UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q 
(Mark One)
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018March 31, 2019
OR 
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                 to                
Commission File Number 1-9977
 
 mhlogo1linetaga12.jpg
Meritage Homes Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland 86-0611231
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
  
8800 E. Raintree Drive, Suite 300,
Scottsdale, Arizona
 85260
(Address of Principal Executive Offices) (Zip Code)
(480) 515-8100
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and FormalFormer Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý No  ¨
Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerýAccelerated filer¨
Non-accelerated filer
¨ 
Smaller reporting company¨
  Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý

Common shares outstanding as of July 26, 2018: 40,649,453April 25, 2019: 38,264,142


MERITAGE HOMES CORPORATION
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2018MARCH 31, 2019
TABLE OF CONTENTS
 
  
PART I. FINANCIAL INFORMATION
 
 
Item 1. Financial Statements
 
 
Unaudited Consolidated Balance Sheets as of June 30, 2018March 31, 2019 and December 31, 20172018
3
 
Unaudited Consolidated Income Statements for the Three and Six Months Ended June 30,March 31, 2019 and 2018 and 2017
4
 
Unaudited Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2019 and 2018 and 2017
5
 
Notes to Unaudited Consolidated Financial Statements
6
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
3935
 
Item 4. Controls and Procedures
3935
 
PART II. OTHER INFORMATION
 
 
Item 1. Legal Proceedings
4036
 
Item 1A. Risk Factors
4036
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4036
 
Items 3-5. Not Applicable 
 
Item 6. Exhibits
4137
 
SIGNATURES
4238
 
INDEX OF EXHIBITS
4238
 






PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
        
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Assets        
Cash and cash equivalents $169,426
 $170,746
 $327,499
 $311,466
Other receivables 78,395
 79,317
 79,990
 77,285
Real estate 2,870,047

2,731,380
 2,744,578

2,742,621
Real estate not owned 38,864
 38,864
Deposits on real estate under option or contract 48,880
 59,945
 44,827
 51,410
Investments in unconsolidated entities 16,639
 17,068
 15,661
 17,480
Property and equipment, net 52,122
 33,631
 53,798
 54,596
Deferred tax asset 36,294
 35,162
 25,939
 26,465
Prepaids, other assets and goodwill 84,227
 85,145
 103,575
 84,156
Total assets $3,394,894
 $3,251,258
 $3,395,867
 $3,365,479
Liabilities        
Accounts payable $154,819
 $140,516
 $124,562
 $128,169
Accrued liabilities 173,770

181,076
 189,763

177,862
Home sale deposits 37,130
 34,059
 29,171
 28,636
Liabilities related to real estate not owned 34,978
 34,978
Loans payable and other borrowings 16,552
 17,354
 13,785
 14,773
Senior notes, net 1,294,705
 1,266,450
 1,295,515
 1,295,284
Total liabilities 1,711,954
 1,674,433
 1,652,796
 1,644,724
Stockholders’ Equity        
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at June 30, 2018 and December 31, 2017 —
 —
Common stock, par value $0.01. Authorized 125,000,000 shares; issued 40,649,453 and 40,330,741 shares at June 30, 2018 and December 31, 2017, respectively 406
 403
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at March 31, 2019 and December 31, 2018 —
 —
Common stock, par value $0.01. Authorized 125,000,000 shares; 38,264,142 and 38,072,659 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively 383
 381
Additional paid-in capital 593,561
 584,578
 498,683
 501,781
Retained earnings 1,088,973
 991,844
 1,244,005
 1,218,593
Total stockholders’ equity 1,682,940
 1,576,825
 1,743,071
 1,720,755
Total liabilities and stockholders’ equity $3,394,894
 $3,251,258
 $3,395,867
 $3,365,479
See accompanying notes to unaudited consolidated financial statements




MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share amounts)
 
 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
Homebuilding:            
Home closing revenue $872,383
 $797,780
 $1,600,915
 $1,458,397
 $698,650
 $728,532
Land closing revenue 5,112
 4,198
 19,144
 16,353
 9,495
 14,032
Total closing revenue 877,495
 801,978
 1,620,059
 1,474,750
 708,145
 742,564
Cost of home closings (712,868) (656,870) (1,317,070) (1,210,219) (582,188) (604,202)
Cost of land closings (5,799) (4,198) (21,041) (13,858) (9,129) (15,242)
Total cost of closings (718,667) (661,068) (1,338,111) (1,224,077) (591,317) (619,444)
Home closing gross profit 159,515
 140,910
 283,845
 248,178
 116,462
 124,330
Land closing gross (loss)/profit (687) —
 (1,897) 2,495
Land closing gross profit/(loss) 366
 (1,210)
Total closing gross profit 158,828
 140,910
 281,948
 250,673
 116,828
 123,120
Financial Services:            
Revenue 3,870
 3,649
 6,918
 6,593
 3,228
 3,048
Expense (1,693) (1,551) (3,177) (2,930) (1,504) (1,484)
Earnings from financial services unconsolidated entities and other, net 3,474
 3,459
 6,130
 6,184
 2,978
 2,656
Financial services profit 5,651
 5,557
 9,871
 9,847
 4,702
 4,220
Commissions and other sales costs (60,823) (54,701) (113,575) (103,021) (52,555) (52,752)
General and administrative expenses (34,205) (29,591) (65,098) (59,213) (33,566) (30,893)
(Loss)/earnings from other unconsolidated entities, net (156) 570
 (202) 943
Interest expense (44) (1,620) (180) (2,445) (4,085) (136)
Other income, net 1,934
 2,080
 7,305
 3,190
 1,046
 5,325
Earnings before income taxes 71,185
 63,205
 120,069
 99,974
 32,370
 48,884
Provision for income taxes (17,347) (21,625) (22,357) (34,822) (6,958) (5,010)
Net earnings $53,838
 $41,580
 $97,712
 $65,152
 $25,412
 $43,874
Earnings per common share:            
Basic $1.32
 $1.03
 $2.41
 $1.62
 $0.66
 $1.08
Diluted $1.31
 $0.98
 $2.37
 $1.54
 $0.65
 $1.07
Weighted average number of shares:            
Basic 40,647
 40,317
 40,568
 40,248
 38,215
 40,488
Diluted 41,164
 42,781
 41,193
 42,836
 38,849
 41,140
See accompanying notes to unaudited consolidated financial statements





MERITAGE HOMES CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 Six Months Ended June 30, Three Months Ended March 31,
 2018 2017 2019 2018
Cash flows from operating activities:        
Net earnings $97,712
 $65,152
 $25,412
 $43,874
Adjustments to reconcile net earnings to net cash used in operating activities:    
Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:    
Depreciation and amortization 12,608
 7,872
 5,832
 5,866
Stock-based compensation 8,976
 5,785
 5,861
 5,209
Equity in earnings from unconsolidated entities (5,978) (7,127) (2,174) (2,610)
Distributions of earnings from unconsolidated entities 6,834
 6,712
 3,996
 3,244
Other 2,407
 10
 1,827
 2,301
Changes in assets and liabilities:        
Increase in real estate (155,809) (211,384) (1,753) (87,732)
Decrease in deposits on real estate under option or contract 11,093
 9,308
 6,583
 7,406
Decrease/(increase) in other receivables, prepaids and other assets 1,634
 (9,428)
Increase/(decrease) in accounts payable and accrued liabilities 6,997
 (5,497)
Increase in home sale deposits 3,071
 7,849
Net cash used in operating activities (10,455) (130,748)
(Increase)/decrease in other receivables, prepaids and other assets (1,654) 5,426
Decrease in accounts payable and accrued liabilities (12,211) (15)
Increase/(decrease) in home sale deposits 535
 (298)
Net cash provided by/(used in) operating activities 32,254
 (17,329)
Cash flows from investing activities:        
Investments in unconsolidated entities (417) (408) (1,110) —
Distributions of capital from unconsolidated entities —
 1,250
Purchases of property and equipment (15,726) (8,322) (5,240) (6,383)
Proceeds from sales of property and equipment 92
 86
 74
 30
Maturities/sales of investments and securities 1,065
 1,258
 566
 1,018
Payments to purchase investments and securities (1,065) (1,258) (566) (1,018)
Net cash used in investing activities (16,051) (7,394) (6,276) (6,353)
Cash flows from financing activities:        
Repayment of Credit Facility, net —
 (15,000)
Repayment of loans payable and other borrowings (2,499) (5,725) (988) (2,197)
Repayment of senior notes and senior convertible notes (175,000) (52,098)
Repayment of senior notes —
 (175,000)
Proceeds from issuance of senior notes 206,000
 300,000
 —
 206,000
Payment of debt issuance costs (3,315) (3,998) —
 (3,315)
Net cash provided by financing activities 25,186
 223,179
Net (decrease)/increase in cash and cash equivalents (1,320) 85,037
Repurchase of shares (8,957) —
Net cash (used in)/provided by financing activities (9,945) 25,488
Net increase in cash and cash equivalents 16,033
 1,806
Cash and cash equivalents, beginning of period 170,746
 131,702
 311,466
 170,746
Cash and cash equivalents, end of period $169,426
 $216,739
 $327,499
 $172,552
See Supplemental Disclosure of Cash Flow Information in Note 13.14.
See accompanying notes to unaudited consolidated financial statements




MERITAGE HOMES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION
Organization. Meritage Homes is a leading designer and builder of single-family homes. We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed to appeal to homebuyers primarily focused onto first-time and first move-up buyers. We have homebuilding operations in three regions: West, Central and East, which are comprised of nine states: Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee. We also operate a wholly-owned title company, Carefree Title Agency, Inc. ("Carefree Title"). Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers. Through our predecessors, we commenced our homebuilding operations in 1985. Meritage Homes Corporation was incorporated in 1988 in the state of Maryland.
Our homebuilding and marketing activities are conducted under the name of Meritage Homes in each of our homebuilding markets. In limited cases, we also offer luxury homes under the brand name of Monterey Homes in some markets. At June 30, 2018March 31, 2019, we were actively selling homes in 253260 communities, with base prices ranging from approximately $179,000$189,000 to $1,311,0001,286,000.
Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. The consolidated financial statements include the accounts of Meritage Homes Corporation and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited financial statements include all normal and recurring adjustments (consisting only of normal recurring entries),that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full fiscal year.
Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $56.451.1 million and $107.1$76.1 million are included in cash and cash equivalents at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

Real Estate. Real estate is stated at cost unless the asset is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”). Inventory includes the costs of land acquisition, land development, home construction, capitalized interest, real estate taxes, and capitalized direct overhead costs incurred during development, and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes under construction when construction begins. Home construction costs are accumulated on a per-home basis, while selling and marketing costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in thethat community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. An accrued liability to capture such obligations is recorded in connection with the home closing and charged directly to Cost of home closings.

We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. It is possible that actual results could differ from budgeted amounts for various reasons, including construction and weather delays, labor or material shortages, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.



Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the sale, construction and closing of the


homes. Actual community lives will vary based on the size of the community, the sales absorption rate and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be shorter.

All of our land inventory and related real estate assets are reviewed for recoverability, as our inventory is considered “long-lived” in accordance with GAAP. Impairment charges are recorded to write down an asset to its estimated fair value if the undiscounted cash flows expected to be generated by the asset are lower than its carrying amount. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions. Such an analysis is conducted if there is an indication of a decline in value of our land and real estate assets. If an impairment of a community is required, the impairment charges are allocated to each lot on a straight-line basis.

Deposits. Deposits paid for land options and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of real estate inventory at the time the deposit is applied to the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are charged to expense if the land acquisition contract is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of the non-refundable deposits and any ancillary capitalized costs. Our deposits on real estate under option or contract were $48.9$44.8 million and $59.9$51.4 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. ASC 350 states that an entity may first assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials and labor costs, and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, impairment testing in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable.

Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land and lot positions, expanding our market opportunities, managing our risk profile and leveraging our capital base.base, although our participation in such ventures is currently very limited. See Note 45 for additional discussion of our investments in unconsolidated entities.
Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to option and purchase agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators). See Note 3 for additional information on off-balance sheet arrangements.
Surety Bonds and Letters of Credit. We provide surety bonds or letters of credit in support of our obligations relating to the development of our projects and other corporate purposes. Surety bonds are generally posted in lieu of letters of credit or cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of completion of our development activities. Bonds are generally not released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.



The table below outlines our surety bond and letter of credit obligations (in thousands):
As ofAs of
June 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Outstanding 
Estimated work
remaining to
complete
 Outstanding 
Estimated work
remaining to
complete
Outstanding 
Estimated work
remaining to
complete
 Outstanding 
Estimated work
remaining to
complete
Sureties:              
Sureties related to owned projects and lots under contract$345,297
 $160,981
 $296,387
 $120,320
$369,832
 $163,422
 $339,221
 $133,662
Total Sureties$345,297
 $160,981
 $296,387
 $120,320
$369,832
 $163,422
 $339,221
 $133,662
Letters of Credit (“LOCs”):              
LOCs for land development74,254
 N/A
 70,922
 N/A
65,521
 N/A
 70,287
 N/A
LOCs for general corporate operations3,750
 N/A
 3,750
 N/A
3,750
 N/A
 3,750
 N/A
Total LOCs$78,004
 N/A
 $74,672
 N/A
$69,271
 N/A
 $74,037
 N/A
Accrued Liabilities. Accrued liabilities at June 30, 2018March 31, 2019 and December 31, 20172018 consisted of the following (in thousands):
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Accruals related to real estate development and construction activities $65,468
 $53,522
 $55,205
 $54,589
Payroll and other benefits 39,559
 58,186
 29,887
 60,209
Accrued interest 13,404
 15,369
 33,746
 13,296
Accrued taxes 15,218
 14,067
 10,875
 7,548
Warranty reserves 23,659

23,328
 23,213

24,552
Lease liability (1)
 27,194
 —
Other accruals 16,462
 16,604
 9,643
 17,668
Total $173,770
 $181,076
 $189,763
 $177,862
(1)Refer to Note 4 for additional information related to our leases.
Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty and a major mechanical warranty typically during the first one to two years after the close of the home and a structural warranty that typically extends up to 10 years subsequent to the close of the home. With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our communities. We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. Included in the warranty reserve balances at March 31, 2019 and December 31, 2018 reflected in the table below are case-specific reserves for two warranty matters related to (1) alleged stucco defects in Florida; and (2) a foundation design and performance matter affecting a single community in Texas.
A summary of changes in our warranty reserves follows (in thousands):
 Three Months Ended March 31,
 2019 2018
Balance, beginning of period$24,552
 $23,328
Additions to reserve from new home deliveries3,387
 3,407
Warranty claims(4,726) (2,923)
Adjustments to pre-existing reserves—
 —
Balance, end of period$23,213

$23,812
Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory


warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trade partners and the general liability insurance we maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.
We have received claims related to stucco installation from homeowners in certain Florida communities and based on the information available to us we have established reserves to cover our anticipated net exposure related to these claims. Our review of these stucco related matters is ongoing and our estimate of future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate. As of March 31, 2019, after taking into account potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the repairs related to the existing stucco claims. Additionally, we have received claims related to a foundation design and performance matter affecting a single community in Texas requiring repairs to be made to homes within that community. Our repair efforts are ongoing and our estimate of costs to resolve this matter are updated regularly as progress is made. As of March 31, 2019, taking into account sources of future potential recovery from contractors involved with the design and construction of the homes and their insurers as well as from our general liability insurer, we believe our reserves are sufficient to cover repairs and related claims. See Note 16 in the accompanying unaudited consolidated financial statements for additional information regarding both of these matters.
Revenue Recognition. In accordance with ASC 606 Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligation. The performance obligation and subsequent revenue recognition for our three sources of revenue are outlined below:

Revenue from closings of residential real estate is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.    
Revenue from land sales is recognized when a significant down payment is received, title passes, and collectability of the receivable is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.
Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.
Revenue expected to be recognized in any future year related to remaining performance obligations (if any) and contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty typically during the first one to two years after the close of the home and a structural warranty that typically extends


up to 10 years subsequent to the close of the home. With the assistance of an actuary, we have estimated the reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our communities. We also use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. Included in the warranty reserve balances at June 30, 2018 and December 31, 2017 reflected in the table below are case-specific reserves for three warranty matters related to (1) alleged stucco defects in Florida; (2) a potentially faulty solar component in various locations provided by a bankrupt manufacturer; and (3) a foundation design matter affecting a single community in Texas.

A summary of changes in our warranty reserves follows (in thousands):
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Balance, beginning of period$23,812
 $22,477
 $23,328
 $22,660
Additions to reserve from new home deliveries4,146
 4,310
 7,553
 8,125
Warranty claims(4,299) (3,167) (7,222) (7,165)
Adjustments to pre-existing reserves—
 —
 —
 —
Balance, end of period$23,659

$23,620
 $23,659
 $23,620
Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves, if any, are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trade partners and the general liability insurance we maintain, are sufficient to cover our general warranty obligations. However, as unanticipated changes in legal, weather, environmental or other conditions could have an impact on our actual warranty costs, future costs could differ significantly from our estimates.
We have received claims related to stucco installation from homeowners in certain Florida communities and we established reserves to cover our anticipated exposure related to the repairs based on the information available to us as of June 30, 2018. Our review of the stucco related matter is ongoing and our estimate of future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate. As of June 30, 2018, after taking into account potential recovery under our general liability insurance policies and potential recoveries from the contractors involved and their insurers, we believe our reserves are sufficient to cover the repairs related to the existing stucco claims.

Recent Accounting Pronouncements.
In January 2017,August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04,2018-15, Intangibles - Goodwill and Other (Topic 350), Simplifying the- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Goodwill ImpairmentImplementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("("ASU 2017-04"2018-15"), which simplifiesaligns the accountingrequirements for goodwill impairments by eliminatingcapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the second step of the goodwill impairment test. Under the new guidance, an impairment loss will reflect the amount by which the carrying amount of a reporting unit exceeds its fair value, notrequirements for capitalizing implementation costs incurred to exceed the carrying amount of goodwill.develop or obtain internal-use software. ASU 2017-042018-15 is effective for us beginning January 1, 2020, with early adoption permitted.2020. ASU 2018-15 is required to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact adopting this guidance will have elected to early adopt ASU 2017-04 effective January 1, 2018 and it did not have a material impact on our financial statements.

In August 2016,2018, the FASB issued ASU No. 2016-15,2018-13, StatementFair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which modifies the disclosure requirements of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("fair value measurements. ASU 2016-15"). ASU 2016-15 adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, reducing the existing diversity in practice that has resulted from the lack of consistent principles on this topic. ASU 2016-15 was2018-13 is effective for us beginning January 1, 2018. A2020. Certain disclosures are required to be applied on a retrospective transition method was requiredbasis and others on adoption and it did nota prospective basis. We are currently evaluating the impact adopting this guidance will have a material impact on our financial statement of cash flows.disclosures.


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which amends. ASU 2016-02 amended the existingprevious accounting standards for lease accounting including requiringand resulted in the requirement that lessees to recognize most leases with lease terms of greater than twelve months on their balance sheets. ASU 2016-02 will be effective for us beginning January 1, 2019. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an


option to use certain transition relief. We are currently evaluating the impact adopting this guidance will have on our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 requires entities to recognize revenue that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted ASU 2014-092016-02 on January 1, 20182019 using a modified retrospective method.
method and did not restate prior period financial statements. We elected the practical expedient package which allows us to carry forward our original assessment of whether contracts contained leases, lease classification and the initial direct costs. We also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets. The adoption of ASU 2014-09 did not have an impact2016-02 resulted in a gross up on the amount or timingour consolidated balance sheet for right-of-use ("ROU") assets and lease liabilities of our homebuilding revenues, although forfeited customer deposits, typically an immaterial amount on an annual basis, that were previously$20.5 million and $28.7 million, respectively, as of January 1, 2019. Our ROU assets are included in Other income, netthe Prepaids, other assets and goodwill line item and the corresponding lease obligations are reported as Home closing revenueincluded in the Accrued liabilities line item on our consolidated statements of operations effective January 1, 2018. Additionally, as a result of thebalance sheet. The adoption of ASU 2014-09, there was an immaterial adjustment to our opening balance of Retained earnings with respect to the timing of expenses resulting from ceasing the capitalization of certain selling costs we incur as part of the selling process. The majority of these previously capitalized costs were allocated to either Real estate or Property and equipment, net on our opening 2018 consolidated balance sheet, with an immaterial amount recognized as a cumulative effect adjustment to the opening balance of retained earnings.
As of and for the three and six months ended June 30, 2018 the adoption of ASU 2014-09 did not have a material2016-02 had no impact on our balance sheet, net earnings, stockholders' equity or our statement of cash flows. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.consolidated income statements.
NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST
Real estate consists of the following (in thousands):
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Homes under contract under construction (1)
 $715,373
 $566,474
 $610,236
 $480,143
Unsold homes, completed and under construction (1)
 562,435
 516,577
 555,712
 644,717
Model homes (1)
 138,441
 142,026
 142,340
 146,327
Finished home sites and home sites under development (2)
 1,453,798
 1,506,303
 1,436,290
 1,471,434
Total $2,870,047

$2,731,380
 $2,744,578

$2,742,621

(1)Includes the allocated land and land development costs associated with each lot for these homes.
(2)Includes raw land, land held for development and land held for sale, less impairments, if any. Land held for development primarily reflects land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we may have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.
Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Capitalized interest, beginning of period$81,828
 $70,885
 $78,564
 $68,196
$88,454
 $78,564
Interest incurred21,374
 19,280
 42,243
 37,175
21,443
 20,869
Interest expensed(44) (1,620) (180) (2,445)(4,085) (136)
Interest amortized to cost of home and land closings(18,715) (16,218) (36,184) (30,599)(16,398) (17,469)
Capitalized interest, end of period$84,443
 $72,327
 $84,443
 $72,327
$89,414
 $81,828


NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED
We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures reduce our financial risk associated with land acquisitions and allow us to better leverage our balance sheet.
Based on the provisions of the relevant accounting guidance, we have concluded that when we enter into a purchase or option agreement to acquire land or lots from an entity, a variable interest entity, or “VIE”, may be created. We evaluate all purchase and option agreements for land to determine whether they are a VIE. ASC 810, Consolidation, requires that for each


VIE, we assess whether we are the primary beneficiary and, if so, consolidate the VIE in our financial statements and reflect such assets and liabilities as Real estate not owned. The liabilities related to consolidated VIEs are generally excluded from our debt covenant calculations.
In order to determine if we are the primary beneficiary, we must first assess whether we have the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to: the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability of the VIE to acquire additional land or dispose of land not under contract with Meritage; and the ability to change or amend the existing option contract with the VIE. If we are not determined to control such activities, we are not considered the primary beneficiary of the VIE. If we do have the ability to control such activities, we will continue our analysis to determine if we are also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if we will benefit from a potentially significant amount of the VIE’s expected gains.
In substantially all cases, creditors of the entities with which we have option agreements have no recourse against us and the maximum exposure to loss in our option agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Often, we are at risk for items over budget related to land development on property we have under option if we are the land developer. In these cases, we have contracted to complete development at a fixed cost for our benefit, but on behalf of the land owner, and any budget savings or shortfalls are typically borne by us. Some of our option deposits may be refundable to us if certain contractual conditions are not performed by the party selling the lots.
The table below presents a summary of our lots under option at June 30, 2018March 31, 2019 (dollars in thousands): 
Projected Number
of Lots
 
Purchase
Price
 
Option/
Earnest  Money
Deposits–Cash
 
Projected Number
of Lots
 
Purchase
Price
 
Option/
Earnest  Money
Deposits–Cash
 
Purchase and option contracts recorded on balance sheet as Real estate not owned228
 $38,864
 $3,886
 —
 $—
 $—
 
Option contracts — non-refundable deposits, committed (1)
2,907
 219,491
 26,432
 3,620
 244,783
 27,493
 
Purchase contracts — non-refundable deposits, committed (1)
5,854
 229,643
 18,353
 5,569
 198,841
 12,738
 
Purchase and option contracts —refundable deposits, committed866
 33,091
 1,021
 764
 30,325
 481
 
Total committed9,855
 521,089
 49,692
 9,953
 473,949
 40,712
 
Purchase and option contracts — refundable deposits, uncommitted (2)
10,728
 271,343
 3,074
 9,567
 335,126
 4,115
 
Total lots under contract or option20,583
 $792,432
 $52,766
 19,520
 $809,075
 $44,827
 
Total purchase and option contracts not recorded on balance sheet (3)
20,355
 $753,568
 $48,880
(4)19,520
 $809,075
 $44,827
(4)
 
(1)Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.
(2)Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.
(3)Except for our specific performance contracts recorded on our balance sheet as Real estate not owned, none of our purchase or option contracts require us to purchase lots.
(4)Amount is reflected on our consolidated balance sheet in Deposits on real estate under option or contract as of June 30, 2018.March 31, 2019.
Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts and sales absorptions, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our sales and home starts pace in order to meet the pre-


establishedpre-established minimum number of lots or we will work to restructure our original contract to include terms that more accurately reflect our revised orders pace expectations.
NOTE 4 - LEASES
We lease certain office space and equipment for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842, Leases ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Some of our leases contain renewal options and in accordance with


ASC 842, our lease terms include those renewals only to the extent that they are reasonably certain to be exercised. The exercise of these lease renewal options is generally at our discretion. In accordance with ASC 842, the lease liability is equal to the present value of the remaining lease payments while the ROU asset is based on the lease liability, subject to adjustment, such as for lease incentives. Our leases do not provide a readily determinable implicit interest rate and therefore, we must estimate our incremental borrowing rate. In determining our incremental borrowing rate, we considered the lease period, market interest rates, current interest rates on our senior notes and the effects of collateralization.
Our lease population at March 31, 2019 is comprised of operating leases where we are the lessee and those leases are primarily real estate for office space for our corporate office, division offices and design centers, in addition to leases of certain equipment. As allowed by ASC 842, we adopted an accounting policy election to not record leases with lease terms of twelve months or less on the consolidated balance sheet.
Lease cost included in our consolidated income statements in General and administrative expenses and Commissions and other sales costs is in the table below (dollars in thousands). Our short-term lease costs and sublease income are de minimis.

 Three Months Ended March 31, 2019
Operating lease cost$1,777
ROU assets are classified within Prepaids, other assets and goodwill on our consolidated balance sheet, while lease liabilities are classified within Accrued liabilities on our consolidated balance sheet. The following table contains additional information about our leases (dollars in thousands):

 At March 31, 2019
ROU assets$19,140
Lease liabilities$27,194
ROU assets obtained in exchange for new operating lease obligations (1)
$—
Non-cash lease expense$1,168
Cash payments on lease liabilities$1,876
Weighted-average remaining lease term4.8 years
Weighted-average discount rate (incremental borrowing rate)5.06%
(1)No new lease commitments commenced during the three months ended March 31, 2019.

Maturities of our operating lease liabilities as of March 31, 2019 are as follows (in thousands):
Year ended December 31, 
2019 (excluding the three months ended March 31, 2019)$5,577
20206,843
20215,681
20225,077
20234,243
Thereafter3,415
Total payments30,836
Less: imputed interest(3,642)
Present value of lease liabilities$27,194


NOTE 45 - INVESTMENTS IN UNCONSOLIDATED ENTITIES
We may enter into land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile and leveraging our capital base. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations. Based on the structure of each joint venture, it may or may not be consolidated into our results. Our joint venture partners are generally other homebuilders, land sellers or other real estate investors. We generally do not have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. As of June 30, 2018March 31, 2019, we had threetwo active equity-method land ventures.
As of June 30, 2018March 31, 2019, we also participated in one mortgage joint venture, which is engaged in mortgage activities and provides services to both our homebuyers as well as other buyers. Our investment in this mortgage joint venture as of June 30, 2018March 31, 2019 and December 31, 20172018 was $1.6$1.8 million and $2.2$2.8 million, respectively.
Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):
As ofAs of
June 30, 2018 December 31, 2017March 31, 2019 December 31, 2018
Assets:      
Cash$8,441
 $8,942
$7,171
 $9,595
Real estate57,553
 55,552
58,072
 57,631
Other assets3,451
 4,323
3,489
 3,644
Total assets$69,445
 $68,817
$68,732
 $70,870
Liabilities and equity:      
Accounts payable and other liabilities$6,492
 $7,516
$6,053
 $8,682
Notes and mortgages payable26,572
 25,194
26,818
 26,808
Equity of:      
Meritage (1)
14,736
 14,521
14,723
 14,472
Other21,645
 21,586
21,138
 20,908
Total liabilities and equity$69,445
 $68,817
$68,732
 $70,870
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Revenue$9,982
 $13,430
 $17,314
 $21,029
$8,998
 $7,332
Costs and expenses(3,408) (6,106) (7,343) (10,586)(6,116) (3,935)
Net earnings of unconsolidated entities$6,574
 $7,324
 $9,971
 $10,443
$2,882
 $3,397
Meritage’s share of pre-tax earnings (1) (2)
$3,368
 $4,068
 $5,978
 $7,250
$2,174
 $2,610

(1)Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in our consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.
(2)Our share of pre-tax earnings is recorded in Earnings from financial services unconsolidated entities and other, net and (Loss)/earnings from other unconsolidated entities,Other income, net on our unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.
Our total investment in all of these joint ventures is $16.6$15.7 million and $17.1$17.5 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. We believe these ventures are in compliance with their respective debt agreements, if

applicable, and such debt is non-recourse to us. Subsequent to March 31, 2019 we sold our interest in one of our land joint ventures located in Arizona, reducing our Investments in unconsolidated entities balance by $7.3 million.
NOTE 56 — LOANS PAYABLE AND OTHER BORROWINGS
Loans payable and other borrowings consist of the following (in thousands):
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Other borrowings, real estate notes payable (1)
 $16,552
 $17,354
 13,785
 $14,773
$780 million unsecured revolving credit facility with interest approximating LIBOR (approximately 2.09% at June 30, 2018) plus 1.75% or Prime (5.00% at June 30, 2018) plus 0.75% —
 —
$780.0 million unsecured revolving credit facility with interest approximating LIBOR (approximately 2.49% at March 31, 2019) plus 1.75% or Prime (5.50% at March 31, 2019) plus 0.75% —
 —
Total $16,552
 $17,354
 $13,785
 $14,773
(1)Reflects balance of non-recourse non-interest bearing notes payable in connection with land purchases, with interest rates ranging from 0% to 8%.purchases.
The Company entered into an amended and restated unsecured revolving credit facility ("Credit Facility") in 2014 that has been amended from time to time. In June 2018 the aggregate commitment was increased to $780.0 million, and the maturity date extended to July 2022. The accordion feature was also refreshed permitting the size of the facility to increase to a maximum of $880.0 million.million, subject to certain conditions, including the availability of additional bank commitments. Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.1 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of March 31, 2019.
We had no outstanding borrowings under the Credit Facility as of June 30, 2018 andMarch 31, 2019 or December 31, 2017.2018. During the three and six months ended June 30, 2018,March 31, 2019, we had $285.0 million in grossno borrowings andor repayments. During the three months ended June 30, 2017March 31, 2018, we had $85.0$285.0 million of gross borrowings and $145.0 million of repayments. During the six months ended June 30, 2017, we had $245.0 million of gross borrowings and $260.0 million of repayments. As of June 30, 2018,March 31, 2019, we had outstanding letters of credit issued under the Credit Facility totaling $78.0$69.3 million, leaving $702.0$710.7 million available under the Credit Facility to be drawn.


NOTE 67 — SENIOR NOTES, NET
Senior notes, net consist of the following (in thousands):
  As of
  June 30, 2018 December 31, 2017
4.50% senior notes due 2018 $—
 $175,000
7.15% senior notes due 2020. At June 30, 2018 and December 31, 2017 there was approximately $995 and $1,280 in net unamortized premium, respectively. 300,995
 301,280
7.00% senior notes due 2022 300,000
 300,000
6.00% senior notes due 2025. At June 30, 2018 there was approximately $5,727 in net unamortized premium. (1)
 405,727
 200,000
5.125% senior notes due 2027 300,000
 300,000
Net debt issuance costs (12,017) (9,830)
Total $1,294,705
 $1,266,450
(1)$200.0 million of the total $400.0 million 6.00% Senior Notes due 2025 outstanding at December 31, 2017 was issued at par and had no unamortized premium.
In March 2018, the Company completed an offering of $200.0 million aggregate principal amount of 6.00% Senior Notes due 2025 (the "Additional Notes"). The Additional Notes were issued as an add-on to the existing $200.0 million of 6.00% Senior Notes due 2025 that were issued in June 2015 which resulted in a combined $400.0 million aggregate principal amount of 6.00% Senior Notes due 2025 outstanding as of June 30, 2018. The Additional Notes were issued at a premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemption of the Company's $175.0 million of 4.50% Senior Notes that were due to mature on March 1, 2018.
  As of
  March 31, 2019 December 31, 2018
7.15% senior notes due 2020. At March 31, 2019 and December 31, 2018 there was approximately $569 and $711 in net unamortized premium, respectively. 300,569
 300,711
7.00% senior notes due 2022 300,000
 300,000
6.00% senior notes due 2025. At March 31, 2019 and December 31, 2018 there was approximately $5,114 and $5,318 in net unamortized premium, respectively. 405,114
 405,318
5.125% senior notes due 2027 300,000
 300,000
Net debt issuance costs (10,168) (10,745)
Total $1,295,515
 $1,295,284
The indentures for all of our senior notes contain covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We believe we are in compliance with all such covenants as of June 30, 2018.March 31, 2019.
Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be


released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.
NOTE 78 — FAIR VALUE DISCLOSURES
We account for non-recurring fair value measurements of our non-financial assets and liabilities in accordance with ASC 820-10 Fair Value Measurement ("ASC 820"). This guidance defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:
Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.


Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.
Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (level 2 inputs as per the discussion above) and is as follows (in thousands):
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
 
Aggregate
Principal
 
Estimated  Fair
Value
 
Aggregate
Principal
 
Estimated  Fair
Value
 
Aggregate
Principal
 
Estimated  Fair
Value
 
Aggregate
Principal
 
Estimated  Fair
Value
4.50% senior notes N/A
 N/A
 $175,000
 $175,228
7.15% senior notes $300,000
 $317,250
 $300,000
 $326,250
 $300,000
 $309,750
 $300,000
 $307,500
7.00% senior notes $300,000
 $323,250
 $300,000
 $337,500
 $300,000
 $320,250
 $300,000
 $309,750
6.00% senior notes $400,000
 $405,000
 $200,000
 $214,000
 $400,000
 $418,000
 $400,000
 $379,520
5.125% senior notes $300,000
 $277,500
 $300,000
 $305,250
 $300,000
 $290,910
 $300,000
 $255,750
Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.
NOTE 89 — EARNINGS PER SHARE
Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Basic weighted average number of shares outstanding40,647
 40,317
 40,568
 40,248
38,215
 40,488
Effect of dilutive securities:          
Convertible debt (1)
—
 1,991
 —
 2,083
Unvested restricted stock517
 473
 625
 505
634
 652
Diluted average shares outstanding41,164
 42,781
 41,193
 42,836
38,849
 41,140
Net earnings as reported$53,838
 $41,580
 $97,712
 $65,152
Interest attributable to Convertible Notes, net of income taxes (1)
—
 354
 —
 739
Net earnings for diluted earnings per share$53,838
 $41,934
 $97,712
 $65,891
Net earnings$25,412
 $43,874
Basic earnings per share$1.32
 $1.03
 $2.41
 $1.62
$0.66
 $1.08
Diluted earnings per share (1)
$1.31
 $0.98
 $2.37
 $1.54
Diluted earnings per share$0.65
 $1.07
Antidilutive stock not included in the calculation of diluted earnings per share1
 59
 1
 2
139
 1
 
(1)
In accordance with ASC 260-10, Earnings Per Share, ("ASC 260-10") we calculate the dilutive effect of convertible securities using the "if-converted" method based on the number of days our Convertible Notes were outstanding during the period. All of the Convertible Notes were retired in the second half of 2017.



NOTE 910 — ACQUISITIONS AND GOODWILL
Goodwill. Over the past several years, we entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess of the purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions are recorded in accordance with ASC 805, Business Combinations and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions is allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included on our consolidated balance sheet in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

A summary of the carrying amount of goodwill follows (in thousands):    
 West Central East Financial Services Corporate Total
Balance at December 31, 2017$—
 $—
 $32,962
 $—
 $—
 $32,962
Additions—
 —
 —
 —
 —
 —
Impairments—
 —
 —
 —
 —
 —
Balance at June 30, 2018$—
 $—
 $32,962
 $—
 $—
 $32,962
 West Central East Financial Services Corporate Total
Balance at December 31, 2018$—
 $—
 $32,962
 $—
 $—
 $32,962
Additions—
 —
 —
 —
 —
 —
Balance at March 31, 2019$—
 $—
 $32,962
 $—
 $—
 $32,962
NOTE 1011 — STOCKHOLDERS’ EQUITY
A summary of changes in stockholders’ equity is presented below (in thousands): 
  Six Months Ended June 30, 2018
  (In thousands)
  
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 Total
Balance at December 31, 2017 40,331
 $403
 $584,578
 $991,844
 $1,576,825
Adoption of ASU 2014-09 (1)
 —
 —
 —
 (583) (583)
Net earnings —
 —
 —
 97,712
 97,712
Exercise/vesting of stock-based awards 318
 3
 (3) —
 —
Stock-based compensation expense —
 —
 8,986
 —
 8,986
Balance at June 30, 2018 40,649
 $406
 $593,561
 $1,088,973
 $1,682,940
  Three Months Ended March 31, 2019
  (In thousands)
  
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 Total
Balance at December 31, 2018 38,073
 $381
 $501,781
 $1,218,593
 $1,720,755
Net earnings —
 —
 —
 25,412
 25,412
Stock-based compensation expense —
 —
 5,861
 —
 5,861
Issuance of stock 400
 4
 (4) —
 —
Share repurchases (209) (2) (8,955) —
 (8,957)
Balance at March 31, 2019 38,264
 $383
 $498,683
 $1,244,005
 $1,743,071
(1)Refer to Note 1 for additional information related to the adoption of ASU 2014-09.

  Six Months Ended June 30, 2017
  (In thousands)
  
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 Total
Balance at December 31, 2016 40,031
 $400
 $572,506
 $848,589
 $1,421,495
Net earnings —
 —
 —
 65,152
 65,152
Exercise/vesting of stock-based awards 289
 3
 (3) —
 —
Stock-based compensation expense —
 —
 5,792
 —
 5,792
Balance at June 30, 2017 40,320
 $403
 $578,295
 $913,741
 $1,492,439
  Three Months Ended March 31, 2018
  (In thousands)
  
Number of
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 Total
Balance at December 31, 2017 40,331
 $403
 $584,578
 $991,844
 $1,576,825
Adoption of ASU 2014-09 —
 —
 —
 (583) (583)
Net earnings —
 —
 —
 43,874
 43,874
Issuance of stock 301
 3
 (3) —
 —
Stock-based compensation expense —
 —
 5,216
 —
 5,216
Balance at March 31, 2018 40,632
 $406
 $589,791
 $1,035,135
 $1,625,332




NOTE 1112 — STOCK BASED AND DEFERRED COMPENSATION
We have two stock-based compensation plans, the Amended and Restated 2006 Stock Incentive Plan (the “2006 Plan”) and the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), collectively the "Stock Plans". The 2006 Plan was approved by our Board of Directors and adopted in 2006 and has been amended or restated from time to time. The 2018 Plan was approved by our Board of Directors and our stockholders and adopted in May 2018, authorizing 1,250,000 shares for issuance.2018. Both plans are administered by our Board of Directors and allow for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. The Stock Plans authorize awards to officers, key employees, non-employee directors and consultants. The 2006 Plan authorizes 5,350,000 shares of common stock to be awarded, of which 643,793701,163 shares remain available for grant at June 30, 2018March 31, 2019. Upon expiration of the 2006 Plan in May 2019, any available shares from expired, terminated or forfeited awards that remain under the 2006 Plan and prior plans will be available for grant under the 2018 Plan. The 2018 Plan hasauthorizes 1,250,000 shares of stock to be awarded, of which 776,809 shares remain available for grant at June 30, 2018March 31, 2019. We believe that such awards provide a means of performance-based compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees and with a three-year cliff vesting for both non-vested stock and performance-based awards granted to certain senior executive officers and non-employee directors.
Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718-10-25-20, Compensation – Stock Compensation ("ASC 718"), which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense recorded on a straight-line basis through the end of the award vesting period. For the three and six months ended June 30, 2018, stock compensation increased as compared to prior year partially due to a change in the compensation structure for certain executives to all performance-based equity grants. A portion of the performance-based restricted stock awards granted to our executive officers contain market conditions as defined by ASC 718. The guidance in ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is being expensed straight-line over the service period of the awards. Below is a summary of compensation expense and stock award activity (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Stock-based compensation expense$3,767
 $2,490
 $8,976
 $5,785
$5,861
 $5,209
Non-vested shares granted—
 —
 306,164
 416,500
377,514
 306,164
Performance-based non-vested shares granted—
 —
 157,637
 154,120
94,152
 157,637
Restricted stock awards vested (includes performance-based awards)17,137
 6,190
 318,712
 289,764
400,323
 301,575
The following table includes additional information regarding our PlanStock Plans (dollars in thousands):
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Unrecognized stock-based compensation cost $25,155
 $18,439
 $28,410
 $24,954
Weighted average years expense recognition period 2.71
 2.48
 2.95
 2.24
Total equity awards outstanding (1)
 1,331,946
 1,269,657
 1,356,443
 1,301,745

(1)Includes unvested restricted stock, performance-based awards (assuming 100% payout) and restricted stock units.



We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three and six months ended June 30,March 31, 2019 or 2018, or 2017, other than minor administrative costs.
NOTE 1213 — INCOME TAXES
Components of the income tax provision are as follows (in thousands):
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Federal$14,425
 $19,215
 $17,371
 $30,788
$5,742
 $2,946
State2,922
 2,410
 4,986
 4,034
1,216
 2,064
Total$17,347
 $21,625
 $22,357
 $34,822
$6,958
 $5,010

The effective tax rate for the three and six months ended June 30,March 31, 2019 and March 31, 2018 was 24.4%21.5% and 18.6%, respectively, and for the three and six months ended June 30, 2017 was 34.2% and 34.8%10.2%, respectively. The lower 2018 effective tax rates reflect lower corporate tax rates as a result of the Tax Cuts and Jobs Act of 2017 (the "Tax Act") passed in December 2017 and the lower year-to-date rate also reflects the impact from the President signing the Bipartisan Budget Act of 2018 in February 2018, which included a retroactive extension of the Internal Revenue Code ("IRC") §45L new energy efficient homes credit that had previously expired in 2016. This extension provision providesprovided for a single year extension of energy tax credits for homes sold in 2017 that meetmet the qualification criteria. Under ASC 740, the effects of these tax credits were required to be recorded in 2018, based on the date of enactment, regardless of the retroactive treatment. Ourtreatment, resulting in a $6.3 million reduction of the federal tax rate for 2017 does not includeprovision in 2018. In the first quarter of 2019, we recorded a relatively minor tax benefit from our efforts to capture additional energy credits but was favorably impacted by the homebuilding manufacturing deduction, which was eliminatedfrom 2016 and 2017. We also recorded a tax benefit from equity-based compensation for 2018 under the Tax Act. We anticipate that with the completion of our 2017 income tax returns, future guidance and additional information and interpretations with respect to the Tax Act will cause us to further adjust the provisional amounts recorded as of December 31, 2017. In accordance with SEC Staff Accounting Bulletin No. 118, we will record such adjustmentsawards vested in the period that relevant guidance or additional information becomes available andquarter. These tax benefits had a favorable impact on our analysis is completed.2019 effective tax rate.
At June 30, 2018March 31, 2019 and December 31, 2017,2018, we have no unrecognized tax benefits. We believe that our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in federal income tax expense.
We determine our deferred tax assets and liabilities in accordance with ASC 740-10, Income Taxes. We evaluate our deferred tax assets, including the benefit from net operating losses ("NOLs"), by jurisdiction to determine if a valuation allowance is required. Companies must assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard with significant weight being given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no valuation allowance on our deferred tax assets and NOL carryovers at June 30, 2018.March 31, 2019.
At June 30, 2018,March 31, 2019, we had no remaining federal NOL carry forward or un-utilized federal tax credits. At June 30, 2018,March 31, 2019, and December 31, 20172018 we had tax benefits for state NOL carry forwards of $1.8$1.0 million, net of federal benefit, that begin to expire in 2028.
At June 30, 2018,March 31, 2019, we have income taxes payable of $8.2$4.3 million, which primarily consists of current federal and state tax accruals, net of estimated tax payments and tax credits. This amount is recorded in Accrued liabilities on the accompanying unaudited balance sheet at June 30, 2018.March 31, 2019.
We conduct business and are subject to tax in the U.S. and several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2013.2014. We have one state income tax examination of multiple years under auditbeing conducted at this time and do not expect it to have a material outcome.
The tax benefits from NOLs, built-in losses, and tax credits would be materially reduced or potentially eliminated if we experience an “ownership change” as defined under IRC §382. Based on our analysis performed as of March 31, 2019 we do not believe that we have experienced an ownership change. As a protective measure, our stockholders held a Special Meeting of Stockholders on February 16, 2009 and approved an amendment to our Articles of Incorporation that restricts certain transfers of our common stock. The amendment is intended to help us avoid an unintended ownership change and thereby preserve the value of any tax benefit for future utilization.


NOTE 1314 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table presents certain supplemental cash flow information (in thousands):
 
  Six Months Ended June 30,
  2018 2017
Interest capitalized, net $4,602
 $161
Income taxes paid $22,353
 $34,426
Non-cash operating activities:    
Real estate not owned increase $—
 $9,987
Real estate acquired through notes payable $1,697
 $5,786
  Three Months Ended March 31,
  2019 2018
Cash paid during the year for:    
Interest, net of interest capitalized $(16,907) $(15,961)
Non-cash operating activities:    
Real estate acquired through notes payable $—
 $1,697
NOTE 1415 — OPERATING AND REPORTING SEGMENTS
We operate with two principal business segments: homebuilding and financial services. As defined in ASC 280-10, Segment Reporting, we have nine homebuilding operating segments. The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our current reportable homebuilding segments are as follows:
 West:Arizona, California and Colorado 
 Central:Texas 
 East:Florida, Georgia, North Carolina, South Carolina and Tennessee 
Management’s evaluation of segment performance is based on segment operating income, which we define as home and land closing revenues less cost of home and land closings, commissions and other sales costs, land development and other land sales costs and other costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 1, “Organization and Basis of Presentation.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.
The following segment information is in thousands: 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Homebuilding revenue (1):
          
West$351,647
 $369,574
 $668,875
 $681,378
$272,966
 $317,228
Central260,106
 225,679
 451,976
 400,510
191,606
 191,870
East265,742
 206,725
 499,208
 392,862
243,573
 233,466
Consolidated total$877,495
 $801,978
 $1,620,059
 $1,474,750
$708,145
 $742,564
Homebuilding segment operating income:          
West$33,062
 $35,131
 $54,183
 $59,143
$18,308
 $21,121
Central25,576
 23,230
 39,843
 37,120
12,336
 14,267
East14,564
 5,285
 25,923
 7,721
9,693
 11,359
Total homebuilding segment operating income73,202
 63,646
 119,949
 103,984
40,337
 46,747
Financial services segment profit5,651
 5,557
 9,871
 9,847
4,702
 4,220
Corporate and unallocated costs (2)
(9,402) (7,028) (16,674) (15,545)(9,630) (7,272)
(Loss)/earnings from other unconsolidated entities, net(156) 570
 (202) 943
Interest expense(44) (1,620) (180) (2,445)(4,085) (136)
Other income, net (3)
1,934
 2,080
 7,305
 3,190
1,046
 5,325
Net earnings before income taxes$71,185
 $63,205
 $120,069
 $99,974
$32,370
 $48,884
 



(1)Homebuilding revenue includes the following land closing revenue, by segment, as outlined in the table below:


Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Land closing revenue:          
West$1,935
 $—
 $14,390
 $11,800
$—
 $12,455
Central762
 —
 887
 122
—
 125
East2,415
 4,198
 3,867
 4,431
9,495
 1,452
Total$5,112
 $4,198
 $19,144
 $16,353
$9,495
 $14,032
(2)Balance consists primarily of corporate costs and numerous shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.
(3)For the sixthree months ended June 30,March 31, 2018, Other income, net includes a favorable $4.8 million legal settlement from long-standing litigation related to a previous joint venture in Nevada.
 At June 30, 2018 At March 31, 2019
 West Central East Financial Services 
Corporate  and
Unallocated
 Total West Central East Financial Services 
Corporate  and
Unallocated
 Total
Deposits on real estate under option or contract $11,790
 $15,512
 $21,578
 $—
 $—
 $48,880
 $6,659
 $12,999
 $25,169
 $—
 $—
 $44,827
Real estate 1,235,184
 739,853
 895,010
 —
 —
 2,870,047
 1,164,724
 715,356
 864,498
 —
 —
 2,744,578
Investments in unconsolidated entities 8,073
 6,974
 —
 —
 1,592
 16,639
 7,481
 6,375
 —
 —
 1,805
 15,661
Other assets 58,486
(1)104,174
(2)117,332
(3)741
 178,595
(4)459,328
 54,503
(1)106,268
(2)83,949
(3)749
 345,332
(4)590,801
Total assets $1,313,533
 $866,513
 $1,033,920
 $741
 $180,187
 $3,394,894
 $1,233,367
 $840,998
 $973,616
 $749
 $347,137
 $3,395,867

(1)Balance consists primarily of property and equipment and cash.
(2)Balance consists primarily of development reimbursements from local municipalities and cash.
(3)Balance consists primarily of goodwill (see Note 10), prepaid expenses and other assets and property and equipment.
(4)
Balance consists primarily of cash, prepaid expenses and other assets and our deferred tax asset.
  At December 31, 2018
  West Central East Financial Services 
Corporate  and
Unallocated
 Total
Deposits on real estate under option or contract $7,514
 $13,870
 $30,026
 $—
 $—
 $51,410
Real estate 1,188,975
 679,422
 874,224
 —
 —
 2,742,621
Investments in unconsolidated entities 8,320
 6,396
 —
 —
 2,764
 17,480
Other assets 51,115
(1)117,150
(2)85,869
(3)1,013
 298,821
(4)553,968
Total assets $1,255,924
 $816,838
 $990,119
 $1,013
 $301,585
 $3,365,479
(1)Balance consists primarily of cash and property and equipment.
(2)Balance consists primarily of development reimbursements from local municipalities and cash.
(3)Balance consists primarily of real estate not owned, goodwill (see Note 9)10), cash and property and equipment.
(4)
Balance consists primarily of cash and our deferred tax asset.cash. 
  At December 31, 2017
  West Central East Financial Services 
Corporate  and
Unallocated
 Total
Deposits on real estate under option or contract $15,557
 $21,309
 $23,079
 $—
 $—
 $59,945
Real estate 1,174,285
 700,460
 856,635
 —
 —
 2,731,380
Investments in unconsolidated entities 7,833
 6,999
 —
 —
 2,236
 17,068
Other assets 58,470
(1)110,173
(2)144,681
(3)1,249
 128,292
(4)442,865
Total assets $1,256,145
 $838,941
 $1,024,395
 $1,249
 $130,528
 $3,251,258
(1)Balance consists primarily of cash and property and equipment.
(2)Balance consists primarily of development reimbursements from local municipalities and cash.
(3)Balance consists primarily of real estate not owned, cash, and goodwill (see Note 9).
(4)
Balance consists primarily of cash and our deferred tax asset.



NOTE 1516 — COMMITMENTS AND CONTINGENCIES
We are involved in various routine legal and regulatory proceedings, including, without limitation, warranty claims and litigation and arbitration proceedings alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to litigation. We believe there are no pending legal or warranty matters that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.
    
As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $23.7$23.2 million of total warranty reserves related to a foundation design and performance matter affecting a single community in Texas. In addition to the repairs required to be made to homes within that community, we have been named as a defendant in several lawsuits filed by homeowners in that community. As of June 30, 2018,March 31, 2019, the claim we made for this matter under our general liability insurance policypolicies has initially been denied, which we vehemently disagree with and have disputed with our insurance carrier. We regularly review our reserves, and adjust them, as necessary to reflect changes as more information becomes available. As of June 30, 2018,March 31, 2019, taking into account sources of potential future recovery from the contractors involved with the design and construction design of thethese homes and their insurers as well as from our general liability insurer, we believe our reserves are sufficient to cover repairs and related claims.
Also included within our case specific reserves are reserves for alleged stucco defects in homes in certain Florida communities we developed prior to 2016. We are involved in legal proceedings relating to such stucco defects. Our review of these stucco related matters is ongoing and our estimate of and reserve for future costs of repairs is based on our judgment, various assumptions and internal data. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate and thus our related reserves. As of March 31, 2019, after considering potential recoveries from the contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the existing stucco related repairs and claims.



Special Note of Caution Regarding Forward-Looking Statements
In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.
The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” "may," "will," "should," "could," “estimate,” “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.1934 (the "Exchange Act"). Forward-looking statements in this Quarterly Report include: statements concerning trends and economic factors in the homebuilding industry in general, and our markets and results specifically; our operating strategy and initiatives, including our strategy to expand the number of communities that target the first-time buyer segment;and first move-up buyers; demand and pricing trends in the short-term throughout our geographies; that we may opportunistically repurchase our debt and equity securities; the benefits of our land acquisition strategy and structures, including the use and the benefits of option contracts and joint ventures; that we expect to redeploy cash generated from operations to acquire and develop lot positions; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the adequacy of our insurance coverage and warranty reserves; the expected outcome of legal proceedings we are involved in and the sufficiency of our reserves relating thereto; the sufficiency of our liquidity and capital resources to support our business strategy; our ability and willingness to acquire land under option or contract; our strategy and trends and expectations concerning sales prices, sales pace, closings, orders, cancellations, material and labor costs for land development and home construction, gross margins, gross profit, revenues, net earnings, operating leverage, backlog, land prices, changes in and location of active communities, and the amount, type and timing of new community openings; seasonality; our future cash needs; that we may seek to raise additional debt and equity capital; and our intentions regarding the payment of dividends and the use of derivative contracts; our perceptions about the importance of joint ventures to our business; and the impact of changes in interest rates.
Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: changes in interest rates and the availability and pricing of residential mortgages; legislation related to tariffs; the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; changes in interest rates and the availability and pricing of residential mortgages; changes in tax laws that adversely impact us or our homebuyers; inflation in the cost of materials used to develop communities and construct homes; the success of strategic initiatives; the ability of our potential buyers to sell their existing homes; cancellation rates;inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slow absorption rates; slowing in the growth of first-time homebuyers; competition; impairments of our real estate inventory; cancellation rates; competition; changes in tax laws that adversely impact us or our homebuyers; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest money or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; home warranty and construction defect claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations; the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; negative publicity that affects our reputation; and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in this Form 10-Q and our Form 10-K for the year ended December 31, 20172018 under the caption "Risk Factors," which can be found on our website.
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we disclaim and undertake no obligations to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview and Outlook
The housing market has remained healthy duringfirst quarter of 2019 reflected an improvement in home buying sentiment and activity for the first six monthsentire homebuilding industry as buyers responded to increased affordability from the decline in interest rates and increased availability of 2018 as a solidaffordable home offerings. We believe the demand seen so far in the spring selling season reflects the sustained positive macroeconomic factors in the economy assisted bywith low unemployment levels, wage growth, and a shortage in the supply of new homes, particularly at entry-level price points, has overcome concerns from potential impactspoints. With the meaningful re-entry of rising interest ratesmillennials into the home buying market and stock market volatility. Wethe desire to downsize in the baby boomer generation, we believe that these factorsdemand for affordable new homes will outpace demand for other product offerings. Accordingly, homebuilders with attractive, lower price-point product in desirable locations should be poised to capture this demand for nicely appointed but reasonably priced homes, as buyers in this environment are primarily motivated by affordability.
At Meritage, we continue to create a positive demand environment fordemonstrate our sector, particularly amongcommitment to the first-time homebuyer segment where lower-priced homes continue to offer affordable solutions for home buyers.
The desire for new homes continues to be strong across most ofand first move-up buyer through our markets, especially for our entry-level LiVE.NOW.® communities that target first-time or move-down homebuyers looking for a lower priced product. We continue to focus on simplification and our key strategic initiatives such as home closing gross margin improvement, selling, general and administrative cost control and community count growth that westability. We believe the successful execution of these initiatives will position us to improve profitability withas we realize the benefits of our focus on thetransition. We have made considerable progress as 35.8% of our active communities are targeted to first-time buyers and first move-up buyer. First-timethose buyers represented nearly half44.7% of our orders in the secondfirst quarter of 2019, increases of 11.9% and 17.0%, respectively, over the first quarter of 2018 and wepercentages. We expect that growth to continue to deliver on our operational initiatives as we are opening an increasedincreasing number of communities that target the first-time buyer segment. Our entry-level product is also attracting move-down buyers with select floor plansas well as the first move-up buyer. We believe this strategy will allow us to achieve higher gross margins and price points that appealbetter opportunities to an age-targeted audience.leverage our overhead costs as we build and sell to the largest segments of the home buying population.
Summary Company Results
Our secondfirst quarter 20182019 results delivered on several of our key strategic initiatives, withreflect growth in our entry-level business growingand improved orders pace in our markets and performance gains reflected in our improved home closing gross margins, most notably in our East region.closings compared to the prior year quarter. Total home closing revenue was $872.4$698.7 million for the three months ended June 30, 2018, anMarch 31, 2019, with a 2.3% increase in the number of $74.6 millionhomes closed over the corresponding prior year period,period. Home closing revenue decreased $29.9 million compared to the first quarter of 2018 due to 233 additional homes closed.a $26,500 decrease in average sales price resulting from our shift in focus to the first-time and first move-up buyer in addition to incremental incentives offered in the latter half of the fourth quarter of 2018 and early in 2019 to help drive order volume. The increasedecrease in home closing revenue and 60-basis-point improvement inlower year-over-year home closing gross margin provided $18.6resulted in $7.9 million in additionallower home closing gross profit which, combined with a $1.6$3.9 million increase in interest expense, a $4.3 million decrease in interest expenseother income, net and a lowerhigher income tax provision, contributed to $53.8 milliona 42.1% decline in net income of $25.4 million for the three months ended June 30, 2018, a 29.5% improvement over the $41.6March 31, 2019 versus $43.9 million in the corresponding 2017 period. Secondfirst quarter of 2018. Other income, net was favorably impacted in the first quarter of 2018 as a result of receiving a $4.8 million settlement from long-standing litigation with no comparable activity in the first quarter of 2019. Additionally, first quarter 2019 results reflect a lowerhigher provision for income taxes of 21.5% versus 10.2% in the first quarter of 2018 due to a lower effectivecumulative retroactive extension of energy tax rate of 24.4% versus 34.2%credits for homes closed in 2017 as a result of the Tax Act signed into lawthat was recorded in December 2017, which resulted in a lower corporate tax rate. Similar to the second quarter, year-to-date results reflect $142.5 million in additional home closing revenue and $35.7 million higher home closing gross profit versus the six months ended June 30, 2017. Higher gross profit combined with a $4.1 million increase in Other income, net and lower year-over-year interest expense led to net income of $97.7 million for the six months ended June 30, 2018 compared to $65.2 million for the 2017 period.2018.
On a consolidated basis, we experienced year over yearyear-over-year growth in closings and orders both in units and value, for the three and six months ended June 30, 2018March 31, 2019 over the prior year. For the three months ended March 31, 2019, orders and order value improved by 7.3% and 1.5%, respectively to 2,530 orders valued at $977.0 million versus 2,358 orders valued at $962.8 million in the prior year. We ended the secondfirst quarter of 20182019 with 3,6193,198 homes in backlog valued at $1.5$1.3 billion, 5.6%declines of 8.8% and 5.5% improvements,12.6%, respectively, over June 30, 2017.March 31, 2018. The growthdecline in year-over-year backlog, isdespite the increase in orders, was due to a higher backlog conversion rate in the first quarter of 2019 as a result of a 7.5% improvement in year-to-date orders at June 30, 2018 compared to the prior year, asclosing more of our average sales price on homes in backlog was down slightly stemming fromavailable spec inventory, consistent with our pivot to entry-level product. The percentage of actively selling communities that target to the first-time buyer grew to 34.0% in the second quarter of 2018, as compared to 24.5% in the prior year second quarter.strategy.
Company Positioning
We believe that the investments in our new communities, particularly those designed for the first-time and first move-up homebuyer, and industry-leading innovation in our energy-efficient product offerings and automation create a differentiated strategy that has aided us in our growthsuccess in the highly competitive new home market.


Our focus includes the following strategic initiatives:
•
Expanding the number of LiVE.NOW® communities that target the growing first-time homebuyer;® communities that target the growing first-time homebuyer segment;
Improving the overall customer experience, most recently through a simplification of the customer purchasesale and construction process and option selection processes;process for move-up buyers at Studio M;
EnhancingDemonstrating our websitecommitment to innovation through a new fully-automated and sales offices through investments in technology. As of June 30, 2018 all ofsecured digital loan pre-approval process available on our LiVE.NOW communities feature interactive tools offering homebuyers the ability to search for available homes with their desired home features and based on their preferred availability or move-in dates;website;
•
Enhancing our website and sales offices through investments in technology. All of our LiVE.NOW® communities feature interactive technology tools offering homebuyers the ability to electronically search for available homes with their desired home features and based on their preferred availability or move-in dates;
Improving our home closing gross marginprofit by growing revenue while managing costs, allowing us to better leverage our overhead; and
Actively acquire and developstrategically acquiring and developing land in key markets in order to maintain and grow our lot supply and active community count; and


count.
In order to maintain focus on growing our business, we also remain committed to the following:
Increasing orders and order pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities;
Expanding market share in our smaller markets;
•
Continuing to innovate and promote our energy efficiency program and our M.Connected® ®Automation Suite to create differentiation for the Meritage brand;
Managing construction efficiencies and cost increasescosts through national and regional vendor relationships with a focus on quality construction and warranty management;
Generating additional working capitalCarefully managing our liquidity and maintaining adequate liquidity,a strong balance sheet, as we ended the quarter with $327.5 million in cash and cash equivalents and with a 42.9% debt-to-capital ratio and a 36.0% net debt-to-capital ratio;
Maximizing returns to our shareholders, most recently through a $200 million add-on to our existing $200.0 million of 6.00% Senior Notes due 2025 and through the expansion and extension of our Credit Facility;share repurchase program; and
Promoting a positive environment for our employees in order to develop and motivate them and to minimize turnover.

turnover and to maximize recruitment efforts.
Critical Accounting Policies
The accounting policies we deem most critical to us and that involve the most difficult, subjective or complex judgments include revenue recognition, valuation of real estate, goodwill, warranty reserves and valuation of deferred tax assets and warranty reserves as well as the calculation of compensation cost relating to share-based payments. Other than the adoption of ASU 2014-09, as described in Note 1 in the accompanying unaudited consolidated financial statements, thereassets. There have been no significant changes to our critical accounting policies during the sixthree months ended June 30, 2018March 31, 2019 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 20172018 Annual Report on Form 10-K.


Home Closing Revenue, Home Orders and Order Backlog
The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):
 Three Months Ended June 30, Quarter over Quarter Three Months Ended March 31, Quarter over Quarter
 2018 2017 Change $ Change % 2019 2018 Change $ Change %
Home Closing Revenue                
Total                
Dollars $872,383
 $797,780
 $74,603
 9.4 % $698,650
 $728,532
 $(29,882) (4.1)%
Homes closed 2,139
 1,906
 233
 12.2 % 1,765
 1,725
 40
 2.3 %
Average sales price $407.8
 $418.6
 $(10.7) (2.6)% $395.8
 $422.3
 $(26.5) (6.3)%
West Region                
Arizona                
Dollars $118,272
 $141,015
 $(22,743) (16.1)% $98,454
 $90,996
 $7,458
 8.2 %
Homes closed 366
 419
 (53) (12.6)% 297
 275
 22
 8.0 %
Average sales price $323.1
 $336.6
 $(13.4) (4.0)% $331.5
 $330.9
 $0.6
 0.2 %
California                
Dollars $142,019
 $140,270
 $1,749
 1.2 % $85,837
 $159,391
 $(73,554) (46.1)%
Homes closed 206
 231
 (25) (10.8)% 132
 231
 (99) (42.9)%
Average sales price $689.4
 $607.2
 $82.2
 13.5 % $650.3
 $690.0
 $(39.7) (5.8)%
Colorado                
Dollars $89,421
 $88,289
 $1,132
 1.3 % $88,675
 $54,386
 $34,289
 63.0 %
Homes closed 162
 154
 8
 5.2 % 169
 94
 75
 79.8 %
Average sales price $552.0
 $573.3
 $(21.3) (3.7)% $524.7
 $578.6
 $(53.9) (9.3)%
West Region Totals                
Dollars $349,712
 $369,574
 $(19,862) (5.4)% $272,966
 $304,773
 $(31,807) (10.4)%
Homes closed 734
 804
 (70) (8.7)% 598
 600
 (2) (0.3)%
Average sales price $476.4
 $459.7
 $16.8
 3.6 % $456.5
 $508.0
 $(51.5) (10.1)%
Central Region - Texas                
Central Region Totals                
Dollars $259,344
 $225,679
 $33,665
 14.9 % $191,606
 $191,745
 $(139) (0.1)%
Homes closed 741
 610
 131
 21.5 % 543
 542
 1
 0.2 %
Average sales price $350.0
 $370.0
 $(20.0) (5.4)% $352.9
 $353.8
 $(0.9) (0.3)%
East Region                
Florida                
Dollars $110,467
 $82,448
 $28,019
 34.0 % $90,824
 $112,787
 $(21,963) (19.5)%
Homes closed 252
 187
 65
 34.8 % 226
 260
 (34) (13.1)%
Average sales price $438.4
 $440.9
 $(2.5) (0.6)% $401.9
 $433.8
 $(31.9) (7.4)%
Georgia                
Dollars $34,835
 $25,366
 $9,469
 37.3 % $42,139
 $24,973
 $17,166
 68.7 %
Homes closed 104
 73
 31
 42.5 % 119
 73
 46
 63.0 %
Average sales price $335.0
 $347.5
 $(12.5) (3.6)% $354.1
 $342.1
 $12.0
 3.5 %
North Carolina                
Dollars $77,075
 $59,560
 $17,515
 29.4 % $56,541
 $50,673
 $5,868
 11.6 %
Homes closed 195
 132
 63
 47.7 % 156
 128
 28
 21.9 %
Average sales price $395.3
 $451.2
 $(56.0) (12.4)% $362.4
 $395.9
 $(33.4) (8.4)%
South Carolina                
Dollars $26,885
 $23,866
 $3,019
 12.6 % $19,582
 $22,121
 $(2,539) (11.5)%
Homes closed 76
 70
 6
 8.6 % 57
 66
 (9) (13.6)%
Average sales price $353.8
 $340.9
 $12.8
 3.8 % $343.5
 $335.2
 $8.4
 2.5 %
Tennessee                
Dollars $14,065
 $11,287
 $2,778
 24.6 % $24,992
 $21,460
 $3,532
 16.5 %
Homes closed 37
 30
 7
 23.3 % 66
 56
 10
 17.9 %
Average sales price $380.1
 $376.2
 $3.9
 1.0 % $378.7
 $383.2
 $(4.5) (1.2)%
East Region Totals                
Dollars $263,327
 $202,527
 $60,800
 30.0 % $234,078
 $232,014
 $2,064
 0.9 %
Homes closed 664
 492
 172
 35.0 % 624
 583
 41
 7.0 %
Average sales price $396.6
 $411.6
 $(15.1) (3.7)% $375.1
 $398.0
 $(22.8) (5.7)%
  Six Months Ended June 30, Quarter over Quarter
  2018 2017 Chg $ Chg %
Home Closing Revenue        
Total        
Dollars $1,600,915
 $1,458,397
 $142,518
 9.8 %
Homes closed 3,864
 3,487
 377
 10.8 %
Average sales price $414.3
 $418.2
 $(3.9) (0.9)%
West Region        
Arizona        
Dollars $209,268
 $241,565
 $(32,297) (13.4)%
Homes closed 641
 715
 (74) (10.3)%
Average sales price $326.5
 $337.9
 $(11.4) (3.4)%
California        
Dollars $301,410
 $272,364
 $29,046
 10.7 %
Homes closed 437
 441
 (4) (0.9)%
Average sales price $689.7
 $617.6
 $72.1
 11.7 %
Colorado        
Dollars $143,807
 $155,649
 $(11,842) (7.6)%
Homes closed 256
 282
 (26) (9.2)%
Average sales price $561.7
 $551.9
 $9.8
 1.8 %
West Region Totals        
Dollars $654,485
 $669,578
 $(15,093) (2.3)%
Homes closed 1,334
 1,438
 (104) (7.2)%
Average sales price $490.6
 $465.6
 $25.0
 5.4 %
Central Region - Texas        
Central Region Totals        
Dollars $451,089
 $400,388
 $50,701
 12.7 %
Homes closed 1,283
 1,105
 178
 16.1 %
Average sales price $351.6
 $362.3
 $(10.8) (3.0)%
East Region        
Florida        
Dollars $223,254
 $148,022
 $75,232
 50.8 %
Homes closed 512
 333
 179
 53.8 %
Average sales price $436.0
 $444.5
 $(8.5) (1.9)%
Georgia        
Dollars $59,808
 $45,841
 $13,967
 30.5 %
Homes closed 177
 128
 49
 38.3 %
Average sales price $337.9
 $358.1
 $(20.2) (5.6)%
North Carolina        
Dollars $127,748
 $116,467
 $11,281
 9.7 %
Homes closed 323
 263
 60
 22.8 %
Average sales price $395.5
 $442.8
 $(47.3) (10.7)%
South Carolina        
Dollars $49,006
 $49,921
 $(915) (1.8)%
Homes closed 142
 143
 (1) (0.7)%
Average sales price $345.1
 $349.1
 $(4.0) (1.1)%
Tennessee        
Dollars $35,525
 $28,180
 $7,345
 26.1 %
Homes closed 93
 77
 16
 20.8 %
Average sales price $382.0
 $366.0
 $16.0
 4.4 %
East Region Totals        
Dollars $495,341
 $388,431
 $106,910
 27.5 %
Homes closed 1,247
 944
 303
 32.1 %
Average sales price $397.2
 $411.5
 $(14.2) (3.5)%
         


  Three Months Ended June 30, Quarter over Quarter
  2018 2017 Change $ Change %
Home Orders (1)
        
Total        
Dollars $917,996
 $878,718
 $39,278
 4.5 %
Homes ordered 2,250
 2,153
 97
 4.5 %
Average sales price $408.0
 $408.1
 $(0.1) — %
West Region        
Arizona        
Dollars $135,717
 $129,870
 $5,847
 4.5 %
Homes ordered 416
 397
 19
 4.8 %
Average sales price $326.2
 $327.1
 $(0.9) (0.3)%
California        
Dollars $131,699
 $162,597
 $(30,898) (19.0)%
Homes ordered 190
 274
 (84) (30.7)%
Average sales price $693.2
 $593.4
 $99.7
 16.8 %
Colorado        
Dollars $89,818
 $76,978
 $12,840
 16.7 %
Homes ordered 166
 133
 33
 24.8 %
Average sales price $541.1
 $578.8
 $(37.7) (6.5)%
West Region Totals        
Dollars $357,234
 $369,445
 $(12,211) (3.3)%
Homes ordered 772
 804
 (32) (4.0)%
Average sales price $462.7
 $459.5
 $3.2
 0.7 %
Central Region - Texas        
Central Region Totals        
Dollars $277,556
 $254,642
 $22,914
 9.0 %
Homes ordered 766
 714
 52
 7.3 %
Average sales price $362.3
 $356.6
 $5.7
 1.6 %
East Region        
Florida        
Dollars $136,534
 $120,951
 $15,583
 12.9 %
Homes ordered 320
 283
 37
 13.1 %
Average sales price $426.7
 $427.4
 $(0.7) (0.2)%
Georgia        
Dollars $41,964
 $32,865
 $9,099
 27.7 %
Homes ordered 109
 99
 10
 10.1 %
Average sales price $385.0
 $332.0
 $53.0
 16.0 %
North Carolina        
Dollars $54,704
 $61,375
 $(6,671) (10.9)%
Homes ordered 143
 143
 —
 — %
Average sales price $382.5
 $429.2
 $(46.7) (10.9)%
South Carolina        
Dollars $30,652
 $22,840
 $7,812
 34.2 %
Homes ordered 88
 66
 22
 33.3 %
Average sales price $348.3
 $346.1
 $2.3
 0.7 %
Tennessee        
Dollars $19,352
 $16,600
 $2,752
 16.6 %
Homes ordered 52
 44
 8
 18.2 %
Average sales price $372.2
 $377.3
 $(5.1) (1.4)%
East Region Totals        
Dollars $283,206
 $254,631
 $28,575
 11.2 %
Homes ordered 712
 635
 77
 12.1 %
Average sales price $397.8
 $401.0
 $(3.2) (0.8)%


  Three Months Ended March 31, Quarter over Quarter
  2019 2018 Change $ Change %
Home Orders (1)
        
Total        
Dollars $976,979
 $962,796
 $14,183
 1.5 %
Homes ordered 2,530
 2,358
 172
 7.3 %
Average sales price $386.2
 $408.3
 $(22.2) (5.4)%
West Region        
Arizona        
Dollars $145,398
 $153,161
 $(7,763) (5.1)%
Homes ordered 457
 459
 (2) (0.4)%
Average sales price $318.2
 $333.7
 $(15.5) (4.6)%
California        
Dollars $108,474
 $160,398
 $(51,924) (32.4)%
Homes ordered 167
 219
 (52) (23.7)%
Average sales price $649.5
 $732.4
 $(82.9) (11.3)%
Colorado        
Dollars $105,248
 $97,095
 $8,153
 8.4 %
Homes ordered 204
 175
 29
 16.6 %
Average sales price $515.9
 $554.8
 $(38.9) (7.0)%
West Region Totals        
Dollars $359,120
 $410,654
 $(51,534) (12.5)%
Homes ordered 828
 853
 (25) (2.9)%
Average sales price $433.7
 $481.4
 $(47.7) (9.9)%
Central Region - Texas        
Central Region Totals        
Dollars $306,265
 $279,503
 $26,762
 9.6 %
Homes ordered 870
 809
 61
 7.5 %
Average sales price $352.0
 $345.5
 $6.5
 1.9 %
East Region        
Florida        
Dollars $126,074
 $112,670
 $13,404
 11.9 %
Homes ordered 301
 263
 38
 14.4 %
Average sales price $418.9
 $428.4
 $(9.5) (2.2)%
Georgia        
Dollars $50,227
 $50,870
 $(643) (1.3)%
Homes ordered 144
 148
 (4) (2.7)%
Average sales price $348.8
 $343.7
 $5.1
 1.5 %
North Carolina        
Dollars $82,985
 $61,485
 $21,500
 35.0 %
Homes ordered 230
 157
 73
 46.5 %
Average sales price $360.8
 $391.6
 $(30.8) (7.9)%
South Carolina        
Dollars $25,214
 $28,674
 $(3,460) (12.1)%
Homes ordered 81
 80
 1
 1.3 %
Average sales price $311.3
 $358.4
 $(47.1) (13.2)%
Tennessee        
Dollars $27,094
 $18,940
 $8,154
 43.1 %
Homes ordered 76
 48
 28
 58.3 %
Average sales price $356.5
 $394.6
 $(38.1) (9.7)%
East Region Totals        
Dollars $311,594
 $272,639
 $38,955
 14.3 %
Homes ordered 832
 696
 136
 19.5 %
Average sales price $374.5
 $391.7
 $(17.2) (4.4)%
(1)Home orders for any period represent the aggregate sales price of all homes ordered, net of cancellations. We do not include orders contingent upon the sale of a customer’s existing home as a sales contract until the contingency is removed.


  Six Months Ended June 30, Quarter over Quarter
  2018 2017 Chg $ Chg %
Home Orders (1)
        
Total        
Dollars $1,880,792
 $1,771,421
 $109,371
 6.2 %
Homes ordered 4,608
 4,288
 320
 7.5 %
Average sales price $408.2
 $413.1
 $(5.0) (1.2)%
West Region        
Arizona        
Dollars $288,878
 $263,702
 $25,176
 9.5 %
Homes ordered 875
 800
 75
 9.4 %
Average sales price $330.1
 $329.6
 $0.5
 0.2 %
California        
Dollars $292,097
 $356,355
 $(64,258) (18.0)%
Homes ordered 409
 602
 (193) (32.1)%
Average sales price $714.2
 $592.0
 $122.2
 20.6 %
Colorado        
Dollars $186,913
 $159,073
 $27,840
 17.5 %
Homes ordered 341
 276
 65
 23.6 %
Average sales price $548.1
 $576.4
 $(28.2) (4.9)%
West Region Totals        
Dollars $767,888
 $779,130
 $(11,242) (1.4)%
Homes ordered 1,625
 1,678
 (53) (3.2)%
Average sales price $472.5
 $464.3
 $8.2
 1.8 %
Central Region - Texas        
Central Region Totals        
Dollars $557,059
 $506,415
 $50,644
 10.0 %
Homes ordered 1,575
 1,407
 168
 11.9 %
Average sales price $353.7
 $359.9
 $(6.2) (1.7)%
East Region        
Florida        
Dollars $249,204
 $222,511
 $26,693
 12.0 %
Homes ordered 583
 522
 61
 11.7 %
Average sales price $427.5
 $426.3
 $1.2
 0.3 %
Georgia        
Dollars $92,834
 $55,267
 $37,567
 68.0 %
Homes ordered 257
 168
 89
 53.0 %
Average sales price $361.2
 $329.0
 $32.3
 9.8 %
North Carolina        
Dollars $116,189
 $127,707
 $(11,518) (9.0)%
Homes ordered 300
 293
 7
 2.4 %
Average sales price $387.3
 $435.9
 $(48.6) (11.1)%
South Carolina        
Dollars $59,326
 $48,378
 $10,948
 22.6 %
Homes ordered 168
 138
 30
 21.7 %
Average sales price $353.1
 $350.6
 $2.6
 0.7 %
Tennessee        
Dollars $38,292
 $32,013
 $6,279
 19.6 %
Homes ordered 100
 82
 18
 22.0 %
Average sales price $382.9
 $390.4
 $(7.5) (1.9)%
East Region Totals        
Dollars $555,845
 $485,876
 $69,969
 14.4 %
Homes ordered 1,408
 1,203
 205
 17.0 %
Average sales price $394.8
 $403.9
 $(9.1) (2.3)%
         



Three Months Ended June 30,Three Months Ended March 31,
2018 20172019 2018
Ending Average Ending AverageEnding Average Ending Average
Active Communities      
Total253 253.0 257
 256.5260 266.0 253
 248.5
West Region      
Arizona40 38.5 39
 40.534 37.0 37
 37.5
California15 15.0 26
 27.521 19.0 15
 17.5
Colorado19 18.0 10
 10.023 21.5 17
 14.0
West Region Totals74 71.5 75
 78.078 77.5 69
 69.0
Central Region - Texas      
Central Region Totals90 93.5 92
 88.584 89.5 97
 94.5
East Region      
Florida30 29.0 30
 31.032 31.5 28
 28.0
Georgia20 20.5 19
 18.019 20.5 21
 20.0
North Carolina20 20.0 20
 19.025 25.0 20
 18.5
South Carolina11 11.5 14
 14.511 11.5 12
 12.5
Tennessee8 7.0 7
 7.511 10.5 6
 6.0
East Region Totals89 88.0 90
 90.098 99.0 87
 85.0

 Six Months Ended June 30,
 2018 2017
 Ending Average Ending Average
Active Communities
      
Total253 248.5 257
 250.0
West Region
      
Arizona40 39.0 39
 40.5
California15 17.5 26
 27.0
Colorado19 15.0 10
 10.0
West Region Totals74 71.5 75
 77.5
Central Region - Texas
      
Central Region Totals90 91.0 92
 86.0
East Region
      
Florida30 29.0 30
 28.5
Georgia20 19.5 19
 18.0
North Carolina20 18.5 20
 18.5
South Carolina11 12.0 14
 14.5
Tennessee8 7.0 7
 7.0
East Region Totals89 86.0 90
 86.5
        



 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended March 31,
 2018 2017 2018 2017 2019 2018
Cancellation Rates (1)
            
Total 12% 13% 13% 13% 12% 14%
West Region            
Arizona 12% 12% 12% 13% 11% 12%
California 12% 15% 16% 13% 15% 19%
Colorado 13% 8% 10% 10% 7% 8%
West Region Totals 12% 13% 13% 12% 11% 13%
Central Region - Texas            
Central Region Totals 13% 15% 15% 14% 13% 16%
East Region            
Florida 9% 11% 10% 12% 9% 11%
Georgia 22% 18% 16% 18% 12% 11%
North Carolina 12% 9% 14% 8% 10% 16%
South Carolina 10% 14% 10% 11% 21% 9%
Tennessee 7% 8% 5% 13% 8% 2%
East Region Totals 12% 12% 12% 12% 11% 11%
(1)Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.


 At June 30, Quarter over Quarter At March 31, Quarter over Quarter
 2018 2017 Change $ Change % 2019 2018 Change $ Change %
Order Backlog (1)
                
Total                
Dollars $1,528,756
 $1,448,782
 $79,974
 5.5 % $1,295,295
 $1,482,205
 $(186,910) (12.6)%
Homes in backlog 3,619
 3,428
 191
 5.6 % 3,198
 3,508
 (310) (8.8)%
Average sales price $422.4
 $422.6
 $(0.2) — % $405.0
 $422.5
 $(17.5) (4.1)%
West Region                
Arizona                
Dollars $199,508
 $183,480
 $16,028
 8.7 % $180,556
 $181,979
 $(1,423) (0.8)%
Homes in backlog 560
 529
 31
 5.9 % 503
 510
 (7) (1.4)%
Average sales price $356.3
 $346.8
 $9.4
 2.7 % $359.0
 $356.8
 $2.1
 0.6 %
California                
Dollars $213,761
 $237,629
 $(23,868) (10.0)% $89,095
 $223,982
 $(134,887) (60.2)%
Homes in backlog 290
 392
 (102) (26.0)% 126
 306
 (180) (58.8)%
Average sales price $737.1
 $606.2
 $130.9
 21.6 % $707.1
 $732.0
 $(24.9) (3.4)%
Colorado                
Dollars $158,019
 $157,508
 $511
 0.3 % $120,115
 $157,602
 $(37,487) (23.8)%
Homes in backlog 284
 267
 17
 6.4 % 220
 280
 (60) (21.4)%
Average sales price $556.4
 $589.9
 $(33.5) (5.7)% $546.0
 $562.9
 $(16.9) (3.0)%
West Region Totals                
Dollars $571,288
 $578,617
 $(7,329) (1.3)% $389,766
 $563,563
 $(173,797) (30.8)%
Homes in backlog 1,134
 1,188
 (54) (4.5)% 849
 1,096
 (247) (22.5)%
Average sales price $503.8
 $487.1
 $16.7
 3.4 % $459.1
 $514.2
 $(55.1) (10.7)%
Central Region - Texas                
Central Region Totals                
Dollars $489,106
 $460,761
 $28,345
 6.2 % $488,009
 $470,392
 $17,617
 3.7 %
Homes in backlog 1,312
 1,233
 79
 6.4 % 1,308
 1,287
 21
 1.6 %
Average sales price $372.8
 $373.7
 $(0.9) (0.2)% $373.1
 $365.5
 $7.6
 2.1 %
East Region                
Florida                
Dollars $222,653
 $190,943
 $31,710
 16.6 % $200,182
 $196,470
 $3,712
 1.9 %
Homes in backlog 517
 442
 75
 17.0 % 447
 449
 (2) (0.4)%
Average sales price $430.7
 $432.0
 $(1.3) (0.3)% $447.8
 $437.6
 $10.3
 2.3 %
Georgia                
Dollars $83,505
 $42,789
 $40,716
 95.2 % $54,483
 $76,358
 $(21,875) (28.6)%
Homes in backlog 231
 131
 100
 76.3 % 148
 226
 (78) (34.5)%
Average sales price $361.5
 $326.6
 $34.9
 10.7 % $368.1
 $337.9
 $30.2
 8.9 %
North Carolina                
Dollars $85,273
 $98,492
 $(13,219) (13.4)% $93,818
 $107,578
 $(13,760) (12.8)%
Homes in backlog 220
 223
 (3) (1.3)% 251
 272
 (21) (7.7)%
Average sales price $387.6
 $441.7
 $(54.1) (12.2)% $373.8
 $395.5
 $(21.7) (5.5)%
South Carolina                
Dollars $45,805
 $39,093
 $6,712
 17.2 % $37,987
 $42,027
 $(4,040) (9.6)%
Homes in backlog 125
 111
 14
 12.6 % 113
 113
 —
 — %
Average sales price $366.4
 $352.2
 $14.3
 4.0 % $336.2
 $371.9
 $(35.8) (9.6)%
Tennessee                
Dollars $31,126
 $38,087
 $(6,961) (18.3)% $31,050
 $25,817
 $5,233
 20.3 %
Homes in backlog 80
 100
 (20) (20.0)% 82
 65
 17
 26.2 %
Average sales price $389.1
 $380.9
 $8.2
 2.2 % $378.7
 $397.2
 $(18.5) (4.7)%
East Region Totals                
Dollars $468,362
 $409,404
 $58,958
 14.4 % $417,520
 $448,250
 $(30,730) (6.9)%
Homes in backlog 1,173
 1,007
 166
 16.5 % 1,041
 1,125
 (84) (7.5)%
Average sales price $399.3
 $406.6
 $(7.3) (1.8)% $401.1
 $398.4
 $2.7
 0.7 %
(1)Our backlog represents net sales that have not closed.



Operating Results

Companywide. In the first quarter of 2019, despite the lower number of homes in backlog entering the year, home closing volume improved by 2.3% to 1,765 closings valued at $698.7 million compared to 1,725 closings valued at $728.5 million in the corresponding prior year period. The increase in closings year-over-year was driven by improved backlog conversion due to selling and closing more speculative inventory homes in the first quarter of 2019 compared to the prior year. Home closing revenue increaseddecreased by 9.4%4.1% due to $872.4 million from 2,139 closings for the three months ended June 30, 2018 compared to $797.8 million from 1,906 closings during the same quarter of the prior year, driven by a 12.2% increase in closing volume partially offset by a 2.6% decrease$26,500 reduction in average sales price. Average sales prices on home closings are beginning to decline withprice reflective of a higher percentage of entry-level homes in our closing mix that is offsetting average sales price increases in some markets.related to our strategic transition to the first-time and first move-up homebuyers. Home orders alsoorder volume improved by 4.5%7.3% to 2,2502,530 homes valued at $918.0$977.0 million in the secondfirst quarter of 20182019 as compared to 2,1532,358 homes valued at $878.7$962.8 million in the secondfirst quarter of 2017. Order2018. The improvement in orders was drivenprimarily aided by our company-widea 7.0% increase in average active communities in the first quarter of 2019 compared to prior year and a flat year-over-year Companywide orders pace growing by 6.0% to 8.9at 9.5 homes ordered per average community in the second quarter of 2018 compared to 8.4 in the comparable 2017 quarter.active community. We ended the quarter with 253260 actively selling communities, consistent with the first quarter of 2018, but a slight decline year-over-year.
For the six months ended June 30, 2018, home closing units and revenue grew by 377 units and $142.5 million for ending home closing revenue of $1.6 billion on 3,864 closings, 9.8% and 10.8% higher than the six month period in 2017, respectively. Orders increased by 320 units and $109.4 million to 4,608 orders valued at $1.9 billion for the six months ended June 30, 2018, 7.5% and 6.2% increases, respectively.2.8% increase over prior year. We ended the quarter with 3,6193,198 homes in backlog valued at $1.5$1.3 billion, reflecting an $80.0 million, or 5.5%, increase8.8% and 12.6% decreases from the second quarter of 2017 driven entirely by volume as average sales prices are beginning to temper as we shift toward a higher percentage of entry-level homes in backlog.2018, respectively.
West. During the second quarter of 2018, theThe West Region closed 734598 homes and generated $349.7$273.0 million in home closing revenue in the first quarter of 2019 compared to 804600 homes and $369.6$304.8 million in the secondfirst quarter of 2017.2018. The decrease in home closing revenue is due to a 8.7%10.1% decrease in homes closed, partially offset by a 3.6% increase in average sales price.price combined with relatively flat home closing volume. The slight reduction in closing volume reflected 8.3%was related to California which entered the year with lower backlog stemming from fewer communities open on average duringin 2018 and slower sales in the secondfourth quarter of 2018 compared to 2017. Despite a strong shift to first-time buyers2018. The decline was nearly offset by year-over-year increases in the Region, the higherclosing volume in Colorado and Arizona. The decline in average sales price in the second quarter of 2018was driven by Colorado where entry-level product is the result of a larger percentage of closings from several high-priced communities in California contributing more meaningfully to the closing mix in the first quarter of 2019 compared to prior year and the prior year.lessened impact of California in the Region's closing mix. The Region ended the secondfirst quarter of 20182019 with 772828 orders valued at $357.2$359.1 million versus 804 homes853 orders valued at $369.4$410.7 million in the secondfirst quarter of 2017. Orders per average community2018. The 2.9% decline in order volume was primarily driven by California where a 29.6% decline in orders pace compared to the prior year contributed to a 23.7% reduction in orders. Average active communities in California improved by 8.6%, however, these new communities opened late in the West Regionquarter and contributed minimally to first quarter orders. Orders improved by 4.9% partially offsetting the impact of the decline16.6% in community count. Strong demand has resultedColorado due to a 53.6% improvement in manyaverage active communities selling out faster than anticipated driving the declineand orders were down minimally in community count, particularly in California.Arizona compared to prior year. We opened 14ten communities throughout the Region in the secondfirst quarter of 20182019 and we anticipate opening 20 new communitieseven more West Region community openings in the next severaltwo quarters, with halfthe majority of thosewhich will be targeted toward the first-time homebuyer.
Year-to-date results in the West Region were similar to that of the second quarter of 2018. The number and value of homes closed versus prior year declined by 7.2% and 2.3%, respectively, partially offset by a 5.4% increase in average sales price. Orders for the Region declined 3.2% year-to-date which resulted in a 1.4% decline in order value, partially offset by a $8,200 increase in average sales price. Orders pace improved by 4.6% in the Region for the six months ended June 30, 2018, however both closings and orders were impacted by a 7.7% decline in average community count. The Region ended the quarter with 1,134849 homes in backlog valued at $571.3$389.8 million, 4.5% and 1.3% declinesa 30.8% decline in value from prior year respectively, offset slightly byreflecting a $16,700 increase10.7% reduction in average sales price.price and a 22.5% decrease in the number of homes.
Central. In the secondfirst quarter of 2018,2019, the Central Region, made up of our Texas markets, closed 741543 homes and generated $259.3$191.6 million in home closing revenue, improvementsrelatively flat with prior year results of 21.5%542 homes and 14.9%$191.7 million of home closing revenue. Orders and order value grew by 7.5% and 9.6%, respectively, leading to year-over-year home closing revenue growth of $33.7 million. The Region ended the quarter with 766 orders870 units valued at $277.6$306.3 million compared to 714809 units valued at $254.6$279.5 million in the prior year 7.3% and 9.0% increases, respectively. We continue to see solid demand trendsquarter. Order volume improved in the Central Region, evidenced by the year-over-year growthfirst quarter of 2019 due to a 12.8% increase in orders pace in the second quarter of 2018 whenRegion despite a 5.3% decrease in average community count compared to a strong second quarter in 2017. The improved order volume is the result of a 5.6% increase in average communities during the second quarter of 2018 and a relatively flat orders pace of 8.2 homes per average community compared to 8.1 homes in the prior year quarter.year. We are responding to the entry-level demand in this Region with a strong transition to first-time buyer product offerings. The resulting marginal net increase in average sales price year-over-year onofferings and we attribute the improved orders is duepace to lower priced entry-level product offsetting price increases in some markets. Throughout the remainder of 2018, we anticipate opening over 20 new communities in our Central region, the majority of which will bethat transition and to targeted to the first-time buyer.
We also saw overall improvementsincentives offered in the Region forfirst quarter of 2019. Approximately 45% of our first quarter 2019 orders resulted from communities designated as entry-level and we expect that percentage to continue to grow as most of the six months ended June 30, 2018. Home closings and home closing revenue were up 16.1% and 12.7%, respectively, and orders and order value were up year-over-year by 11.9% and 10.0%, respectively. Orders pace and average active communities increased by 5.5% and 5.8%, respectively, helpingprojected community openings throughout the Region endin 2019 are designated as entry-level. The Region ended the first quarter of 2019 with 1,312 homes1,308 units in backlog valued at $489.1$488.0 million, 6.4%1.6% and 6.2% improvements3.7% increases, respectively, over the prior year, respectively.


year.
East. During the three months ended June 30, 2018,March 31, 2019, the East Region generated the largest increasedelivered 624 closings and $234.1 million in home closing volume and revenue compared to the same period in the prior year. The Region contributed 664583 closings and $263.3$232.0 million in home closing revenue in the secondprior year, improvements of 7.0% and 0.9%, respectively. Average sales price decreased by $22,800 in the first quarter of 2018, improvements of 35.0% and 30.0%, respectively, from the same period in 2017. The increase in closing volume was partially offset by a 3.7%, or $15,100, decrease in average sales price2019 compared to prior year resulting from our pivottransition to the first-time buyer segment. In the second quarter of 2018, orders paceentry-level product. Orders and order volume in the East Region improved by 14.1% compared to the 2017 second quarter with increases in the majority of our markets in the Region. This demand led to order volume19.5% and value increasing by 12.1% and 11.2%14.3%, respectively, compared tofor the secondfirst quarter of 2017 to 7122019 with 832 units valued at $283.2$311.6 million for the three months ended June 30, 2018. Simplifying our business and improving our buyers' experiences through a strategic shift to product and communities that appeal to the first-time buyer has been a key strategic focus for us and we believe our improvements are reflective of that.
The year-to-date results of the East Region were similar to those of the second quarter, with 32.1% and 27.5% improvements in closing volume and revenue, respectively, compared to 2017 providing 1,247 closings and $495.3696 units valued at $272.6 million in home closing revenue for the six month period ending June 30, 2018.prior year. The number and value ofimprovement in orders also improved by 17.0% and 14.4%, respectively,is primarily due to an 18.0%a 16.5% increase in average active communities combined with a 2.4% increase in orders pace forpace. The East Region ended the six months ended June 30, 2018quarter with 1,041 homes in backlog valued at $417.5 million compared to prior year. These improvements contributed to a year-over-year increase in backlog units and value of 16.5% and 14.4%, respectively, ending the second quarter of 2018 with 1,173 units1,125 homes valued at $468.4 million.$448.3 million at March 31, 2018, 7.5% and 6.9% decreases, respectively.
Land Closing Revenue and Gross Profit/(Loss)/Profit
From time to time, we may sell certain lots or land parcels to other homebuilders, developers or investors if we feel the sale will provide a greater economic benefit to us than continuing home construction or where we are looking to diversify our land positions in the specific geography. As a result of such sales, we recognized land closing revenue of $5.1$9.5 million and $4.2 $14.0


million for the three months ending June 30,March 31, 2019 and 2018, and 2017, respectively, and $19.1 and $16.4 million for the six months ended June 30, 2018 and 2017, respectively. We recognized land closing gross profit of $0.4 million in the first quarter of 2019 compared to a loss of $0.7$1.2 million as a combined result of gains and losses on various land sales throughout the country in the secondfirst quarter of 2018 compared to break-even results in 2017. Year to date land sales in 2018 resulted in a $1.9 million loss as compared to a $2.5 million gain in the prior year.2018.
Other Operating Information (dollars in thousands)  
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue Dollars Percent of Home Closing RevenueDollars Percent of Home Closing Revenue Dollars Percent of Home Closing Revenue
Home Closing Gross Profit (1)
                      
Total$159,515
 18.3% $140,910
 17.7% $283,845
 17.7% $248,178
 17.0%$116,462
 16.7% $124,330
 17.1%
          
   
       
West$63,630
 18.2% $65,962
 17.8% $113,835
 17.4% $114,467
 17.1%$45,395
 16.6% $50,205
 16.5%
        

 
 

 
       
Central$52,496

20.2% $45,856
 20.3% $88,772
 19.7% $79,132
 19.8%$34,363

17.9% $36,276
 18.9%
                      
East$43,389
 16.5% $29,092
 14.4% $81,238
 16.4% $54,579
 14.1%$36,704
 15.7% $37,849
 16.3%
 
(1)Home closing gross profit represents home closing revenue less cost of home closings, including impairments. Cost of home closings includes land and lot development costs, direct home construction costs, an allocation of common community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.
Companywide. Home closing gross margin for the secondfirst quarter of 2018 improved 602019 decreased by 40 basis points overcompared to the same prior year period and combined with higherlower home closing revenue, resulted in a $18.6$7.9 million increasedecrease in home closing gross profit.With improved demand The reduction in home closing revenue and pricing power and the introduction of new, efficient productgross margin compared to prior year is partially due to targeted incentives that were offered in the East region where our most notable improvements are, we have been successfullatter half of the fourth quarter of 2018 and early in minimizing the impactfirst quarter of rising labor2019 on slow-moving move-up inventory and commodity costs. Margin growth has been a key initiative for us and we have been largely successful in managing price and pace in order to improve margins while also ensuring we are competitively priced to appeal to homebuyers. Increased revenues have also enabled us to maintain or improve our leverage of construction overhead costs in most markets which hashighly competitive markets. First quarter 2018 gross margin was positively impacted margins. Forby 20 basis points from a one-time $1.4 million settlement related to Chinese drywall costs incurred in prior periods with no similar recoveries in the six months ended June 30, 2018, home closingfirst quarter of 2019. We expect our improved backlog conversion and simplified product offerings will help improve gross margin improved by 70 basis points which increased home closing gross profit by $35.7 million overand gain operating leverage as we progress throughout the 2017 period.year.


West. Our West Region reported higher year-over-year homeHome closing gross margin for the secondWest Region improved by 10 basis points to 16.6% for the first quarter of 2018 of 18.2% compared to 17.8% in 2017 and 17.4%2019 versus 17.1% for the six months ended June 30, 2018 and 2017, respectively. We are making concerted efforts to maximize margins16.5% in the Regionfirst quarter of 2018. Lower home closing revenue resulting from increased incentives and have been successful with raisinglower average sales prices in certain marketsrelated to offset cost increases. We also have benefited from the pivotour shift to entry-level product which simplifieswas offset by construction efficiencies driven by our simplified product generating construction and cost efficiencies. We anticipate continuedofferings providing slightly improved year-over-year gross margin improvement in the Region as closing volume rebounds with community count growth and we are better able to leverage our construction overhead costs.Region.
Central. The Central Region producedprovided the highest home closing gross margin in the company during the secondfirst quarter of 2018.2019. Home closing gross margin of 20.2%17.9% for the quarter ending June 30, 2018March 31, 2019 was relatively flatdown compared to 20.3%18.9% in the prior year. Year to date,The year-over-year decline in gross margin for the Region experienced similar results with relatively flat closing gross margin. Weis primarily due to targeted incentives offered on speculative inventory homes that were largely successful in maintaining pricing in alignment with labor, constructionavailable to both sell and land cost increases. We continue to respond to the first-time buyer demandclose in the Region and our margins are reflectivefirst quarter of the product for this segment that combines a streamlined construction process enabling cost control with the opportunity to leverage overhead costs with increased absorptions.2019.
East. The East Region experienced a 210 basis point improvement in year-over-year homeHome closing gross margin in the three months ended June 30, 2018East Region declined 60 basis points year-over-year to 15.7% in the first quarter of 16.5%2019 versus 14.4%16.3% for the comparable 20172018 period. As a direct result of our strategic initiatives to improve profitability, we are experiencing margin improvement throughout the Region as communities with our new product offering begin to contribute more materially to the closing mix. In addition, closings in newer communities in our Florida markets are achieving higher margins than the communities that contributed to the closing mixMargins in the prior year. The higher volumefirst quarter of closings and associated revenue2018 were positively impacted by 60 basis points from the above-mentioned settlement related to Chinese drywall with no similar recoveries in the Region helped leverage construction overhead costs to further improve margins. Similar to secondfirst quarter results, year-to-date home closing gross margin also achieved significant growth, improving by 230 basis points to 16.4% in 2018 versus 14.1% in 2017.of 2019.
Financial Services Profit (in thousands)
 Three Months Ended June 30, Six Months Ended June 30,
 2018 2017 2018 2017
Financial services profit$5,651
 $5,557
 $9,871
 $9,847
 Three Months Ended March 31,
 2019 2018
Financial services profit$4,702
 $4,220
Financial services profit represents the net profit of our financial services operations, including the operating profit generated by our wholly-owned title company, Carefree Title, as well as our portion of earnings from a mortgage joint venture. Financial services profit remained relatively flatimproved year over year despite adue to higher closing volume due to a decline in the capture rate of homebuyers by our mortgage joint venture.volume.


Selling, General and Administrative Expenses and Other Expenses ($ in thousands)
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended March 31,
2018 2017 2018 20172019 2018
Commissions and other sales costs          
Dollars$(60,823) $(54,701) $(113,575) $(103,021)$(52,555) $(52,752)
Percent of home closing revenue7.0% 6.9% 7.1% 7.1%7.5% 7.2%
General and administrative expenses          
Dollars$(34,205) $(29,591) $(65,098) $(59,213)$(33,566) $(30,893)
Percent of home closing revenue3.9% 3.7% 4.1% 4.1%4.8% 4.2%
(Loss)/earnings from other unconsolidated entities, net       
Dollars$(156) $570
 $(202) $943
Interest expense          
Dollars$(44) $(1,620) $(180) $(2,445)$(4,085) $(136)
Other income, net          
Dollars$1,934
 $2,080
 $7,305
 $3,190
$1,046
 $5,325
Provision for income taxes          
Dollars$(17,347) $(21,625) $(22,357) $(34,822)$(6,958) $(5,010)
Commissions and Other Sales Costs. Commissions and other sales costs are comprised of internal and external commissions and related sales and marketing expenses such as advertising and sales office costs. These costs increased by $6.1were $52.6 million for the three months ended June 30, 2018 versus 2017 and increased $10.6 millionMarch 31, 2019, relatively flat with the prior year to date as a result of increased closing volume.period. As a percentage of home closing revenue, commissions and other sales costs increased 1030 basis points to 7.0%7.5% during the three months ended June 30, 2018 asMarch 31, 2019 due primarily to higher external commissions paid in the first quarter of 2019 compared to the prior year period. Thisdue partially to sales campaigns to capture orders on our available spec inventory that was dueable to a higher volumeclose in the first quarter of closings with international homebuyers, which typically have a higher percentage of external brokers representing the buyers, resulting in higher overall commission expense. Commissions and other sales costs as a percent of revenue remained flat at 7.1% for the six months ended June 30, 2018 and 2017.2019.
General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. For the three months ended June 30, 2018,March 31, 2019, general and administrative expenses were $34.2$33.6 million as compared to $29.6$30.9 million for the 20172018 period. As a percentage of home closing revenue, these costs increased 2060 basis points for the three month period ending June 30, 2018March 31, 2019 to 3.9%4.8%, partiallyprimarily the result of recognitiondecreased leverage from lower home closing revenue combined with the impact of stock$2.5 million in one-time charges related to severance costs and accelerated equity compensation expense at June 30, 2018 forcosts in the probable achievementfirst quarter of performance targets for certain equity awards. There was no comparable expense for2019 compared to the prior year period, as ouryear. The charges related to equity compensation program for certain executives was adjusted to all performance based effective in 2017. For the six months ended June 30, 2018 and 2017, general and administrative costs were flat at 4.1% of home closing revenue. We continually strive to optimize overhead leverage through cost control efforts at both the corporate and divisional levels.
(Loss)/Earnings from Other Unconsolidated Entities, Net. Earnings from other unconsolidated entities, net represents our portion of pre-tax earnings/(losses) from non-financial services joint ventures. Included in this amount is both the pass through of earnings/(losses) from the joint ventures' most recently available financial statements as well as any accrued expected earnings/(losses) for the periods presented that might not have been reflected in the joint ventures' financial statements provided to us. The three and six-month periods ended June 30, 2018 reported a slight loss of $0.2 millionare due to general and administrative expensesa revision in executive compensation as a recently formed joint venture compared to earningsresult of $0.6 million and $0.9 millionchanges in the respective three and six-month periodstax law, effective for us in 2017 period related to land sales recorded in our land joint ventures.2019.
Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior notes, prior Convertible Notes, other borrowings, and our amended and restated unsecured revolving credit facility ("Credit Facility"). Interest expense decreased year over year infor the second quarter to $44,000 in 2018three months ended March 31, 2019 totaled $4.1 million compared to $1.6 million in 2017 due to a higher balance of inventory that qualifies for interest capitalization. We experienced similar declines in year to date interest expense with $180,000 in 2018 compared to $2.4$0.1 million in the corresponding prior year.year period. This year-over-year increase is due to less interest capitalized to assets under development resulting from more efficient turnover of inventory related to our simplified construction strategy.
Other Income, Net. Other income, net, primarily consists of (i) sublease income, (ii) interest earned on our cash and cash equivalents, and (iii) payments and awards related to legal settlements. Beginning in 2018, forfeited homebuyer deposits are reflected in Home closing revenue resultingsettlements and (iv) our portion of pre-tax income or loss from the adoption of ASU 2014-09. These are reflected as Other income, net in 2017 results.non-financial services joint ventures. For the three months ended June 30, 2018,March 31, 2019, Other income, net was flat with the prior year at $1.9$1.0 million versus $2.1$5.3 million in 2017. For the six months ended June 30, 2018, Other income, net was $7.3 million compared to $3.2 million in the 2017 period.2018. Other income, net was favorably impacted year to date in the first quarter of 2018 as a result of receiving a $4.8 million settlement from long-standing litigation related to a previous joint venture in Nevada.
Income Taxes. Our effective tax rate was 24.4%21.5% and 34.2%10.2% for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and 18.6% and 34.8% for the six months ended June 30, 2018 and 2017, respectively. The reduced ratesrate in 2018 are due to lower corporate rates under tax reform. In addition, the year-to-date rate was favorably impacted by the enactment of the Bipartisan Budget Act of 2018 in February 2018, which included a retroactive extension of the Internal Revenue Code §45L new energy efficient homes credit, which had previously expired in 2016. This extension provision providesprovided for a single year extension of energy tax credits for homes sold in 2017 that meetmet the qualification criteria. In accordance with ASC 740, the effects of these tax credits were recorded in the first quarter of 2018, based on the date of enactment, regardless of the retroactive treatment. OurIn the first quarter of 2019, we recorded a relatively minor tax rate was favorably impactedbenefit from our efforts to capture additional energy credits from 2016 and 2017. We also recorded a tax benefit from equity-based compensation for awards vested in 2017 by the homebuilding manufacturing deduction, which was eliminated underquarter. These tax reform for 2018.benefits had a favorable impact on our 2019 effective tax rate.



Liquidity and Capital Resources
Overview
Our principal uses of capital in the first sixthree months of 20182019 were acquisition and development of new and strategic lot positions, operating expenses, home construction, repurchasing our common stock and the payment of routine liabilities. We used funds generated by operations and borrowings under our Credit Facility to meet our short-term working capital requirements. In addition, in the first six months of 2018 we used the net proceeds of our new senior notes to pay off our maturing senior notes. We remain focused on acquiring desirable land positions, generating increasing margins in our homebuilding operations and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.

Operating Cash Flow Activities

During the sixthree months ended June 30, 2018 and June 30, 2017,March 31, 2019, net cash provided by operating activities totaled $32.3 million versus net cash used in operations totaled $10.5operating activities of $17.3 million and $130.7 million, respectively.in the first quarter of 2018. Operating cash flows in 20182019 and 20172018 benefited from cash generated by net earnings of $97.7$25.4 million and $65.2$43.9 million, respectively,respectively. For the three months ended March 31, 2019, net earnings were offset mainly by increasesa decrease in accounts payable and accrued liabilities of $12.2 million. For the three months ended March 31, 2018, net earnings were offset by an increase in real estate of $155.8$87.7 million, reflecting land development and $211.4 million, respectively, reflecting home construction spending as we have more homes under construction in both backlog as well as in our spec home inventory.

spending.
Investing Cash Flow Activities

During the sixthree months ended June 30, 2018,March 31, 2019, net cash used in investing activities totaled $16.1$6.3 million as compared to $7.4$6.4 million for the same period in 2017.2018. Cash used in investing activities in the first sixthree months of 20182019 and 20172018 is mainly attributable to the purchases of property and equipment of $15.7$5.2 million and $8.3$6.4 million for the 20182019 and 20172018 periods, respectively.

Financing Cash Flow Activities

During the sixthree months ended June 30, 2018,March 31, 2019, net cash used in financing activities totaled $9.9 million as compared to net cash provided by financing activities totaled $25.2 million as compared to $223.2of $25.5 million for the same period in 2017.2018. The net cash used in financing activities in 2019 primarily reflects repurchases of our common stock of $9.0 million. The net cash provided by financing activities in 2018 is primarily the result of $202.7$206.0 million in net proceeds received from our 6.00% bond issuance offset partially by the $175.0 million repayment of our 4.50% senior notes. Our 2017 results were mainly attributable to $296.0 million in net proceeds received from our 5.125% bond issuance offset partially by repayments of our Credit Facility of $15.0 million and repurchases of a portion of our Convertible Senior Notes of $52.1 million.

Overview of Cash Management
    
Cash flows for each of our communities depend on their stage of the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, zoning plat and other approvals, community and lot development, and construction of model homes, roads, utilities, landscape and other amenities. Because these costs are a component of our inventory and not recognized in our income statement of operations until a home closes, we incur significant cash outlays prior to recognition of earnings. In the later stages of a community, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflow associated with home and land construction was previously incurred. From a liquidity standpoint, we are currently actively acquiring and developing lots in our markets to maintain and grow our lot supply and active community count. We are also using our cash on hand and draws under our Credit Facility, as needed, to fund operations in newer markets. As weWe have spent the last several years building a pipeline of desirable land positions to position us for growth in an improving homebuilding environment and to replenish a depletedour supply of lots, however in recent quarters our cash outlaysgenerated from operations have exceeded our cash generated from operations. Weoutlays. Accordingly, we expect future cash needs to begin to moderate and for cash generated from on-going operations to support our expected growth.growth in the near term to be funded from our on-going operations.

During the sixthree months ended June 30, 2018,March 31, 2019, we closed 3,8641,765 homes, purchased about 5,4001,900 lots for $223.6$66.8 million, spent $186.6$74.4 million on land development and started construction on 4,8671,966 homes. We primarily purchase undeveloped land or partially-finished lots requiring development dollars in order to bring them to a finished status ready for home construction. We exercise strict controls and believe we have a prudent strategy for Company-wide cash management, including those related to cash outlays for land and inventory acquisition and development. We ended the secondfirst quarter of 20182019 with $169.4$327.5 million of cash and cash equivalents, a slight decreasean increase of $1.3$16.0 million from December 31, 2017.2018 and had no outstanding borrowings on our Credit Facility.



We expect to generate cash from the sale of our inventory, but we intend to redeploy most of that cash to acquire and develop strategic and well-positioned lots to grow our business. We believe that we currently have strong liquidity. Nevertheless, we may seek additional capital to strengthen our liquidity position, enable us to opportunistically acquire additional land inventory in anticipation of improving market conditions, and/or strengthen our long-term capital structure. Such additional capital may be in the form of equity or debt financing and may be from a variety of sources. There can be no assurances that we would be able to obtain such additional capital on terms acceptable to us, if at all, and such additional equity or debt financing could dilute the interests of our existing stockholders or increase our interest costs. We may also from time to time engage in opportunistic repurchases of our common stock in open market or privately-negotiated transactions as well as repurchase our outstanding senior notes.

In June 2018, we entered into an amendmentOn February 13, 2019, the Board of Directors authorized a new stock repurchase program, authorizing the expenditure of up to our Credit Facility, which among other things, increased the total commitments available from $625.0$100.0 million to $780.0 million and extendedrepurchase shares of our common stock. This program followed the maturity datecompletion of the Credit Facility from$100.0 million stock repurchase program approved in July 2021 to July 2022. In addition,2018 and completed in March 2018, the Company completed an offeringfourth quarter of $200.0 million aggregate principal amount of 6.00% Senior Notes due 2025 (the "Additional Notes").2018. There is no stated expiration for this program. The Additional Notes were issued as an add-on to the existing $200.0 million of 6.00% Senior Notes due 2025 that were issued in June 2015 which resulted in a combined $400.0 million aggregate principal amount of 6.00% Senior Notes due 2025 outstanding at June 30, 2018. The Additional Notes were issued at a premium of 103% of the principal amount and the net proceeds were used to repay outstanding borrowings under the Credit Facility, which included borrowings used for the redemptionrepurchases of the Company's 4.50% Senior Notes that were due to mature on March 1, 2018. Reference isshares may be made to Notes 5 and 6 in the accompanying unaudited consolidated financial statements.open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as market price of the Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased. In the three months ended March 31, 2019, we purchased and retired 208,840 shares of our common stock at an aggregate purchase price of $9.0 million and as of March 31, 2019, $91.0 million remained available under this program.

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. Debt-to-capital and net debt-to-capital are calculated as follows (dollars in thousands): 
 As of As of
 June 30, 2018 December 31, 2017 March 31, 2019 December 31, 2018
Notes payable and other borrowings $1,311,257
 $1,283,804
 $1,309,300
 $1,310,057
Stockholders’ equity 1,682,940
 1,576,825
 1,743,071
 1,720,755
Total capital $2,994,197
 $2,860,629
 $3,052,371
 $3,030,812
Debt-to-capital (1)
 43.8% 44.9% 42.9% 43.2%
Notes payable and other borrowings $1,311,257
 $1,283,804
 $1,309,300
 $1,310,057
Less: cash and cash equivalents (169,426) (170,746) (327,499) (311,466)
Net debt 1,141,831
 1,113,058
 981,801
 998,591
Stockholders’ equity 1,682,940
 1,576,825
 1,743,071
 1,720,755
Total net capital $2,824,771
 $2,689,883
 $2,724,872
 $2,719,346
Net debt-to-capital (2)
 40.4% 41.4% 36.0% 36.7%
 
(1)Debt-to-capital is computed as senior notes, net and loans payable and other borrowings divided by the aggregate of total senior notes, net and loans payable and other borrowings and stockholders' equity.
(2)Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. Net debt is total senior notes, net and loans payable and other borrowings, less cash and cash equivalents. The most directly comparable GAAP financial measure is the ratio of debt to total capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing.
Issuer Purchases of Equity Securities
On July 25, 2018,We have never declared cash dividends, nor do we announced thatintend to declare cash dividends in the Board of Directors approved a new stock repurchase program, authorizingforeseeable future. We plan to retain our cash to finance the expenditure of up to $100.0 million to repurchase shares of our common stock, subject to certain price parameters. This program replaces the previously authorized program that was in place as of June 30, 2018. There is no stated expiration for this program. The repurchasescontinuing development of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timingbusiness and amount of repurchases,increase our liquidity. Future cash dividends, if any, will be determineddepend upon financial condition, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by the Company's management at its discretion and be based on a varietyour Board of factors such as the market price of the Company's common stock, corporate and contractualDirectors.



requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. The Company intends to retire any shares repurchased.
Credit Facility Covenants
Borrowings under the Credit Facility are unsecured, but availability is subject to, among other things, a borrowing base. The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $1.1 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. In addition, we are required to maintain either (i) an interest coverage ratio (EBITDA to interest expense, as defined therein) of at least 1.50 to 1.00 or (ii) liquidity (as defined therein) of an amount not less than our consolidated interest incurred during the trailing 12 months. We were in compliance with all Credit Facility covenants as of June 30, 2018.March 31, 2019. Our actual financial covenant calculations as of June 30, 2018March 31, 2019 are reflected in the table below.
Financial Covenant (dollars in thousands):Covenant Requirement Actual
Minimum Tangible Net Worth> $1,137,354$1,214,870 $1,642,7821,703,641
Leverage Ratio< 60% 39%33%
Interest Coverage Ratio (1)
> 1.50 4.574.60
Minimum Liquidity (1)
> $84,113$85,852 $871,4221,038,228
Investments other than defined permitted investments< $492,835$511,092 $16,63915,661

(1)We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.
Off-Balance Sheet Arrangements
Reference is made to Notes 1, 3, 4,5 and 1516 in the accompanying Notesnotes to the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which are incorporated by reference herein. These Notes discuss our off-balance sheet arrangements with respect to land acquisition contracts and option agreements, and land development joint ventures, including the nature and amounts of financial obligations relating to these items. In addition, these Notes discuss the nature and amounts of certain types of commitments that arise in connection with the ordinary course of our land development and homebuilding operations, including commitments of land development joint ventures for which we might be obligated.
Seasonality
Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements. We typically take orders for more homes in the first half of the fiscal year than in the second half, which creates additional working capital requirements in the second and third quarters to build our inventories to satisfy seasonally higher deliveries in the second half of the year. We expect this seasonal pattern to continue over the long term.
Recently Issued Accounting Pronouncements
See Note 1 to our unaudited consolidated financial statements included in this report for discussion of recently issued accounting standards.


Item 3.Quantitative and Qualitative Disclosures About Market Risk
Our fixed rate debt is made up primarily of $1.3 billion in principal of our senior notes. Except in limited circumstances, we do not have an obligation to prepay our fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed rate borrowings until we would be required to repay such debt and access the capital markets to issue new debt. Our Credit Facility is subject to interest rate changes as the borrowing rates are based on LIBOR or Prime (see Note 56 in the accompanying notes to the unaudited consolidated financial statements included in this Form 10-Q).
Our operations are interest rate sensitive. As overall housing demand is adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of homebuyers to secure adequate financing. Higher interest rates could adversely affect our revenues, gross margins and net income and would also increase our variable rate borrowing costs. We do not enter into, or intend to enter into, derivative financial instruments for trading or speculative purposes.

Item 4.Controls and Procedures
In order to ensure that the information we must disclose in our filings with the SEC is recorded, processed, summarized and reported on a timely basis, we have developed and implemented disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, has reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this Form 10-Q (the “Evaluation Date”). Based on such evaluation, management has concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective at a reasonable assurance level in ensuring that information that is required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
During the fiscal quarter covered by this Form 10-Q, there has not been any change in our internal control over financial reporting that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION
Item 1.Legal Proceedings
We are involved in various routine legal and regulatory proceedings, including, without limitation, warranty claims and litigation and arbitration proceedings alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. WeIn addition to our warranty reserve, we have approximately $401,000$509,000 of total reserves not related to non-warrantywarranty or construction defect matters. See Note 1 and Note 1516 of the accompanying unaudited consolidated financial statements for additional information related to construction defect and warranty related reserves.Withreserves. With respect to the majority of pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to litigation.
We believe there are no pending legal or warranty matters that could have a material adverse impact upon our unaudited consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.
Item 1A.Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and as discussed in Part I, Item IA. "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which could materially affect our business, financial condition or future results. The risks described below and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may eventually prove to materially adversely affect our business, financial condition and/or operating results.
Legislation related to tariffs could increase the cost to construct our homes.
Government imposed tariffs on imported building supplies such as lumber could significantly increase the cost to construct our homes. Such cost increases limit our ability to control costs, potentially reducing margins on the homes we build if we are not able to successfully offset the increased costs through higher sales prices.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
We have never declared cash dividends, nor do we intend to declare cash dividends in the foreseeable future. We plan to retain our cash to finance the continuing development of the business. Future cash dividends, if any, will depend upon financial condition, results of operations, capital requirements, statutory requirements, compliance with certain restrictive debt covenants, as well as other factors considered relevant by our Board of Directors.
As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "IssuerIssuer Purchases of Equity Securities", on July 25, 2018, we announced thatSecurities
On February 13, 2019, the Board of Directors approvedauthorized a new stock repurchase program, authorizing the expenditure of up to $100.0 million to repurchase shares of our common stock. This new program replacesfollows the previously authorizedcompletion of the $100.0 million stock repurchase program that wasapproved in placeJuly 2018 and completed in the fourth quarter of 2018. There is no stated expiration for this program. The repurchases of the Company's shares may be made in the open market, in privately negotiated transactions, or otherwise. The timing and amount of repurchases, if any, will be determined by the Company's management at its discretion and be based on a variety of factors such as the market price of June 30, 2018 (originally adopted in February 2006) under whichthe Company's common stock, corporate and contractual requirements, prevailing market and economic conditions and legal requirements. The share repurchase program may be modified, suspended or discontinued at any time. As of March 31, 2019, there was $130.2$91.0 million available under this program to repurchase shares atshares.
A summary of the time it was replaced withCompany's repurchase activity for the new program described above.three months ended March 31, 2019 is as follows:
PeriodTotal Number of Shares Purchased Average price paid per share Total number of shares purchased as part of publicly announced plans or programs Approximate dollar value of shares that may yet be purchased under the plans or programs
January 1 - January 31, 2019—
 $—
 —
 $—
February 1 - February 28, 2019—
 $—
 —
 $—
March 1 - March 31, 2019208,840
 $42.89
 208,840
 $91,043,337
Total208,840
   208,840
  


Item 6.Exhibits


Exhibit
Number
DescriptionPage or Method of Filing
3.1Restated Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Exhibit 3 of Form 8-K dated June 20, 2002
   
3.1.1Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Exhibit 3.1 of Form 8-K dated September 15, 2004
   
3.1.2Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix A of the Proxy Statement for the Registrant's 2006 Annual Meeting of Stockholders
   
3.1.3Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix B of Proxy Statement for the Registrant's 2008 Annual Meeting of Stockholders
   
3.1.4Amendment to Articles of Incorporation of Meritage Homes CorporationIncorporated by reference to Appendix A of the Definitive Proxy Statement filed with the Securities and Exchange Commission on January 9, 2009
   
3.2Amended and Restated Bylaws of Meritage Homes CorporationIncorporated by reference to Exhibit 3.1 of Form 8-K dated May 10, 2017
   
10.1*Meritage Homes 2018 Stock Incentive PlanIncorporated by reference to Appendix A of the Proxy Statement for the Registrant's 2018 Annual Meeting of Stockholders
10.2Fourth Amendment to Amended and Restated Credit AgreementIncorporated by reference to Exhibit 10.1 of Form 8-K filed on June 29, 2018
31.1Rule 13a-14(a)/15d-14(a) Certification of Steven J. Hilton, Chief Executive OfficerFiled herewith
   
31.2Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial OfficerFiled herewith
   
32.1Section 1350 Certification of Chief Executive Officer and Chief Financial OfficerFurnished herewith
   
101.0The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018March 31, 2019 were formatted in XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.
* Indicates a management contract or compensation plan



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    
 
MERITAGE HOMES CORPORATION,
a Maryland Corporation
 
  
By:/s/ HILLA SFERRUZZA  
 
Hilla Sferruzza
Chief Financial Officer and Chief Accounting Officer
(Duly Authorized Officer and Principal Financial Officer)
 
    
Date:July 30, 2018April 29, 2019  

INDEX OF EXHIBITS         
    
3.1 
Restated Articles of Incorporation of Meritage Homes Corporation
   
3.1.1 
Amendment to Articles of Incorporation of Meritage Homes Corporation
   
3.1.2 
Amendment to Articles of Incorporation of Meritage Homes Corporation
   
3.1.3 
Amendment to Articles of Incorporation of Meritage Homes Corporation
   
3.1.4 
Amendment to Articles of Incorporation of Meritage Homes Corporation
   
3.2 
Amended and Restated Bylaws of Meritage Homes Corporation
   
10.1
Meritage Homes 2018 Stock Incentive Plan
10.2
Fourth Amendment to Amended and Restated Credit Agreement
31.1 
Rule 13a-14(a)/15d-14(a) Certification of Steven J. Hilton, Chief Executive Officer
   
31.2 
Rule 13a-14(a)/15d-14(a) Certification of Hilla Sferruzza, Chief Financial Officer
   
32.1 
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
   
101.0 The following financial statements from the Meritage Homes Corporation Quarterly Report on Form 10-Q for the three and six months ended June 30, 2018March 31, 2019 were formatted in XBRL (Extensible Business Reporting Language); (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Income Statements, (iii) Unaudited Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Consolidated Financial Statements.


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