Good morning and welcome to the Meritage Homes First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Mr. Brent Anderson, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Rocco. Good morning and welcome to our analyst call to discuss our first quarter results. We issued a press release before the market opened today and if you need a copy of the release or the slides that accompany this webcast, you can find them on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom left of our homepage. On Slide 2, I will review the customary cautionary language. Our statements during this call and the accompanying materials contain projections and forward-looking statements, which are the current opinions of management and are subject to change. We undertake no obligation to update these projections or opinions. Our actual results may also be materially different than our expectations due to various risk factors, which are listed and explained in our press release and our most recent filings with the Securities and Exchange Commission, specifically our 2014 Annual Report on Form 10-K. Today’s presentation also includes certain non-GAAP financial measures as defined by the SEC, but we have provided a reconciliation of those non-GAAP measures to the closest GAAP figures within our earnings press release. Turning to Slide 3. With me today to discuss our results are Steve Hilton, Chairman and CEO; Larry Seay, our Executive Vice President and CFO; and Phillippe Lord, our new Executive Vice President and Chief Operations Officer of Meritage Homes. We expect this call to run about an hour and a replay will be available on our website approximately 1 hour after we conclude the call. It will remain active for 30 days. I will now turn it over to Mr. Hilton to review our first quarter results. Steve?

Thank you, Brent. I would like to welcome everyone listening to this call and thank you for your interest in Meritage Homes. The spring selling season kicked off earlier than usual this year as we indicated when we announced our January orders growth of 48%, which certainly got 2015 off to a good start. Our continuing strong growth this quarter reflects improvement in the overall homebuilding market as well as the results of our strategic decisions to expand the promising new markets over the last few years and grow our community count, which allowed us to capture additional sales as the economic recovery continued and demands for homes increased. As our new markets mature, we believe they will not only contribute more sales and top line growth, but will also improve their margins and provide us additional overhead leverage at a consolidated level to drive future earnings growth. Turning to Slide 4. Our first quarter 2015 highlights included strong top line growth, with a 27% increase in home closing revenue over the first quarter of 2014, including a 20% increase in home closings and a 6% increase in average sales price. Even stronger order growth with a 30% increase in units and a 41% increase in total value and ending backlog value that was 33% higher than it was a year ago. Our top line growth was led by the East region, which had a 64% increase in home closing revenue over the first quarter of 2014. As a result, the East region expanded 31% of our total 2015 first quarter home closing revenue, up from 24% last year of total home closing revenue, while our West region dropped to 40% of our first quarter 2015 home closing revenue from 47% in the first quarter of 2014 as it grew at a slower pace – slower 8% pace. Net earnings for the quarter were down 35% year-over-year primarily due to anticipated declines in our gross margin overhead leverage, which Larry will review in more detail. Despite those declines and a strong order growth and expected improvement in our margins and leverage give us more confidence in achieving our projections for the year. But first, I’d like to introduce Phillippe Lord, our new Chief Operating Officer to review our order trends. We recently promoted Phillippe from the position of Region President responsible for our divisions in California, Arizona and Colorado. Prior to that, he established our strategic operations group at Meritage which is responsible for market research, housing analytics and the land acquisition underwriting process, he was key to our success coming out of the downturn. Many of you have met him during our Analyst Days or conference calls – conferences. And I will turn it over to Phillippe. Phillippe?

Thank you, Steve. I am honored to join you here today. Meritage is very well positioned and I am optimistic about our opportunities for continued growth and improved profitability. I look forward to meeting many of you in the future. Order trends, Slide 5. Our consolidated orders for the first quarter of 2015 increased by 30% over 2014, this was driven by the combination of 21% more actively selling communities and a higher number of average sales per community than last year. Our average sales prices also continued their upward trend, though at a more moderate pace. Our ASP on orders reached a company all-time high of 396,000 in the first quarter of 2015, 9% higher than a year ago, which pushed our total order value up by 41% compared to the first quarter of 2014. The order trends were positive in all of our markets. In the West, sales picked up considerably in Phoenix this quarter, which was a welcomed improvement as Phoenix was one of our most challenged markets last year. Arizona orders were up 26% in the first quarter of 2015 compared to 2014. It appears that buyers have recalibrated their expectations, incentives have stabilized and buyers have more confidence in the market resulting in the start of a stronger spring selling season. California was once again our strongest market with 13.8 average sales per community in the first quarter of 2015 compared to an average of 12.2 last year, well above our company average of 8.6 orders per community in the first quarter this year. California’s orders grew 31% over the first quarter of 2014. Most of the improvement has been driven by our communities up north, where we continued to position ourselves closer to the Bay Area. Two of our South Bay communities close to…

Thanks Phillippe. Turning to Slide 6, I will provide some additional details regarding our home closing margins first. Our first quarter 2015 home closing gross margin was 18.5% compared with 22.8% in the first quarter of 2014. We expected most of that decline due to the higher land prices in the last couple of years that we have experienced, that are bringing margins back in line with our underwriting targets as they work their way through the income statement. Some of the decline was also expected due to less appreciation in home prices during the latter half of 2014 than we experienced in 2013, which had driven our margins well above our target levels. We have discussed both of these trends many times in the last year. In addition to those, a higher percentage of our closings came from the East region, where our margins are still quite a bit lower than the West, so the shift in our mix of revenue further reduced our home closing margins. The shift in the first quarter closing revenue from our more mature divisions in the West to our newer divisions in the East is evident in the table on Slide 6. Two things are clear here. West region margins are quite a bit higher than the East region. This is not only true due to the regional differences, but also reflects the fact that many of our markets in the East are still relatively new and getting their operations up to speed. It can take quite a while to get your operations dialed in when you are in industry with a long lead cycle such as homebuilding. There are extra selling and marketing costs associated with setting up new divisions and for re-branding, retraining and immigrating systems over the first couple of…

Thank you, Larry. In summary, we were pleased with our operating results for the first quarter of 2015 and are more confident in our projections for the year. Our orders, closings and backlog all showed positive trends in units, ASPs and dollar value. Our legacy markets are performing well and trends are improving with order growth being boosted by our new markets. And as our newer divisions become more established, we expect our margins to improve and provide greater overhead leverage on a consolidated basis. We expect to end the year with approximately 250 to 260 actively selling communities. I applaud our team for their hard work to secure and develop new communities, get them opened quickly and help many more people realize their dream of homeownership. With the benefits of a healthy backlog value that is 33% higher than it was a year ago, 21% more actively selling communities and higher demand for homes than we had at this time last year, we are expecting strong growth in 2015 orders and closings. Seasonally higher orders in the first half and higher closes in the third and fourth quarters, which should improve our overhead leverage. We are currently projecting a revenue growth of 25% to 30% for the full year, a gross margin of approximately 20%, and earnings of approximately $3.75 to $4 per diluted share for the full year with the benefit of better overhead leverage coming in the back half of the year. We expect second quarter diluted earnings per share of approximately $0.64 to $0.68 per share and that our second half results should significantly outperform 2014. Thank you for your support and time today. We will now open it up for questions. The operator will remind you of the instructions. Operator?

Thank you, sir. [Operator Instructions] Our first question comes from Ivy Zelman of Zelman & Associates. Please go ahead.

Hey, good morning guys. It’s actually Alan on for Ivy. And first off, congratulations to Phillippe on the well deserved promotion.

Thank you.

First question, just on the guidance, I think that obviously the full year guidance is certainly solid relative to expectations, but perhaps maybe some of the concern or skepticism is just on how much of that is back-end loaded. And I guess if we look at your backlog conversion, it’s running, call it, 60% a quarter, it’s really based on at least the way I am thinking about it on homes that are not yet in backlog, thinking about the margin improvement you expect to see really in the third and fourth quarters. So, I was hoping you could give us a little bit more color granularity on exactly what the drivers are to get the margin up a couple of 100 basis points through the year? I know the purchase accounting dissipates, I know the expectation for the East margins to improve, but do you see something specific either on homes and backlog on the margins there that are significantly greater than what you delivered this quarter or just a feedback from the field as far as pricing power that gets you comfortable with that type of trajectory through the year?

Well, Alan, it’s a whole combination of things. Number one, we feel very bullish about the business right now. We have strong demand in many of our markets. Some of our markets in the West were starting to have more pricing power, particularly in California and Colorado. Although we don’t have pricing power yet in Phoenix, we have volume here and we think pricing power is going to return in the back half of the year and that will help us close some homes, that will impact the margin. Our business in Texas continues to be strong. Certainly, we are keeping our eye on Houston, but we had our best month ever in San Antonio. Volume is getting stronger there. The business in Dallas is pretty robust. We have lot of new communities opened up there. We are excited about what’s happening in the south. We think we are going to grow our margins there, later in the year for what – as Larry articulated. And we mentioned that some of the purchase accounting is going to go away from the Legendary acquisition. We think the extra volume will allow us to leverage our overhead, particularly the construction overhead, which is in the gross margin line. So we feel pretty confident that we can deliver on our statement that we are going to have around – approximately 20% gross margin. So and just – we are just not wavering from that.

I appreciate that. And I guess just potentially trying to get a little bit more quantification, if you look at your 230 communities, you have got open for sale right now, what percentage of those would you say you have raised prices since the beginning of the year and if you can get – I mean give us some type of average of what that base price increase would look like?

Boy, it’ hard to tell and I don’t really think we have that number precisely to give you. Larry, I mean do you agree with that?

Yes. I don’t have that number, but we are seeing improved pricing in particularly some of the stronger markets as Steve said. But I don’t have the specific number that we increased prices or what percent the price increase was.

Okay, thanks a lot. Good luck.

Thanks.

Our next question comes from Stephen Kim of Barclays. Please go ahead.

Yes. Thanks guys. Yes. I wanted to also sort of follow up a little bit on that gross margin guidance about 20%, just wanted to make sure I understood how you are thinking about that on a quarter-by-quarter basis, so in particular are you talking about – are you sort of basing that specifically around what you are seeing over the next couple of quarters or really are you talking about – you think you are going to be in an exit rate of like 20% plus as you end the year?

Well, we are going to have to be above 20% in the back half of the year to make up the below 20% we are at now and we will be at in the second quarter. So clearly, to make the math work, we are going to have to get above that. But that was the same that we saw last year. Our gross margins were higher, in the last couple of quarters than they were in the earlier quarters, if I am correct. But we are looking at our backlog and we are looking at the gross margins in our backlog. And then we are looking at the pricing power that we have in homes that we are selling today versus homes that we sold a quarter or two ago. And it’s the mixture of both of those that gives us the confidence that we can hit the 20% number.

So I guess, if you are looking at it based around pricing power you are seeing in the market today and so therefore for homes that you expect to be selling over the course of the next couple of quarters, if we could – if I can just shift to that slide which you presented about the East margins versus the West margins, you talked about the fact that the West margins are higher than the East margins, but if I remember looking at that slide, actually that compression – there has been a fair amount of compression there. And in fact, I am wondering the West margins at this point aren’t all that much higher than the East margins, so I am wondering like are you talking specifically about improvement in pricing in the Phoenix market and California and Colorado, which you alluded to, but particularly the Phoenix market going forward into your guidance for 20% or is it mostly driven from increased volume in the East?

Well, it’s both, I mean as you know we had real pressure on pricing from the second half of ‘13, all the way through ‘14 in inland California and in Arizona. And that pressure is dissipating. We had strong order growth in the first quarter in both of those areas. And we believe, as we get later into the year, we are going to be able to start to gradually raise prices in those markets. And so the combination of the volume, the price increases, the leveraging and the construction overhead, again some of the new markets in the East are also giving us better leverage. We are getting better pricing power. We are getting better material cost. I mean, we are getting better labor cost as we grow and synchronize our operations, so all of that leads us to believe that we are going to be able to deliver on this 20% gross margin.

I think you need to realize that the closings in the first quarter came from the softer back half of ‘14 where really all of our markets were being impacted by softer demand. Now, all of our markets are being impacted by positive demand. And particularly in the West, last year we had really, really strong kind of off-the-charts margins which made – particularly in Northern California, which made the West higher. Northern California and California are still good but not as good. But it’s still benefiting from the improved market. So some of the West we expect to increase, particularly in Northern California and Colorado, a little bit in Phoenix, but not as much improvement in Phoenix in margins. But the combination of that is going to expand the West margins. We have already talked a lot about the East margins and why that’s going to expand. And Central we expect that to stay fairly flat, it probably have some improvement but not as much, because it wasn’t as impacted as much by the slower 2014.

Got it. Okay, that really helps to clarify. And I guess what I am hearing in there is that no, there is no anticipated mix shift, in case the entry level buyer starts to come back stronger at the end of the year, right. I mean, you are not assuming that in your numbers either, right?

No.

Got it. Okay, great. Thanks a lot guys.

Our next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Thanks. Good morning, everyone. The first question I had was on the East margin that you highlighted in terms of mix shift and some of the impact on the quarter. And you also kind of noted that in that region in particular you have newer areas that you are operating in and as those come online and that region grows and gets onto scale, I wanted to know if you have a sense of – as you look at your plans over the next couple of years, when do you think that, that East margin can kind of come up to company average as you would expect the build out to be more in a fuller state?

It’s hard – I will let Larry jump in here also, but it’s hard to pinpoint exactly the date and time when that will happen. We are at different stages in different divisions. Some divisions were further along like Charlotte. In Raleigh, we have been there a little bit longer, but we have newer divisions. Like Nashville, we are bringing on a lot of new communities. We are certainly pretty young and small in Atlanta. We are bigger in Greenville, but we have – we are going to be bringing more of the Meritage systems and processes there that we think will help. So it’s – and Tampa as well is the market that we need to improve our margins there. So I would say over the next couple of years, 18 months to 24 months margins will be improving, gradually, hopefully every quarter.

Alright, okay.

Yes, I agree to what Steve said. I guess, I would also point out that for the Legendary acquisition, we just moved into a new office there. We are in the middle of the computer conversion for Atlanta and Greenville. And some of that stuff does distract from operations. We are going to get that done over the next couple or three months that conversion and get people focused on operations. But some of that stuff does have a little bit of a drag as it’s not only the cost, but also the distraction. But the other thing we mentioned is that we did sell some of the – some greater percentage of specs in Tampa. And those specs – we had overbuilt specs in Tampa so we have cleared out those specs and some of those specs were sold at a little lower price. So that was another kind of non-continuing drag in the first quarter that will go away and help the margins bounce back in the East.

What do you think that, that had specifically, that particular issue in specs in Tampa on the margin and overall Larry, I think you have a sense?

I couldn’t give you a basis point impact, but it did have a little bit of a drag too. We mentioned it in our script. But I don’t have a specific basis point impact.

Right. I guess just last or second question, last question, you kind of always give great regional color. And I am sorry if you hit on this earlier, but from a pricing and incentive standpoint, just curious, if through the first three months and perhaps even into April are there any regions that you wanted to highlight in terms of pricing power maybe a little better than expected or continuing to – or you are rising at a solid pace that would kind of in some ways, perhaps drives your second half confidence or any areas from a market, from a pricing standpoint that are maybe a little softer than expected?

Yes. I think I went through that in pretty good strong detail with Alan on the first call, but just to reiterate again, we have strong pricing power right now in Northern California certainly the inland communities in Southern California, but we don’t have that many of them. Denver pricing power is good, although there is a lot of cost pressure there. Dallas, we have several new communities opening in Dallas, strong pricing power there, to a lesser degree, Austin and San Antonio, although volumes are picking up there. And then some of the markets in the South, the pricing power is pretty good, some of our communities in Charlotte we have been raising prices.

And Orlando too is good.

And a limited way in Orlando as well. So, certainly, we don’t have the pricing power that we had in ‘04/05, but we are starting to see on a regional basis a little bit of pricing power.

Great. Appreciate it. Thanks for going over that again. Thank you.

Our next question comes from Stephen East of Evercore ISI. Please go ahead.

Thank you. Good morning guys. Steve, if I just – if we step back a little bit and look more at a macro type level, your capital allocation etcetera just a few things, could you talk about what type of land spend you think is going on this year? And also you mentioned two-third zone, one-third options, are you purposely trying to option more or utilize land banking more to look more like you did say pre-bust versus post-bust? And then also on the M&A side, you all have historically done a lot, what’s the market look like, what’s your appetite there? And with your net debt at 43% or so, you are comfortable with that? Would you – I mean your stocks at pretty high level, would you put some equity out there to reduce your debt? Just sort of the whole ball of wax, if you will.

Okay. Larry, correct me if I am wrong here, but I think our budgeted land spend this year is probably between $800 million, $900 million and that’s including land banking. So, to the extent that – or maybe it’s not including land banking. Larry, what’s the number?

No, no, it’s about $900 million, including land banking. We expect to land bank about $200 million in rough numbers and that’s land banking. There are other options we get from sell-or-carry options, which is what pushes that percentage up to kind of that third percentage, including those.

Sure. Would you like to push that higher?

I think we would like to push that a little higher, because it makes our asset turns better, our ROA better. On the other hand, there is limited availability of land banking. So, we are doing what we can, but we aren’t expecting that percentage to go up a bunch. We think it will be about the same.

So, in respect to your question about equity and debt, we have no equity offerings planned. I just don’t see that in the near-term. We are very comfortable with our debt to capital ratio. If anything I would like it to be a point or two lower, but we are comfortable with exactly where it is right here. As far as M&A, our eyes are always open and we are certainly looking at opportunities. But clearly, we understand that it’s important for us to get these smaller markets that we have moved into either through organic growth or M&A to get them up to scale. So, we can leverage our overhead. We are not happy with our overhead percentage, where it is today. We would like to see it a point lower. And the way we are going to get there is by getting these smaller markets bigger. So, M&A, unless we did something on a large scale, it doesn’t really help us achieve that goal. So, it’s not likely we will be doing any M&A in the real short-term. But again, our eyes are always open for transformational opportunities that are strategic and make a difference. So, I think I covered everything you asked on land spend, land banking, M&A and capital.

Hey, one clarification, just to give you a little bit more – little more clarity on SG&A is we were at that kind of mid ‘13, a little higher than that this quarter for SG&A and we think we will probably bring that down to around somewhere between 11.5 to the high 11s for the average for the full year and that’s all part of the equation that gets us to our guidance forecast.

Okay, thank you. That’s helpful. And then the other thing Steve just asking the pricing question a little bit differently that’s been asked, are you all comfortable now where your absorption paces are and to the point where it’s a pretty balanced price versus pace or would you still like that to get higher and thus you would sacrifice a little bit of price appreciation in the markets?

I certainly like to see our pace over all of our markets on average to be higher, but in no way do we have a strategy here that we are going to sacrifice margin for volume. We are going to take what the market will give us at a – as far as price at a reasonable pace.

Okay.

And I think a reasonable pace in most communities is three a month. So, if we can get three sales a month and we can raise prices we are pretty happy.

Got it. Okay, alright. If I can sneak one other quick one in, on your community growth that you talked about, is Texas – are you restocking Texas or how are you looking at that market right now?

Well, we have got a green light on for land acquisitions in Dallas, Austin and San Antonio. We don’t see any oil impact in those markets. We see a lot of relos, lot of national companies relocating to Dallas, Austin to a lesser degree. And we are being very cautious and limited in land acquisition in Houston, pretty much as keeping our ongoing communities running and restocked, we have where it’s a lot of master plan communities there, where we buy 20 or 30 lots at a time from the developer, and to the extent we are selling homes we are just replenishing those, but we are not going out to do any larger land development deals in Houston for sure.

Yes. The bouncing back of the community count in Texas is going to occur from already controlled and existing communities coming online for sales. So, we don’t need to spend a lot of money to get our community count back up to where it was a year ago in that kind of 70ish plus range.

These are communities – these are land deals that we purchased a year ago or even longer that will be coming online.

Alright, thanks a lot.

Thanks.

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

Thanks. Yes, I also wanted to ask about the community count and appreciate all the guidance and the color. The – you are talking about some pretty robust growth this year close to 20%, that’s a pretty significant acceleration from last year, where I think absent the Legendary acquisition, it would have been pretty modest growth. So, what’s the driver of that? Were there some deferrals from last year? So, what – is it just things moving through the pipeline? What’s the main driver behind the growth?

I mean, it’s just – it’s land that we have been – purchased over the last couple of years that is ripening and moving to the pipeline and stores are getting ready to open. So, there is nothing unusual in there. It should track pretty closely with our land spend.

Got it. I mean, I guess one of the things I was thinking about in asking that question was if we go back to a year ago in ‘14, you also had fairly aggressive goals for community count growth last year, but at the end of the year, you looked back and the growth was mainly through Legendary. So, what were the factors, I guess, if you compare the aggressive plans last year time ago to now and yet what might influence the outcome for this year?

I mean, I am not really sure how to answer your question. I mean, the only thing that could change this if we get held up by cities for permits or we have run into some entitlement issues, but for the most part, everything that we are going to be opening between now and the end of the year is already well through the process. And the only thing that could really impact it is construction delays or weather or things like that. So, again, I feel pretty confident that we can deliver on that 250 to 260 ending community count for the year based upon what we – what’s in our pipeline and what's under development right now today.

Got it.

I guess, I would also add that to some extent we anticipated that what Legendary happening and did cut back on some of the growth, because we were spending the money there versus some place else. And the percentage increase is only 9% to 14% from the beginning of the year to the end of the year, depending I am going to use 250 or 260. So I wouldn’t call that extremely aggressive. I think that’s kind of normal growth.

Got it. And you also – you addressed Texas and on what Steve is just asking, in the balance of the country, where is most of the growth going to come, if you could just give us some color regionally?

Well, we are at 61 communities right now in Texas. We think we are going to be in this mid-70s there. So that’s a big chunk of it. Probably not going to be growing community count in Arizona, we will probably grow it a little bit in California, but a lot of it will probably come in the South, in Tennessee, Carolinas and Georgia.

Got it, great. Thank you.

Our next question comes from Susan Maklari of UBS. Please go ahead.

Good morning.

Good morning.

Building a little bit on Nishu’s question there, it seems like your order trends in Arizona have definitely improved as we sort of moved through the last few months, can you give us some color on what you are seeing there and how we should think about the opportunity there. I know Steve, you just said that you don’t expect to open a lot of communities there, but can you just give us some on the ground sales perhaps?

I am going to toss that over to Phillippe and let he answer your first question. Phillippe.

Thanks. Yes, we have seen a real stabilization in the market. It started occurring late Q4. Incentives have really stabilized. The resale market has stabilized from a supply perception. And so really, in January, we saw a much stronger traffic in most of our stores at all price points. And that traffic turned into stronger urgency and conversions through the first quarter. And so we are feeling very good that the market has stabilized. Steve mentioned earlier that we are not seeing a lot of pricing power, but the discounts being stabilized is a big deal. It helped to sort of improve our margins when discounts aren’t continuing to be moving around in the market and they are more stable. So we are seeing margin stabilize in Phoenix through Q1 and we expect that to hold through going forward and potentially turning into pricing power.

Okay, that’s perfect. And then taking sort of a broader approach, you have recently announced that you are doing some Net Zero homes and energy efficiency has been a big part of your story. Given the decline that we have seen in energy prices, have you seen any change in consumers’ reaction to maybe some of the energy-efficient initiatives or have you changed the way you are marketing them or talking to consumers about them at all?

No. I mean the decline in energy prices haven’t really had much impact on utility cost, particularly electricity, maybe some impact on gas. But power companies out in the West aren’t lowering their rates. That’s for sure. So I don’t think there is a connection between energy prices and new home energy efficiency. So we continue to sell our extremely energy efficient homes as a differentiator between our self and the resale market and other new home competitors. And it’s a strength of ours particularly when we are trying to close the sale. So we have got some things we are working on in that area to even bolster our strategy, but nothing new to announce today.

Okay, great. Thank you.

Thank you.

Our next question comes from Jade Rahmani of KBW. Please go ahead.

Hi, yes. This is actually Ryan Tomasello on for Jade. Thanks for taking my question. Just digging a bit more into the land market, just wondering if you could provide a bit more color on where you are seeing most attractive opportunities, are you seeing better margins on the larger deals that require more development and how is the overall deal flow there currently?

Not necessarily. I mean we are trying to stay away from the real large land development opportunities, where we have multiple product lines. Those definitely can carry more risk. Certainly, we do have a few, but we are focused in California on more infill opportunities. We are spending more money on building our team that can do more infill attached communities closer to the water, closer to the Bay or closer to Orange County, where we have some strong opportunities, we are pursuing certainly in Colorado, in many of the Texas markets outside of Houston and mostly in the south. So, land is fully priced in most places. There is no bargains out there, but we have got some real sharp people on our land acquisition teams throughout the country and we are still finding opportunities to fuel our growth.

Great, thanks for taking my questions.

Thank you.

Our next question comes from Jay McCanless of Sterne, Agee. Please go ahead.

Good morning, guys. Larry, first question, could you talk about the sequential increase in the interest expense from 4Q to 1Q? And then relative to your guidance, how should we be thinking about that for the year?

Sure. What’s happened – that number bounced up a little bit and it’s being caused by us completing several projects that were under development. So, we have a lower percentage of under development land now sitting as finished lots versus quarter or two ago. So, that number is going to remain a little more elevated. I thought it would actually go down and stay lower and maybe approach zero. Right now, I don’t think that, that’s going to happen because of that percentage of under development versus development land. So, that’s a good story in that we have finished communities that can start selling. But it’s causing us to expense directly a little more interest than we are – than we had thought and a little bit less is being capitalized. So, I see that number staying up in kind of that range that we had this quarter probably go down a little bit through the year, but it’s not going to go to zero.

Okay. And then also on the EPS guidance for this year, does that include the one-time severance charge next quarter?

Yes, it does.

Okay. And then my last question, could you guys talk about Northern California a little bit? It seems like the markets there – the existing home markets seem to be perking up and just want to see what you guys are hearing in the neighborhood?

As Phillippe mentioned in his comments, Northern Cal was very strong. We had a couple of new communities open in the South Bay, Morgan Hill, Gilroy area. We had strong traffic, strong demand, strong pricing power. Our community – we have one community on the Central Valley. We have communities along the corridor between the East Bay and Sacramento and then we have communities either throughout Sacramento. All have had strong traffic and strong demand and probably our best market in the entire company right now. So, we are really excited about our business opportunity up there and we are going to have a great 2015 in Northern California.

Okay, thanks guys.

Thank you.

Thank you. It looks like we have time for couple of more questions. And next up, we have Mike Dahl of Credit Suisse. Please go ahead.

Hi, thanks for taking my question. Wanted to go back to some of the earlier discussion about margins and I think, Steve, you guys have been one of the more open and kind of early in terms of talking about the impact from rising land costs. And just curious with the guidance that’s now for margins to be up above 20% in the back half of the year, how are the land costs as a percentage of sales price trending? And is there anything that you are seeing differently in that on what’s coming, what’s opening over the next couple of quarters?

Well, what’s opening in the next couple of quarters will be land that we bought already and it’s been our pipeline now for probably over a year. So, today’s current land prices don’t really affect what’s going to happen this year. But certainly, land prices are higher and we will have to get higher housing prices to offset that. It varies by market. And some markets, it’s attainable, we have a green light on, we are buying land and other markets, we are certainly being more cautious. But the land market is certainly tighter than it was a year or two ago and...

Steve?

Yes. Go ahead, Larry.

If I could jump in here, a couple of things are causing that improvement, the most notable is leveraging construction overhead, which is buried in cost of sales and therefore affects margins. So, that leverage is helping us improve as we grow volumes through the year. The other thing is that we have talked about, particularly in the East, about improving some of our operational metrics and the direct construction cost. So, the other piece is some improvement, particularly in the East on construction costs and then again generally speaking, we are talking about the market being stronger than last year and we are having improved pricing power. So, we are going to be able to increase – and we have increased pricing in many of our markets this quarter and we are projecting that to be able to continue that improved pricing metric.

Got it. Okay, thank you. And as a second question just looking at the Southeast markets specifically an area of investment for you guys and also a lot of others. So, curious how you are thinking about just with some of the community count ramps and competitively a good bit of community growth from some of the others? If you look out over the next 6, 12, 18 months, are you concerned about the level of competition that’s out there in some of these markets or do you think the demand is strong enough that it shouldn’t be an issue?

I am not more overly concerned more so than any quarter before. Competition is strong, but we have great locations and we have great people and great products. So, I am not worried about that. I would like to clarify though I think I may have given the wrong perception about pricing. We don’t put any appreciation in our pro forma. So, we don’t believe we have to get price increases to hit these margin targets that we have. Certainly, again, we are looking at our backlog today and we are looking at the prices that we are at today, and going forward, that gives us comfort that we can hit these margin targets. So, I don’t want to misconstrue to anybody that we are going to have to have houses – house prices rise to make land deals work. That’s not really what I am implying.

Okay, thank you.

Thank you.

And our next question comes from Will Randow of Citi. Please go ahead.

Hey, good morning guys and thanks for fitting me in.

Good morning.

Just two quick follow-ups. On gross margins, particularly in Texas or Houston, we saw one competitor who breaks it out, their step down year-over-year for the February end quarter. Just kind of curious have you seen any pickup in incentives, I know you talked about it earlier or any step down in gross margin in those markets?

Larry, what do you think? I don’t think we have.

Yes, I agree. I don’t think we have seen that.

Okay, great. Thanks for that. And just one follow-up to the last set of questions. I remember back in 2013, a lot of the land deals – and I think you guys addressed this too we are getting frothy from HPA assumption. It sounds like that probably stepped down in the California and Arizona markets. How would you characterize that?

Well, I mean, land prices haven’t come down, but there hasn’t been as much land acquisition activity. And we certainly haven’t bought any land in Arizona for well over a year now. And I think for some land deals to get moving, housing prices will have to rise or builders there won’t accept lower margins or buy the land, but I am pretty comfortable of what we have in Arizona, we don’t need any land. We are still making a good gross margin on the land that we own for the most part. In California, we are really more focused on infill opportunities, where we have less competition from builders and we are able to get stronger pricing power. And so land is – there is still quite a bit of land that makes sense in a lot of our other markets throughout the country.

Thanks again guys and good luck on the year.

Thank you. Is that our last call, operator?

Yes, sir. This concludes the question-and-answer session. I would like to turn it back over to Mr. Hilton for any closing remarks.

Well, thank you very much for your interest and participation and we look forward to talking to you again next quarter. Have a great day.