Brent Anderson - VP, IR Steven Hilton - Co-Founder, Chairman and CEO Phillippe Lord - COO and EVP Hilla Sferruzza - CFO, CAO and EVP.

Michael Rehaut - JPMorgan Chase & Co. Alan Ratner - Zelman & Associates Paul Przybylski - Wells Fargo Securities Nishu Sood - Deutsche Bank Aegean Peter Galbo - Bank of America Merrill Lynch Jade Rahmani - KBW Carl Reichardt - BTIG Daniel Oppenheim - UBS Investment Bank Alex Barrón - Housing Research Center.

Good morning, and welcome to the Meritage Homes Third Quarter 2017 Analyst Conference Call. [Operator Instructions]. Please note this event is also being recorded. I would now like to turn the conference over to Brent Anderson, Vice President, Investor Relations. Please go ahead, sir..

Thank you, Chad. Good morning, and welcome to our analyst call to discuss our third quarter and year-to-date 2017 results.

We issued the press release before the market opened today, and you can find it, along with the slides that we'll be referring to during this call, on our website at investors.meritagehomes.com, or you can select the Investor Relations link at the bottom of our homepage.

I'll refer you to Slide 2, and remind you that our statements during this call as well as the press release and slides, contain forward-looking statements, including our projections for 2017 operating metrics, such as order trends, closings, revenue, margins, earnings and community count.

Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain, and actual results made be materially different than our expectations.

We have identified the risk factors that may influence our actual results and listed them on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2016 annual report on Form 10-K and subsequent 10-Qs, which contain a more detailed discussion of the risks.

We also have provided a reconciliation of certain non-GAAP financial measures related - referred to in our press release and presentation as compared to the closest related GAAP measures.

With me today to discuss our results are Steve Hilton, Chairman and CEO; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord, Executive Vice President and Chief Operating Officer of Meritage Homes.

We expect to conclude this call within about an hour, and a replay will be available on our website approximately an hour afterwards and remain active for 2 weeks. I'll now turn it over to Mr. Hilton to review our third quarter results.

Steve?.

Thank you, Brent, and welcome to everyone participating in our call today. I'll begin on Slide 4. The third quarter of 2017 was certainly a memorable one, with major hurricanes that hit Houston and Florida.

We've been assisting the relief efforts, but we're relieved and grateful that our team members escaped injuries and our communities sustained little damage, although we did lose 2 to 3 weeks of sales and construction activity.

Even so, we still closed 9% more homes and sold 8% more homes than we did in the third quarter last year, which could have easily been double-digit gains without those disruptions.

The increase in closings generated 9% growth in third quarter home closing revenue, which combined with improvements in our home closing gross margins and overhead leverage, to drive an 18% increase in pretax earnings for the quarter. Turning to Slide 5. We've set out this year with 3 strategic initiatives to enhance our earnings performance.

They include, growing our community count, improving our gross margins and increase our SG&A leverage with top line growth. We grew our community count by 5% in the first quarter of this year, and ended the third quarter with 6% more average active communities than we had a year ago.

Our home closing gross margin improved to 18.1% from 17.7% last quarter and 17.8% in the third quarter of 2016. The improvement was driven by modest pricing power in cost management, good margins on specs and improved leverage of construction overhead expenses.

As has been widely expected in the aftermath of the storm damage, we begun to receive notices of cost increases from some vendors and subcontractors, and we're actively negotiating with them to minimize the adverse impact on future margins. We also improved our overhead leverage by 80 basis points compared to last year's third quarter.

Total SG&A was 10.9% for the third quarter of this year compared to 11.7% last year. Commissions and other sales cost rose just 6% on a 9% increase in home closing revenue, and our G&A expenses were actually down 5% year-over-year in absolute dollars, despite higher closing volumes.

I'm proud the determination and drive of our sales team to deliver year-over-year growth and orders for the third quarter despite the disruptions caused by the storm. I'll turn it over to Phillippe to discuss our sales trends in more detail by market.

Philippe?.

Thank you, Steve. Demand has been solid this year, and we are pleasantly surprised to how quickly buyers returned to our communities in Houston and Florida, where we were able to reopen and traffic began to flow again. The 8% order growth we achieved in the third quarter was primarily due to continued strong demand in Texas and the East.

The year-over-year decline in our West region was mostly due to having fewer community opened in second quarter '17 than 2016. I'm sorry, third quarter '17. As robust demand results in several communities closing up faster than we could replace them. I'll direct you to Slide 6.

Orders decreased 6% in the West, corresponding with a 7% decline in average community count compared to last year's third quarter, while the overall orders pace for the region was consistent. Orders were up slightly in Arizona, where a 6% increase in absorptions offset a 5% decline in average community count.

The demand remained strong in Phoenix, while our entry-level homes under FHL loan limits are selling well. We have a healthy supply of lots to meet that demand at the current pace for selling, with many more entry-level communities slated to open in 2018.

Orders were down 7% from 2016 in California, with 7% fewer communities opened, on average, during the third quarter of this year.

As we noted last quarter, we've been reloading our lot supply over the last couple of years and plan to open several new communities in Northern California over the next few quarters, after delays caused by the heavy rains there in spring.

Thankfully, none of our communities have been directly impacted by any of the wildfires in northern or southern California.

Despite continued strong demand in Denver, our third quarter orders were 24% lower than last year in Colorado, due to a combination of 14% fewer active communities, on average, during the quarter and a 12% decline in absorptions through our average - absorptions of 3.2 per month in Colorado, were still the highest in the company.

We have a solid pipeline of new communities that we're planning to open, including several over the next few quarters. While orders were down 6% for the region, total order value was only down 4%, since our average order price increased 2%.

Average sales prices in the region are starting to tamper, despite recent - decent pricing power as Arizona is contributing a larger percentage to the recent results. And we have been shifting more towards lower price, faster selling community aimed at the first-time buyers. Slight Slide 10.

Texas continues be our best performing region, due to strong demands across all markets there. Our third quarter orders were up 22% over the third quarter last year in Texas, reflecting a 26% increase in average communities opened during the quarter, offset by a slight decrease in average absorptions.

All of our Texas markets were up over last year's third quarter, including Houston, which rebounded quickly after the hurricane path and flooding subsided. The first question people asked when visiting any of our communities was, did it flood here? And when they confirmed, we didn't, they're ready to buy.

A large part of our success has been due to the strong pivot we've made towards more entry level products in Texas, especially in Austin the number this year. Because of that success at lower price points, our average sales price in Texas was down 2% year-over-year. Slide 8.

Our East region orders were up 13% over last year's third quarter, primarily due to increased absorptions. Our average orders per community were up 12% year-over-year. Part of that is due to our new products and our new communities, which have been well received by buyers, and part of it is improved sales management and execution.

Florida, Georgia and South Carolina orders were up 20% or more over the third quarter of 2016, with double-digit improvements in absorptions on top of average community count growth in Florida and Georgia, which has been a core focus for us this year. Florida's growth is also benefiting from our successful offerings in the entry-level market.

Overall, we're executing well on the entry-level growth strategy and are achieving a higher order pace in our entry-level plus and Live Now communities, while earnings comparable or better margins than our move up communities.

We're projecting our community count at year-end 2017 will be relatively flat year-over-year, due to earlier than anticipated closeouts of communities and longer than anticipated schedules to get our new communities opened and fully ready to sell, especially in California and Florida, but expect our total community count to be back to where we were last quarter by mid-2018.

I'll now hand it over to Hilla to review our financials.

Hilla?.

Thank you, Phillippe. I'll recap our year-to-date results and as well as key land and balance sheet metrics, beginning on Slide 9. We generated $108 million in net earnings for the first 3 quarters of 2017, a 10% increase over the first 3 quarters of 2016.

Our performance was primarily driven by a 6% increase in year-to-date home closing revenue and a 60 bps improvement in overhead leverage. Those gains were partially offset by our higher tax rate of 34% year-to-date 2017 compared to 31% in the first 3 quarters of 2016.

Commerce has not renewed the energy tax credit for 2017, which reduced our 2016 tax rate. On a pretax basis, our year-to-date earnings were up 15% year-over-year. Our average closing price was $415,000 for the first 3 quarters of 2017 compared to $406,000 last year.

General home price depreciation in many of our markets offset a mix shift that is occurring overall as we transition to sell more entry-level homes.

Our year-to-date home closing gross margin was 10 bps lower than the first 3 quarters of 2016, due entirely to the first quarter of 2017 coming in lower than last year, while we achieved solid improvement sequentially in our second and third quarter gross margin.

As Steve mentioned, we're expecting to incur some cost increases in the aftermath of the hurricane as a result of increased demand from materials and labor. And we're doing our best to minimize these increases as we focus on getting our backlog homes closed on time.

Potential labor delays could dampen the improvement, we would have otherwise expected in the fourth quarter this year, but we still believe we can leverage increased closing volumes to generate a 17.5% to 18% home closing gross margin in the fourth quarter and achieve our prior guidance for full year 2017 gross margin, consistent with 2016, despite the weather-related disruptions this year.

We had our 2017 target of 10.5% to 11% SG&A leverage in the third quarter of 2017, as we bought our SG&A expenses down to 11% of home closing revenue for the first 3 quarters of 2017 from 11.6% in the first 3 quarters of 2016.

We expect our SG&A percentage to be even lower in the fourth quarter, as we effectively leverage higher closing volume and make progress towards our long-term goal of 10% to 10.5%.

Our interest expense for the first 3 quarters of 2017 was down 31% year-over-year, due to greater capitalized interests on the larger amount of assets under development, though it was nearly $1 million higher in the third quarter of this year over '16, through its issuance of $300 million of new senior notes in June.

With this new debt in place, we anticipate higher interest expense in the fourth quarter of the year from the additional interest on the new senior note. Slide 10.

We used most of the proceeds from the new issuance to pay off borrowings under the credit facility and completely retire our $126.5 million of our convertible senior notes, which we completed in September. On a go-forward basis, that will result on the reduction of approximately 2 million shares from our diluted share count.

We ended the quarter with $115 million of cash and $25 million drawn against our revolving credit facility. Our net debt to cap ratio increased slightly, but it's still within our target range of low to mid-40%. We ended the current quarter at 43.6% compared to 41.2% at year-end 2016.

Part of our cash usage was invested in additional spec inventory, as we have more specs in our entry-level communities, and specifically carry in our move-up communities, to allow the buyers so move in quicker. Our spec strategy allows us to build faster and more efficiently, while locking in lower cost in the driving cost cycle.

40% of our closings in the third quarter of '17 were from spec compared to only 40% in the third quarter of 2016, reflecting more spec sales within our entry-level and Live Now communities.

We ended the third quarter with 1,957 specs completed or under construction, which was approximately 7.8 specs per community, compared to 1,531 a year ago, or an average of 6.5 per community. Approximately 27% from total specs were completed at the end of September 2017 compared to about 21% in September 2016. Turning to Slide 11.

We fixture more than 2,400 additional lots during the quarter, of which approximately 70% were for entry-level communities, and we spend 286 million on land and development during the quarter, bringing a total year-to-date investment in land and development to approximately $771 million compared to $667 million during the third quarter of last year.

We're expecting to spend about $1 billion on land and development this year, which is the most we've ever spent annually, and expect that pace to moderate over the next couple of years. We have approximately 33,300 lots at quarter end, which equates about 4.4 years of supplied lots, based on trailing 12 month closings, with 2.9 years supplied on lot.

After having invested heavily in land and development, over the last 2 years, we have all of the lots we need to meet our plan in 2018, and about 90% of what we believe we need for 2019. With that, I'll turn it back over to Steve to discuss our full year outlook..

Thank you, Hilla. Concerning the results we achieved in the first 9 months of the year, and the expected impacts from the hurricanes, we are modestly reducing our closing and revenue guidance, while tightening our 2017 earnings expectations after - expectations after our strong third quarter performance.

We expect to deliver approximately 7,600 to 7,800 homes and closing revenue of $3.15 billion to $3.25 billion for the year.

Midpoint is about 100 fewer closings that we had previous projected for the year, since it will be difficult to make up for those lost sales due to the hurricanes and convert them to closings in the fourth quarter, which is already our highest volume quarter.

On that level of closings of revenues, we are tightening our expectations for approximately $235 million to $245 million in pretax earnings, with full year 2017 gross margin in line with 2016. In summary, we are pleased with the results we achieved in the third quarter this year, and the progress we made on our strategic initiatives.

Demand continues to be healthy across all of our markets, especially for our entry-level and Live Now homes. More than ever, buyers appreciate in getting Meritage quality, energy efficiency and advanced technology and affordably priced homes.

As we continue to execute our strategy to serve the growing entry-level market, we foresee additional growth opportunities for Meritage.

We're dedicated to our brand promise of delivering a life feel better, for all of our customers, and we will continue to innovate and focus on customer satisfaction, which we expect to drive additional growth and shareholder value. Thank you for your interest in Meritage Homes and for supporting our growth and success.

We'll now open it up for questions, and the operator will now give you instructions.

Operator?.

[Operator Instructions]. The first question will come from Michael Rehaut with JPMorgan..

I appreciate taking my question. First, I just wanted to drill down a little bit in terms of the success that you're starting to have with or - have been having with the entry-level product that you've rolled out over the last 12, 18 months.

I believe you mentioned that due to some solid sales trends, probably it's a good problem, your community count, I believe you said would be flat year-over-year in the fourth quarter. I'm curious as you kind of look into 2018. I know it might be a little bit premature for guidance, but perhaps directionally, you could help us.

If the community count perhaps is a little bit lower or flattish year-over-year in 4Q, which would imply a down trajectory or a little bit more of a challenge to have growth in the first half of '18, how should we think about absorption counterbalancing that as you have more of that entry-level product come through? I know this absorption is up using average community count about 2% year-over-year in 3Q, so would that have to accelerate a little bit? And is that kind of what you're thinking?.

Without not getting too granular, we are focused on increasing our absorptions. We've been accelerating our exit from some of our lower margins, higher-priced communities, particularly in the West, that have put our community count growth under pressure right here.

We had some above FHA higher-priced communities in Arizona and Inland California that we're getting out of. And we're opening more and more entry-level Live Now communities, which we think will help our absorptions.

So although our community count growth is not as fast as we like, I do think there's possibilities for better absorptions, and that's what we're really focused on..

And my thinking about it right in terms of community count that - did I catch it right that you said it should be flattish year-over-year for 4Q? And would that, as a result, in a little bit of a year-over-year drag in the first half of the year?.

It's going to be flat from the beginning of this year. So we'll end the year pretty much where we started on a community count basis. I'm not sure we're ready to go into discussion about it driving to the first half of next year.

Obviously, as entry level becomes a more material portion of our both sales and closing mix, their absorption pace is quite a bit higher than our traditional move-up products. So I think we're going to be able to manage through that, even with a slightly lower community count than we had initially anticipated.

Although those communities, obviously, in the pipeline, will be opening throughout 2018..

Okay, good. So I misheard that Dan, you would be flattish in the mid-250s at year-end? So that's not what I thought. Second question on the gross margin, you did a nice job in the third quarter is a little bit above our expectations, I believe, what you were expecting as well.

But at the same time, we called out for 4Q, maybe a little bit of a negative impact from labor material costs coming out of the hurricane impacted areas.

I wanted to get a sense of - as a result of that, do you expect 4Q gross margins to be a little bit down sequentially? And perhaps, you can give us a sense of - from a basis point, impact - what impact that higher labor and material costs just to quantify that from a margin impact on gross margins..

It's very difficult to pinpoint the precised margin. At this point, for the fourth quarter, it could be down slightly from where it was in the third quarter. On the other hand, it could be right on top of where it was in the third quarter. But, in any event, it's going to be closed.

And I just don't want to hold out a precised number, that's why we've continued to use the range..

We're not at obviously most of our the homes that are going to be closing in the fourth quarter have already started construction side of the dollars are fairly something, but I think we mentioned in our prepared number remarks in order to make sure that we are getting to labor to our job site in this tightened environment.

Post hurricanes, we're doing what we need to do to make sure you that the backlog closings, so in some cases, that may cause a slight uptick in labor, which is kind of why we're going to hover around where we were in Q3, but we don't have a definitive percentage.

But we're very comfortable being at our full year 17.6% gross margin full year 2017 as well..

And we're still selling specs today as we speak that will close this year. And we're very much focused on that. So thanks, Mike..

And that will be from Alan Ratner with Zelman & Associates..

So you guys, obviously, are seeing a nice move into entry-level, and I think that's certainly benefiting your results. I think the cost pressures, I'm sure we'll hear a lot more about from other builders as well. But I'm just curious if you could talk a little bit about the pricing power you've seen at entry-level.

On one hand demand, it seems like the demand is really strong, but on the other hand, it seems like you need to be extra careful about not pushing too hard, given the affordability constraints of lot of those buyers.

So just curious if you do see higher costs, what do you think your ability to pass those costs are on to consumers? And may be just talk a little bit about how aggressive you've been raising prices so far on the entry-level communities you've opened this year?.

This is Phillippe. We are seeing pricing power at the lower price point. Definitely be able ahead of our cost absolutely. The key to our entry-level, again, is just the FHA. We kind of see that as a hard cap. And so as we are positioned below FHA, we're seeing pricing power to that FHA, points where once we get to FHA, it can impact absorptions.

But we are seeing pricing power at the lower price point and really strong demand..

And on that point, Phillippe, I mean if you look at your portfolio of entry-level projects, I mean can you give us any indication of how close you are to the FHA limits in those communities? Is there room to run, if you do need to push prices higher? Or are you kind of budding up right against them in most of your projects?.

It's market by market, Alan. In some markets, we're positioned below, and we can push it. And others were kind of tight there and kind of impossible to hold the line..

The next question comes from Paul Przybylski with Wells Fargo..

Steve, earlier this year, you thought a 50-basis-point increase, and annual gross margins was within the realm of possibility, marching back towards that 19% to 20% range.

Do you think that's still a good roadmap for us to use?.

Yes, it's still what's we were pushing towards, I mean not for this year, but we're hoping to get some gross margin gains next year. That's what we're focused on every day here..

And then I guess how are the absorptions and gross margin of the new East communities compared to the Legacy portfolio in that region? And then what percent of the community there has been transitioned? And do you look at the trajectory of transitioning or the remainder of it?.

They're better, they're higher. You know we're not getting the volume yet that we need so the construction overhead is somewhat of a drag. But as we hit more and more communities on we build that leverage better, which certainly factors a certain factors into the gross margin.

But it's a process of that's going to play out over the next couple of years. And expect to get incremental improvement every quarter out of that region..

The next question will be from Stephen Kim of Evercore ISI..

This is actually on for Steve. I just wanted to follow up on cash flow and land spend, as a percentage of revenue thinking. Last quarter you mentioned that you want to refocus on cash flows, as you're trying to catch up from under purchasing lots.

Just wondered whether this thinking has changed at all?.

I don't think that we're not focused on cash flows. While we're focused on cash flows, we're very, very hyper-focused on making sure that we don't kick off over our comfort zone to our net debt to cap ratio. Although we did realize that we had built that quite a bit of cash, and we had need to refill depleted pipeline of lot.

So I think we've done a very good job over the last 2 years, getting us back to where we need to. So at this point, we need to replace the lots that we're selling and providing not of a growth trajectory in line with our internal forecast, but we're no longer trying to also replace underpurchasing for prior years.

So we mentioned 1 billion SME to purchase for this year is the highest we've ever had in the history of the company. So we're very excited, on a go-forward basis, knowing that we don't need to replace that in under purchased year, we'll be seeing something a little more tempered than that..

We're really focused on improving our assets, Clarence, so I think we can get more volume out of our communities going forward without, spending more money on land. And so we're projecting next year land spend to be between about the same as these years.

Even though we have a higher acid-base, and we think can drive revenue growth for us into '19 and beyond..

And then as you expand your entry-level to the to see, a look at any potential M&A or bolt-on opportunities to grow within existing markets or expand into new ones?.

Our eyes are always open for those kinds of opportunities. Same thing that I said in the past, that we have a lot of opportunity in our existing markets, particularly in the South to grow those businesses and gain market share.

And even in our longer, or older more mature markets, like Phoenix and Dallas, Houston, we can grow our business in those markets. So our primary interest is organic, internal growth, but our eyes are open to opportunities as comfortable and it make sense, we can definitely pursue that. But there's nothing on the horizon at this moment..

The next question is from Nishu Sood with Deutsche Bank..

So just following up on the gross margin, the cost pressure to labor in the materials pressure. I think you laid it out pretty clearly1 for 4Q. Broader question, in an event like this, post the storms, obviously, the pressure is accumulate. And people, I think, are thinking different thoughts about the trajectory of that.

Depending on rebuilding activity in, people talk about obviously insurance fund flows, et cetera, when do you think the cost pressures peak? Are we seeing that now in the fourth quarter? Or given rebuilding timeline, do you expect that to kind of bleed into first quarter.

Obviously, seasonality plays a role in it as well, with potentially greater closings in 4Q.

So Steve, how do you think about that, that unfolding when the peak in those pressures might be in and when it bit begin to receive?.

It's too hard to tell. I mean, I do think this is a national event, I think it's a regional issue. And I think it's probably more in Texas than it is in other markets. Concerned down the road about Northern California, with the prices are going to be up there a lot of houses got burned on up there, they had to be rebuilt.

But - And I think that's a couple a few quarters out at least if not, longer. So I think the Florida cost pressures are really focused on the fourth quarter. Houston is going to play out over several quarters. But again, these are multiple cost pressures and not too much on national..

Got it. Got it. Okay. Turning to Texas. Obviously, you've had great success there in opening new communities, opening new entry-level communities as well. And obviously, there were some effects on the absorptions this quarter because of the storms.

But still if I look at the absorption pace, the kind of the mid-6s, it's about 1 below the East region and 2 below the West region. How should we think about the potential of your Texas communities from an absorption perspective.

I would have expected with the entry-level mix, it might even be higher turn communities, might even get east and western region.

Is that where could behead or is there smaller committees calls it back? How should we think about that?.

It's Phillippe. The people it now is to and access it really encourage primarily in Austin, also we're starting to move that way in Houston. We had some things happening in Dallas and San Antonio's always been a pretty strong entry-level market. So we're well-positioned there.

But I think as we pivot further into that segment with Dallas and Houston, you should expect our absorptions to go up and be more comparable to what you're seeing in the East and the West. I mean, where we pivoted in Austin, our absorptions per community has been very strong in the Live Now. So think that what you should expect to see..

The next question is from Susan Macquarie with Crédit Suisse..

This is Chris Klein on for Susan. I just want to drill in a little bit deeper on to the communities there approaching [Technical Difficulty] I just wanted to drill in a little deeper into those communities that are hitting those FHA limits.

When you go into conversation on supplier on price increases, what portion of those increases do you guys expect to realize? Looking back historically, what have you typically been able to push back on?.

I mean, I don't think that really matters by committee. I mean, obviously in the entry-level committee, we have a more simplified building model more specs and less options, less floorplan. And so that allows us to mitigate our cost because of the business model.

But we don't - we're unable to push back any harder in those communities and then we are in our other communities..

Okay.

So then, on the affordability side, are you expecting that given that hard cap on price, that you'll be able to still drive your expected closing growth in those regions?.

Yes. I mean, I think it's all about what we pay for the land quite frankly, if we can buy lots and support the price point. That's really how we position those communities, and then we manage our costs very carefully to try to remain below FHA. There's a lots of things to do there.

But generally, we're able to, in our entry-level communities thus far, push our pricing to manage our costs and still stand our FHA..

The next question will be from John Lovallo of Bank of America..

It's actually Pete Galbo on for John. Steve, I was wondering if you could just give us a little bit of going forward here. Historically, in the last year, you guys are one of the highest users of option lots among the builders.

And you have a competitor out there who's was very publicly going more towards the option lot model and you guys are sitting around 35% today.

I mean, do you have a target other in terms of what you would look to do in terms of options? And how you think that might impact your turn profile going forward?.

Well, the reason, first of all, we closed two pretty significant landbank transactions in this last quarter or I think some - it may have been October in Orlando, probably equals about $70 million or $80 million worth of watch that we think are going to have great long term results for us there. Both a really nice information locations.

But the spread between the cost of the traditional lawmaking, which we did often the last cycle, and using our balance sheet is pretty wide and with our margins being where they are, we didn't want to do they seem to put further pressure on those margins.

So we have kind of reframed from using land banking as aggressively as we've done on the previous cycle. And then that capacitively just hasn't been there for us to lovemaking prices costs down.

To the extent that we could find options from Glenn Sellers, certainly take advantage of those much all weekend, but in most markets, particularly in the West, is just not available. And there's a lot fewer available in Texas today than there was in the last cycle. So certainly, as an area of focus for us.

I would like to do more with extent that there are available at that they don't hurt our margins, but just a fact of supply..

Got it. And Steve, if you could ballpark kind of those that the spread on the landbanking at all and then maybe one just modeling for dealer.

On the debt maturity on 2018, have you guys outlined at all, whether or not you plan to refi that or pay [indiscernible] cash?.

I mean the land making cost 13% to 14% IRR range. And we're issuing bonds from the 5% to 6% range. So pretty big spread..

Okay.

As far as the 2018, I think we've mentioned it before, we're looking at a couple of different options for Q1 2018 to pick up those bonds, most likely, we'll look at the market and see if there is still competitive and look to do something on a bonsai they're running at taking out when available cash or in our revolving credit facility although we do have capacity in market those will operate.

I just want to clarify one other data point about the community count discussion in an earlier question. I want to make sure that it was clear.

We expect our full year 2017 community count, so as of December this year, to be where we started out this year, which is low 2 40s not low 2 50s, just to clarify, okay?.

The next question will be from Jade Rahmani with KBW..

Just regarding the labor shortages.

Wanted to see if you've given any consideration to any innovative off-site solutions, basically pre-constructing part of the house off-site?.

Yes. This is Phillippe. We're looking at a lot of different beings, quite frankly, to help manage through the current labor environment. It's different types of training, approaches, panelization, other innovative ways to build off-site. So we've been exploring a lot of areas, running models on how to do that.

In a couple of markets, we are doing that, I'd say in San Antonio, and we're actually looking at those opportunities everywhere where it make sense and where we have the ability to execute it..

And can you give any color on the magnitude of margin benefit in San Antonio that you've experienced? And also, how widespread this initiative could become on a national basis?.

It's much about the margin as the capacity and the cycle time, which certainly helps you leverage our field overhead which does help our margin. But it's not a real cost savings per se, it's about efficiency and it's about lower warranty costs, lower waste. And those type of things would translate to higher efficiency for us..

And then in terms of the cost increases that you've started to hear from vendors, can you give a sense of the magnitude of - or range on a percentage basis?.

Not really. Because it's - of depending on the market, sometimes depending on the market of the market. So we're experiencing different pressures in different areas from different trade groups and it's very hard to quantify that..

[Operator Instructions]. Our next question comes from Carl Reichardt with BTIG..

I'm sorry if I missed this. What was the percentage of your orders this quarter that were either Live Now or EL plus or, however, you want to define entry-level or first time versus last year? And then same for deliveries, please..

So on the order side, everything that we consider are core market, which is entry-level or first-time move-ups, was about 75%, 76%, pretty much this entire year. Last year, that number was more 68%, 69% on the order side. On the closings, obviously, we have a little bit of a shift still it's just a couple of percentage points down from that.

If you're looking just at the entry-level Live Now group, that group up to about 34%, I believe, in closings for the third quarter of this year, from about 30% just even last quarter..

And then Phillippe, I just wanted to drill down a bit on the east absorptions, which is up 30% is very good. And you mentioned part product, part execution.

Can you talk a little bit about just the execution initiatives there and what's improved to help those absorptions?.

Yes, absolutely. Primarily, on the sales floor, we've really evaluated our sales team across all those markets, but specifically in Greenville Atlanta, which were the legendary acquisitions. We've hired a latch of new sales people in those markets. We're training them, we're teaching them the Meritage way.

We have some executives sales leadership currently in those markets, coaching training, developing, guiding, leading. And we're really focused on the management of our sales team and the talent of our sales teams in those market. And we've made some improvements.

We have a ways to go, because I think we can really do even better than we are doing, and I expect to see that translate over every quarter we get better and better. So that's mostly what's going on with the management and the execution.

And then, as you mentioned, the committees where we have opened and the with the new product and specifically, the ELP and that now communities, we are seeing much stronger absorptions.

We open up new committee and Charlotte, few communities in rally, few communities and Atlanta and they're seeing better absorptions out of those communities with our new products, and then we were seeing in our legendary assets. Not sorry, legendary assets..

[Operator Instructions]. It's from Dan Oppenheim with UBS..

In terms of the comments about exiting from lower margin communities in the West where you're just getting the accelerating of closeouts there. Talking about how future absorptions opened up.

How much do you think the impact was in terms of the margin or was it still favorable this quarter homage impressed that was from closing out of those lower margin communities?.

I think, previously, we talked about 30 bps of pressure on the margin, and it's probably about the same. I will give you a better guidance on that next quarter because we're going to get through more this quarter, but it's probably about 30 bps..

It will still be a little bit into 2018. By the end of 2018, it will be nominal..

Got it. Okay.

And then in terms of the communities as they're opening up in 2018, as we've talked in terms of what the overall mix of communities will be, presumably the vast majority of what you'll have opening up in terms of the replacement communities will be entry-level, and so do you think about that in terms of having a potential to offset the lower community - could potentially lower community count otherwise, in terms of [indiscernible]..

Absolutely, that's what we've been saying is that the absorptions in those communities, historically over the last many quarters and going forward, are subsequently higher than our move-up communities.

And even though the community count growth hasn't been as strong as we had hoped, the absorption in those communities are better, and that's going to drive the top line. It's also going to have a real positive impacts on our SG&A, because the cost, on a per-store basis, isn't that much higher..

Your next question will be from Alex Barron with Housing Research Center..

Just kind of wanted to talk a little bit about the tax rate. Hilla, do you have any guidance for the next quarter? And what drove the slightly lower rate this quarter. Sorry, if I missed one..

Sure. We didn't cover. It's a great question, Alex. We're still targeting between 34% and 35% full year effective tax rate. We have a slight decline in the tax rate this quarter, we were able to pull in some additional green energy efficiency rebates from prior years.

As you know, the tax rate - the tax fund has not been amended yet for 2017, so we can't recognize any of our 2017 closings. Although we still have a look back period, where we can go back and requalify some of our homes qualification in prior years.

So we're continuing to actively do that for '16 and '15 closings, which have helped take down that rate this quarter..

Got it.

And for the share count next quarter, it's still going to be going down a little bit, right?.

Yes. So if you look at our full year, and our full all-in share count, the result of the convert is going to reduce it by about 2.176 million shares.

But a piece of that, we took about 900,000 bps out during the second quarter, and the balance we took out this quarter 1.3, for the diluted share count it's kind of tough because we're taking the average per day, but all in, our share count jumped by just under 2.2 million shares..

This concludes our question-and-answer session. I'd like to turn the conference back over to Steve Hilton for any closing remarks..

Well, thank you very much for your attention and participation in our earnings call this quarter. We look forward to talking to you again in February. Thank you very much..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..