business in all the other three Texas market is improving as well.

So the Texas is really compensating for the slowdown we saw in Arizona and a little bit in the Inland Empire..

Our next question comes from Nishu Sood with Deutsche Bank..

Thanks I wanted to ask about Legendary to bring you into some new markets 40 communities I think you mentioned 4000 lots. So I wanted to understand given the size of the acquisition relative to your current operations how it might impact fundamentals.

Steve, you already talked about SG&A a little bit just wondering how might affect ASP's and gross margins and beyond the purchase price impact that Mike was asking about earlier?.

I think their ASP is pretty close what ours is maybe a little bit less. The gross margins are right in line with ours in some cases potentially a little bit more. We may try to bring the gross margin is down a little bit to increase our absorptions; their absorptions for community are probably little less than ours.

So as a private builder they are more focused on total dollars most in volume. So I think overall none of the metrics really would impact us, either way and I think they will following really tighter line with us..

Got it and second question -- Steve longer-term focused, last quarter I think the quarter before that you mentioned the need for, you know, ASPs had gotten you know quite high.

And the looking ahead in terms of rising rates and you know broadening of the market you talked about the need to get ASPs down through smaller floor plans and wanting to fit under the FHA cap, etc.

I wanted to ask for your updated thoughts on that the ASPs did seem to flatten out a little bit but what are your thoughts on that now?.

Nothing has really changed, I mean not some that’s going to happen in the quarter or two more of a longer terms proposition. And we’re still focus on that and our opinions really haven’t changed, I think we get to keep our ASP close to 350.

And we’re, as we look at new land going forward in lot of our markets we’re trying to drive with that point so same thing as the last quarter..

So I guess what I meant was, have you had success in recasting current communities with new floor plans? Or is this just more of a as you just described a thought process for evaluating new land acquisitions?.

Yes. As you say, it’s more per forward than -- we're not going into change any other communities we have now to introduce new product or smaller plans. I mean it’s tweaking a little bit around the edges but it’s more for a forward thinking strategy..

The next question comes from Stephen Kim with Barclays..

This is actually Freda on for Steve I did have a question on your land spend strategy. I mean if you look at where land spend has been trending the first two quarters of this year. The first quarter was 40% of revenues tailing down to about 29% of revenues.

So just as the housing market at large I think in general has been below expectations as people coming into the year has that impacted you know how much land you're willing to spend on this year? And then you made some interesting commentary that you guys had spent land to maintain like the 4.8 years worth of land supply.

So is that kind of a commentary that you're not necessarily looking to be you no longer land at this point in the cycle?.

No, we’ve been careful about our land purchases. We are not trying to go longer than we already are. There are certain markets we’re not buying land in right now, Arizona primarily been the biggest one.

We think land prices are pretty high in most markets, but they still deal to do that, they make a lot of sense and we knew we had the Legendary acquisition coming and we’re going to pick up a lot of lots with that. So we’re taking more of pinpoints strategic approach to buying land..

Okay great. And then just looking to the Florida market.

I see both of the other regions nothing was super surprising but in Florida orders were down a bit down year-over-year in ASPs, was that mostly a function of just closing out of communities? And if so could you talk a little bit more about what future community openings are like in the region?.

We’ve been a little bit delayed in getting some communities online in Florida particularly in Tampa we have a new division down there and we only have a couple of store open this last quarter but we got a whole bunch of store common.

I think we have 10 more than 10 net new communities in Florida, opening this quarter, both in Tampa and in Orlando so we got a very strong market share and dominate position in Orlando and we’re looking to build upon that with some additional products. And penetrate some new submarket.

So I’m not concerned about Florida at all and very optimistic about what we going to be all do there..

It’s strictly a community count issue and the sales are lastly remain strong and the sales price is simply a mix issue with some of the higher selling community selling out. So, Florida remains a strong market for us..

The next question comes from Ivy Zelman with Zelman & Associates..

Hi good morning guys it's Alan on for Ivy and congrats on the Legendary deal it's exciting to see the expansion in the Southeast for you. Steve just a first question clarifying the community count guidance in your release, the 190 target to be up by the end of the Q3.

How should we think about the progression through the quarters, is that going to be more back half weighted or are you already seeing the growth in it for the first three weeks of July?.

No, it’s I mean quite a bit it’s going to come in August but a lot of it will come at September and we are pushing hard but it’s not an exact time and we are just committed to be there by the end of the quarter but I can’t tell you precisely when these premiers are going to open up and deliver sales.

Certainly we have a internal calendar year, precisely which community is going to open in which week but doesn’t always quite workout that way and can’t vary..

Got you. In the second question along the lines of the Legendary deal. In both of those markets the Greenville and Atlanta markets now you're going to be going up head-to-head with DR Horton, who out this morning spoke about increasing incentives in many of their markets since specified Atlanta and Greenville specifically.

But what your strategy as the deal closes and you go into those markets? You are forecasting you said above average growth in Greenville and Atlanta.

So is it going to be a situation where you're looking that kind of take share right out of the gate? Or what are your local people telling you as far as the more recent trends in those markets given Horton's commentary this morning?.

Well, above average growth in the region mostly in Atlanta and Nashville..

Okay..

We are the number one builder with the acquisition of Legendary in Greenville and certain Horton is going to have a big position there not only with their own stores but with their acquisition at Crown, we think we are going to compete well of them but they have been competing well of them and we don’t expect to see any fall off in business there in Greenville and expect to grow with the market but we are going to be focusing most of our efforts going forward building the Atlanta business, there is a ton opportunity at Atlanta, there many sub markets in Atlanta they are not one that we want to get into and the price is way big enough for everybody.

So Horton can get there as and we can get ours and I think we can both do really well and that’s mentioned all the other builders there are that will be competing against..

And as far as the margin outlook in both of those markets and ones you move half the purchase accounting and thinking more out into ’15 beyond are those markets you would expect to achieve kind of corporate average margins in?.

Yeah, equal to or better I would say..

The next question comes from Adam Rudiger with Wells Fargo Securities. .

Hi this is Joey Matthews on for Adam. You just mentioned Steve some talk in Atlanta that you want to get into, should we interpret that to mean that you're going to be putting more capital to work in Atlanta in addition to the Legendary deal? Or does the Legendary deal include the lots where you're looking to --..

No, absolutely we are going to be putting more capital into Atlanta, we are buying this as a five parameter growth, starting point to ending point and I’m just bullish about Atlanta is almost to any market in the country..

So the Legendary deal is about eight years supply that seems definitely higher than your average, company average.

I guess what you -- how big of a piece of your total company do want Atlanta to be?.

Well, number one we think we grow there deliveries significantly which mainly the year supply down significantly and number two is, they have got very little money tight up and allow those lots.

The option deposits are very small so there is very low risk to the balance sheet with all those options they have and a lot of those lots have appreciated during the mining so, I really look at that way, I think we can get to over 1,000 units in Atlanta relatively short period of time over the next few years and we’ll have to go to lot supply there because a lot supply is pipeline is much bigger in Greenville..

Great. Shifting over to California, absorptions are down about 30% year-over-year.

How are you feeling about that market? Is it just kind of comparisons just really tough from last year or is it truly getting weaker?.

No, it’s not a demand issue; it’s more of a issue of us finding the plan that makes sense and getting stores online or opened up. You can look at our absorptions, they exceed the company average there, they are 12 per quarter, that’s very good. Our margins are still really good there.

So it’s just about us to be able to penetrate the market in a deeper way and it’s been challenging. But we have quite a few stores opening up this quarter as part of that getting back to 190 or so and feel very good about California..

The next question comes from Paul Przybylski with ISI Group..

Good morning this is Paul Przybylski on for Stephen East.

I was wondering if we could get some color on your monthly order progressions throughout the quarter and if June was down sharply from May?.

We sold 580 homes in April, dipped down to 522 in May and we actually went up, we had a little better June than we did in May and we did to 545 in June..

Okay and you mentioned incentives have increased about 5% in Phoenix.

Were there any other markets where you know increased incentives?.

No, not in a meaningful way..

Okay and then going back to California, can you give us some compare; contrast the differences between Northern California and Southern California? And then coastal versus what's going on in the inland empire?.

I mean our Northern California business continues to be now the strongest of the two; we got several positions open up in the South Bay that we are really bullish on that we think we’re going to deliver some pretty good results going forward. Southern California was a bit of a community count issue but there is still pretty good demand there.

We’re trying push our business in Southern California to become a little bit more urban; we have a couple of urban communities in the pipeline coming on the next several quarters. But as I said earlier, the demand in California is still pretty strong. So it’s more of us getting our supply inline than finding the demand..

Where would the urban locations to be located?.

Like the two 10 corridor community into LA and the Downtown, LA people community on the Pomona, Claremont area out there into LA..

The next question comes from Michael Roxland with Bank of America/Merrill Lynch..

Thanks, good morning everybody thanks for taking the questions. Can you speak to lower FHA loan limits I know something that was instituted earlier this year. I would I obviously had an impact on certain areas; I think it affected your business in Arizona.

Can you talk about how those loans have affected maybe other regions like your positions in California? Especially given that you may be more oriented towards that the inland Empire then say Orange County or San Fran?.

Larry, do you want to take that one..

Sure. That is one of the reasons that we attribute Phoenix in particular being a bit slower because the decrease in loan limits was higher proportionate to the average selling price on Phoenix for a new home, so that’s one of the things that affected the Phoenix business.

Elsewhere, it has had some impact but not a dramatic impact, but that is one of the reasons why our non-FHA VA business has increased.

So over 70% of our homes that we are selling now are conventional financed homes and our down payment is a little bit higher, a lot of it driven not only by the down payment or excuse me the loan limit decrease, but the cost increases of doing an FHA or VA type loan..

How that 70% compared to last quarter or last year let’s say. .

Well it was below conventional was below 50% a year and half or so ago..

Got you, thank you for that Larry. Second question historically the Company has used land banking for growth as opposed to using the balance sheet.

Any change in what we've seen at the land bank and this may be a question asked a quarter or two ago, but have you seen any change with respect to land bankers and has there been any improvement there? And what's company's strategy with respect to land banking if and when we do start to see more notable improvement?.

Steve I will take that one too. We like land banking as we’ve used a lot in the past particularly last cycle. There are more land bankers coming back into the market are new land bankers being created. Still we would be using land bankers a lot more if there were more land bankers available.

But it’s a philosophy and strategy we believe in and you should plan on saying our option control lot supply go up over time. .

But we’re now way going to get anywhere close to where we were before, as a percentage of our lots. We’re long way from there and we’re continuing to try source land bankers but it’s going to be much smaller percentage of our lots on our control..

The next question comes from Jade Rahmani with KBW..

Thank you very much. I was wondering what kind of backlog conversation you think is reasonable to expect going forward and as you expect absorptions to increase on a year-over-year basis in the back half..

I don’t see any meaningful change in backlog conversion or absorptions going into the back half of the year, what do you think Larry?.

Yes. Well, I don’t, obviously there are some seasonality to this question so because we tend to close more houses in the back half, our conversation rate goes up a little bit, I would expect that to be a little strong in the fourth quarter with the third quarter this year from what I can see.

So, as far as sales pace goes again, seasonality will suggest that maybe sell per community would be a bit softer in the back half of the year, but considering that the first half is been softer we would hope that we start to see some market improvement and that traditional slower sales pace would be more muted this year, but it’s hard to see on that, that’s just a conjecture statement..

Great. Thank you.

And secondly just the other income in the quarter, it seems like you picked up because you, was there anything specific later event?.

Yes. So it was we had a two or three legal settlements where we picked up some miscellaneous income so that’s predominately about 3 million of that number from those, the net impact of those legal settlements..

Okay.

Anything on the Horizon, the next few quarter on those types of things?.

That’s really hard to guess when those things may or may not come so it’s hard to say..

The next question comes from Joel Locker with FBN Securities..

Hi guys Question on the community count, obviously the Legendary brings in 40 new committees but the absorption's been around 15 per year a lot lower than the Meritage communities.

And, do you expect to maintain that 40 or if you pick up the absorption rates do think the Legendary footprint will shrink? And then at the end of the year you will have 205, or 210 plus 20, or will it still be 40 and end up say at 250?.

I don’t expect it to shrink I expect to actually to increase; because we need more, we’re going to try get more communities going in Atlanta. They have some pretty deep positions. So we lower their margins as such to matching up ours and try increase the velocity, I don’t expect that, I have a impact on community account..

So you think 250 by the end of the year, all and including Legendary assuming now….

Yes. 245, 260 somewhere in there probably it’s a good number..

Right.

And do you have an early kind of look into the which you want to increase community account of that number in 2015?.

I don’t have that yet but I can, I’ll be prepared to give you that next quarter..

Next quarter. So….

They tend to operate their communities in like groups. So they tend to you know share some of the services to share super intend and among several communities and also sales staff and that results in a lower overhead cost per community and allows them to operate more profitably at a lower desorption rate.

So Legendary may continue to operate at a somewhat lower absorption rate then our traditional communities although overtime that may change..

Right, and then just on the SG&A going forward, do expect a little more leverage there? Based on some revenue growth or is it just kind of hitting the wall unless absorptions really pick up per community?.

No, we’ll get a little leverage, we’ll get a little leverage but it’s going to be 20, 30, 40 basis point it’s not going to be 50 to 100 basis points, but certainly putting the couple of hundred million dollar more revenue on it still gives us a low leverage..

The next question comes from Jay McCanless with Sterne, Agee..

Good morning guys.

I apologize if you have answered this already, but assuming your Legendary clause, what is the mix between first time move up and actually look like post deal?.

I mean I don’t have that precise number but I don’t think it’s going to change when we really were as right now, I mean you agree Larry?.

Agree, Jay, a very similar selling patter to us as far as move up versus first time, so when they blend and it won’t change the totals much..

And what do you think towards the end of the quarter just on Meritage?.

Again, I tend to say 80% but maybe 75% to 80% is first time move up, second time move up, third time move and the rest of it is a combination of first time active adult and luxury..

Nothing’s really changed from the previous quarters. .

The next question comes from David Goldberg with UBS..

Thanks for taking my call guys. I have a little bit of a theoretical question I guess for the first one. And what I was hoping to get some more color on is you guys have a Legendary acquisition and if you kind of give us a little juxtaposition between how Meritage thought about acquisitions in the previous upturn versus this deal.

And I know Steve you commented on the past and kind of how you thought about in the last Meritage being kind of a bank and a backup is for builders when you are doing deals and kind of moving away from that.

Can you talk about how you look at this deal relative to prior deals in terms of strategy and approach to M&A?.

Well it hasn’t changed that much, I mean we’re always looking for, when we make an acquisition primarily for a new market, you know somebody has a solid land position that could do our land strategy, you know product that fits with our product.

You know we want a management team that’s going to be around for a while and you know complementary to the management in our company that we all can get along and we see the world similarly, that’s what we found with this company and certainly we have more centralized functions you know with regard to you know legal, strategic research, national purchasing, marketing and those areas that we had you know 7,8,9 years ago, so it’s a little difference there but the main principle hasn’t changed in what we’re looking for and we found it in Nashville and we found it with Legendary and there’s some others out there that we’re looking at as well, so.

Hope that answers that question..

Yes it does and thank you for the color. I think as a follow-up to that it's interesting Legendary big land acquisition with a lot of control two options as you've mentioned, when you think about you guys are in a great position from a liquidity perspective.

But I'm just trying to think about as you start to work through these options, taking the land down, putting more permanent capital into the land as you build through and how do you guys think about the cap structure? How much can you grow given the current land position and if you keep doing deals, is it going to necessitate additional capital market transactions even if you're able to maybe buy the deals because they're relative land-like companies.

As you look the growth of the land position and grow into them, is that going to require additional capital market transactions?.

I don’t think so, I mean, we’re generating really good retained earnings, our margins, our net margins are still very high, pretty high based upon our historical standards.

So we had good profitability and I think we got enough, we’re generating enough retained earnings to you know grow nicely and I do think land maybe will increase to some degree which will give us more additional capital and you know, I’m not concerned, I feel very good about our balance sheet and our leverage and where we’re at, I don’t think it’s necessary for us to do additional capital transactions unless there’s a deal out there that we really are excited about and really move the needle and you know you need capital we’ll go to the capital market but I’m not planning any right now..

As we grow our equity and drop our leverage it’s always possible we could do a little bit of a debt addition in order to kind of maintain our leverage at that moderate level, we like around that 40% ish level, but it’s not a mandatory thing to do and we can certainly manage our growth and get good growth without doing anything. .

That’s very helpful. Thank you, guys..

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