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TMCNet:  MERITAGE HOMES CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook Industry Conditions

[February 19, 2014]

MERITAGE HOMES CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Outlook Industry Conditions

(Edgar Glimpses Via Acquire Media NewsEdge) During 2013, the overall housing market's results continued to improve from the recovery that began to accelerate in 2012. The existing pent-up demand and increased consumer confidence, coupled with excellent housing affordability based on historical metrics and decreasing inventory home levels in many markets resulted in strong financial and operational performance for the entire homebuilding sector. While individual markets continue to experience varying results as local economic and employment situations strongly influence demand, all of our markets benefited from the homebuilding recovery, particularly those markets most affected by the downturn, including California, Arizona and Florida.


We continue to focus on successfully differentiating ourselves from our competition by offering exciting and desirable new plans that successfully demonstrate the benefits of our industry-leading energy efficient homes situated in well-located communities. We also offer our buyers the ability to personalize their homes and provide a home warranty, successfully setting us apart from the competition we face with resale homes. Our positive results throughout 2013 have strengthened our financial position, with strong improvements in all of our key operating metrics.

Summary Company Results Total home closing revenue was $1.8 billion for the year ended December 31, 2013, increasing 50.6% from $1.2 billion for 2012 and 107.2% from $860.9 million in 2011. We earned net income of $124.5 million compared to $105.2 million in 2012 and a net loss of $21.1 million in 2011. Our 2013 results include $1.0 million of impairments, $3.8 million of early debt extinguishment costs and $53.2 million of taxes as our deferred tax asset valuation allowance was almost fully reversed in 2012. Our 2012 results include $2.0 million of real estate-related impairments, a $5.8 million of loss from early extinguishment of debt, an $8.7 million charge for litigation accruals related to a joint venture, and reflect a $76.3 million benefit from income taxes due to the reversal of most of our deferred tax asset valuation allowance. In 2011, results included $15.3 million of real estate-related impairments, $9.2 million of which is related to our Las Vegas operations and a $0.7 million income tax provision. See Note 2 in the accompanying consolidated financial statements for additional discussion regarding our remaining Nevada assets.

At December 31, 2013, our backlog of $686.7 million was up 43.3% from $479.3 million at December 31, 2012. Our December 31, 2011 backlog was $248.9 million.

Increased community count and higher average sales prices in 2013 are largely responsible for the increase in ending backlog over 2012. Our average sales price for homes in backlog increased to $370,600, up 13.8% from $325,600 at December 31, 2012, and up 36.3% from $272,000 at December 31, 2011 primarily due to our pricing power in many communities and mix of homes shifting to higher-priced markets and states. Our cancellation rate on sales orders as a percentage of gross sales decreased in 2013 to 12.8% down from 13.2% and 17.0%, respectively, for the years ended December 31, 2012 and 2011, reflecting a high quality backlog and greater confidence among buyers, supported by increasing prices and expectations of further home value appreciation. We believe these positive trends will result in continued positive operating results in 2014.

Company Actions and Positioning As the homebuilding market stabilizes and recovers, we remain focused on our main goals of growing our orders and revenue, generating profit and maintaining a strong balance sheet. To help meet these goals we continued to execute on the following initiatives in 2013: • Strengthening our balance sheet - completed two new senior note issuances, and extending our earliest debt maturities until 2018; • Generating additional working capital and improving liquidity - increased the capacity of our revolving credit facility and completed an equity offering in January 2014; • Eliminated our cash secured letter of credit facilities and transferred all outstanding letters of credit to be supported by our increased unsecured revolving credit facility; • Increased the percentage of controlled lots through optioned contracts in order to minimize initial cash outlays for land purchases; • Continuing to actively acquire and develop lots in markets we deem key to our success in order to maintain and grow our lot supply and active community count; increasing controlled lots by 23.3%; 27--------------------------------------------------------------------------------• Utilizing our enhanced market research to capitalize on the knowledge of our buyers' demands in each community, tailoring our pricing, product and amenities offered; • Continuing to innovate and promote the Meritage Green energy efficiency program, where every new home we construct, at a minimum, meets ENERGY STAR® standards, certified by the U.S. Environmental Protection Agency, for indoor air quality, water conservation and overall energy efficiency; • Adapting sales and marketing efforts to generate additional traffic and compete with resale homes; • Focusing our purchasing efforts to manage cost increases as homebuilding recovers and demand rises; • Growing our inventory balance while ensuring sufficient liquidity through exercising tight control over cash flows; • Striving for excellence in construction; and monitoring our customers' satisfaction as measured by survey scores and working toward improving them based on the results of the surveys.

We previously consolidated overhead functions in all of our divisions and at our corporate offices to hold down general and administrative cost burden and we continue to carefully manage such expenditures.

Additionally, we are continually evaluating opportunities for expansion into new markets that indicate positive long-term growth trends. We are looking to redeploy our capital into projects both within our geographic footprint and through entry into new markets. In connection with these efforts, in 2011 we announced our entry into the Raleigh-Durham, North Carolina and Tampa, Florida markets and our wind down of operations in the Las Vegas, Nevada market. In 2012, we announced our entry into the Charlotte, North Carolina market. In the last half of 2013, we entered the Nashville, Tennessee, market through the acquisition of a local homebuilder (See Note 1 of the accompanying consolidated financial statements for additional information).

We believe that the investments in our new communities, markets and product offerings create a differentiated strategy that has lessened the impact of the economic conditions over the past several years and has improved our operating leverage. Throughout 2013, we opened 101 new communities while closing out 71 communities, ending the year with 188 active communities. The improved community count is to a large extent the result of our land acquisition efforts to support growth in existing and new markets.

In the first and fourth quarters of 2013, we also took steps to strengthen our balance sheet and extend debt maturities through three capital transactions. In March 2013, we concurrently issued $175.0 million of 4.50% senior notes due 2018 and redeemed all of our $99.8 million senior subordinated notes due 2017, extending our earliest debt maturities to 2018. During the fourth quarter of 2013, we completed a $100 million add-on debt issuance to our existing 7.15% senior notes due 2020. In addition, we increased the capacity of our unsecured revolving credit facility to $200 million during the fourth quarter to provide additional liquidity. Finally, in the first quarter of 2014 we further strengthened our balance sheet by raising $110.5 million, net of offering costs, in a public equity offering. (See Note 5 to the accompanying consolidated financial statements for further discussion regarding our debt transactions).

Critical Accounting Policies We have established various accounting policies that govern the application of United States generally accepted accounting principles ("GAAP") in the preparation and presentation of our consolidated financial statements. Our significant accounting policies are described in Note 1 of the consolidated financial statements included in this Form 10-K. Certain of these policies involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, and revenue and costs. We are subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the preparation of our financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Changes in estimates are revised when circumstances warrant. Such changes in estimates and refinements in methodologies are reflected in our reported results of operations and, if material, the effects of changes in estimates are disclosed in the notes to our consolidated financial statements.

The judgments, assumptions and estimates we use and believe to be critical to our business are based on historical experience, knowledge of the accounts, industry practices, and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we have made, actual results may differ from these judgments and estimates and could have a material impact on the carrying values of assets and liabilities and the results of our operations.

28 --------------------------------------------------------------------------------The accounting policies that we deem most critical to us and involve the most difficult, subjective or complex judgments are as follows: Revenue Recognition We recognize revenue from a home sale when title passes to the homeowner, the homeowner's initial and continuing investment is adequate to demonstrate a commitment to pay for the home, the receivable, if any, from the homeowner is not subject to future subordination and we do not have a substantial continuing involvement with the sold home. These conditions are typically achieved when a home closes.

Revenue from land sales is recognized when a significant down payment is received, the earnings process is relatively complete, title passes and collectability of the receivable is reasonably assured. Although there is limited subjectivity in this accounting policy, we have designated revenue recognition as a critical accounting policy due to the significance of this balance in our statements of operations.

Real Estate Real estate is stated at cost unless the community or land is determined to be impaired, at which point the inventory is written down to fair value as required by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 360-10, Property, Plant and Equipment. Inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, 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 home construction begins. Home construction costs are accumulated on a per-home basis. 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) 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 the community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. Therefore, an accrual to capture such obligations is recorded in connection with the home closing and charged directly to cost of sales.

Typically, an entitled community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase and concluding with the sale, construction and closing of the homes. Actual community lives will vary based on the size of the community, the absorption rates and whether the land purchased was raw land or finished lots.

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 significantly shorter.

All of our land inventory and related real estate assets are reviewed for recoverability at least quarterly, or more frequently if impairment indicators are present, as our inventory is considered "long-lived" in accordance with GAAP. 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. Our analysis is completed at a community level with each community or land parcel evaluated individually. We pay particular attention to communities experiencing a larger-than-anticipated reduction in their absorption rates or sales prices or where gross margins are trending lower than anticipated. For those assets deemed to be impaired, the impairment to be recognized is measured as the amount by which the assets' carrying balance exceeds their fair value. The impairment of a community is allocated to each lot on a straight-line basis.

Existing and continuing communities. When projections for the remaining income expected to be earned from an existing community are no longer positive, the underlying real estate assets are not deemed fully recoverable, and further analysis is performed to determine the required impairment. The fair value of the community's assets is determined using either a discounted cash flow model for projects we intend to build out or a market-based approach for projects to be sold and the impairments are charged to cost of home closings in the period during which it is determined that the fair value is less than the assets' carrying amount. If a market-based approach is used, we determine fair value based on recent comparable sales activity in the local market, adjusted for known variances as determined by our knowledge of the region and general real estate expertise. If a discounted cash flow approach is used, we compute fair value based on a proprietary model. Our key estimates in deriving fair value under our cash flow model are (i) home selling prices in the community adjusted for current and expected sales discounts and incentives, (ii) costs related to the community - both land development and home construction - including costs spent to date and budgeted remaining costs to spend, (iii) projected sales absorption rates, reflecting any product mix change strategies implemented, or to be implemented, to stimulate the sales pace and expected cancellation rates, (iv) alternative land uses including disposition of all or a portion of the land owned and (v) our discount rate, which is currently 14-16% and varies based on our perceived risk inherent in the community's other cash flow assumptions.

These assumptions 29 --------------------------------------------------------------------------------vary widely across different communities and geographies and are largely dependent on local market conditions. Community-level factors that may impact our key estimates include: • The presence and significance of local competitors, including their offered product type and competitive actions; • Economic and related demographic conditions for the population of the surrounding areas; • Desirability of the particular community, including unique amenities or other favorable or unfavorable attributes; and • Existing home inventory supplies, including foreclosures and short sales.

These local circumstances may significantly impact our assumptions and the resulting computation of fair value, and are, therefore, closely evaluated by our division personnel in their creation of the discounted cash flow models. The models are also evaluated by regional and corporate personnel for consistency and integration, as decisions that affect pricing or absorption at one community may have resulting consequences for neighboring communities. We typically do not project market improvements in our discounted cash flow models, but may do so in limited circumstances in the latter years of a long-lived community.

Mothball communities. In certain cases, we may elect to stop development (mothball) of an existing community if we believe the economic performance of the community would be maximized by deferring development for a period of time to allow market conditions to improve. When a community is initially placed into mothball status, it is management's belief that the community is affected by local market conditions that are expected to improve within the next 1-5 years.

Therefore, a temporary postponement of construction and development work is expected to yield better overall future returns. The decision may be based on financial and/or operational metrics. If we decide to mothball a community, we will impair it to its fair value as discussed above and then cease future development activity until such a time when management believes that market conditions have improved and economic performance will be maximized. No interest or other costs are capitalized to communities that are designated as mothballed.

In addition to our quarterly impairment analysis, which is conducted to determine if any current impairments exist, we also conduct a thorough quarterly review of our mothballed communities to determine if they are at risk of future impairment. The financial and operational status and expectations of these communities are analyzed as well as any unique attributes that could be viewed as indicators for future impairments. Adjustments are made accordingly and incremental impairments, if any, are recorded at each re-evaluation. Based on the facts and circumstances available as of December 31, 2013, we do not believe that any of our underperforming or mothballed communities will incur material impairments in the future. Changes in market and/or economic conditions could materially impact the conclusions of this analysis, and there can be no assurances that future impairments will not occur.

Inventory assessments on inactive assets. For our mothballed communities as well as our land held for future development, our inventory assessments typically include highly subjective estimates for future performance, including the timing of development, the product to be offered, sales rates and selling prices of the product when the community is anticipated to open for sales, and the projected costs to develop and construct the community. We evaluate various factors to develop our forecasts, including the availability of and demand for homes and finished lots within the marketplace, historical, current and future sales trends, and third-party data, if available. Based on these factors, we reach conclusions for future performance based on our judgment.

Option deposits and pre-acquisition costs: We also evaluate assets associated with future communities for impairments on a quarterly basis. Using similar techniques described in the existing and continuing communities section above, we determine if the income to be generated by our future communities is acceptable to us. If the projections indicate that a community is still meeting our internal investment guidelines and is generating a profit, those assets are determined to be fully recoverable and no impairments are required. In cases where we decide to abandon the project, we will fully impair all assets related to such project and will expense and accrue any additional costs that we are contractually obligated to incur. In certain circumstances, we may also elect to continue with a project because it is expected to generate positive future cash flows, even though it may not be generating an accounting profit, or because of other strategic factors. In such cases, we will impair our pre-acquisition costs and deposits, as necessary, to record an impairment to bring the book value to fair value.

Due to the complexity and subjectivity of these fair value computations, as well as the significance of associated impairments to our financial statements in recent years, we have concluded that the valuation of our real-estate and associated assets is a critical accounting policy.

30 -------------------------------------------------------------------------------- During 2013, we recorded $1.0 million of such impairment charges related to our home and land inventories and corresponding deposits. Refer to Notes 2 and 6 of these consolidated financial statements in this Annual Report on Form 10-K for further discussion regarding these impairments and the associated remaining fair values of impaired communities.

The impairment charges we record are based on our fair value calculations, which are affected by current market conditions, assumptions and expectations, all of which are highly subjective and may differ significantly from actual results if market conditions change. Due to the volume of possible outcomes that can be generated from changes in the various model inputs for each community, we do not believe it is possible to create a sensitivity analysis that would provide meaningful information for the users of our financial statements.

Warranty Reserves We use subcontractors for nearly all aspects of home construction. Although our subcontractors are generally required to repair and replace any product or labor defects, we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs. As such, warranty reserves are recorded to cover our exposure to absorb the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims subsequent to the delivery of a home to the homeowner. Reserves are reviewed on a regular basis and, with the assistance of an actuary for the structural warranty, we determine their sufficiency based on our and industry-wide historical data and trends. These reserves are subject to variability due to uncertainties regarding structural defect claims for the products we build, the markets in which we build, claim settlement history, insurance and legal interpretations and expected recoveries, among other factors.

At December 31, 2013, our warranty reserve was $22.0 million, reflecting an accrual of 0.2% to 0.6% of a home's sale price depending on our loss history in the geographic area in which the home was built. A 10% increase in our warranty reserve rate would have increased our accrual and corresponding cost of sales by approximately $1.1 million in 2013. We recorded $1.3 million unfavorable and $2.6 million favorable adjustments to our reserve in 2013 and 2011, respectively, based on historical trends of actual claims paid and our success in recovery of expended amounts. We recorded no such adjustments in 2012. While we believe that the warranty reserve is sufficient to cover our projected costs, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Furthermore, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve.

Off-Balance Sheet Arrangements We enter into option or purchase agreements to acquire land or lots, for which we generally pay non-refundable deposits. We also analyze these agreements under ASC 810-10, Consolidation ("ASC 810-10") to determine whether we are the primary beneficiary of the variable interest entity ("VIE"). In cases where we are the primary beneficiary, even though we do not have title to such land, we would be required to consolidate these purchase/option agreements and reflect such assets and liabilities as "Real estate not owned" in our consolidated balance sheets.

The liabilities related to consolidated VIEs are generally excluded from our debt covenant calculations. See Note 3 in the accompanying financial statements for additional information related to our off-balance-sheet arrangements.

Valuation of Deferred Tax Assets We account for income taxes using the asset and liability method, which requires that deferred tax assets and liabilities be recognized based on future tax consequences of both temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the changes are enacted.

In accordance with ASC 740-10, Income Taxes, we evaluate our deferred tax assets by tax jurisdiction, including the benefit from NOLs by tax jurisdiction, to determine if a valuation allowance is required. Companies must assess, using significant judgments, 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 current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, experience with operating losses and experience of utilizing tax credit carryforwards and tax planning alternatives. Based upon a review of all available evidence, we recorded a full non-cash valuation allowance against our deferred tax assets during 2008 due to economic conditions and the weight of negative evidence at the time. During 2012 and 2013, we reversed all of the valuation allowance against our net deferred tax assets as we had determined that the weight of the positive evidence exceeds that of the negative evidence and it is more likely than not that we will be able to utilize all of our deferred tax assets and NOL carryovers.

31 -------------------------------------------------------------------------------- At December 31, 2013 and 2012, we had a valuation allowance of $0 and $8.7 million (all state related), respectively, against deferred tax assets which include the tax benefit from NOL carryovers. Our future deferred tax asset realization depends on sufficient taxable income in the carryforward periods under existing tax laws. Federal net operating loss carryforwards may be used to offset future taxable income for 20 years and expire in 2030. State net operating loss carryforwards may be used to offset future taxable income for a period of time ranging from 5 to 20 years, depending on the state, some of which expired in 2012 and 2013.

Share-Based Payments We have stock options and restricted common stock units ("nonvested shares") outstanding under our stock compensation plan. Per the terms of the plan, the exercise price of our stock options may not be less than the closing market value of our common stock on the date of grant. Such option exercises are permitted in pre-determined installments based upon a vesting schedule established at the time of grant. Each stock option expires on a date determined at the time of the grant, but not to exceed seven years from the date of the grant. Our last stock option grant was in 2009. Our restricted stock generally vests on a pro-rata basis over either three or five years.

The calculation of employee compensation expense involves estimates that require management judgments. These estimates include determining the value of each of our stock options on the date of grant using a Black-Scholes option-pricing model. The fair value of our stock options, which typically vest ratably over a five-year period, is determined at the time of grant and is expensed on a straight-line basis over the vesting life of the options. Expected volatility is based on a composite of historical volatility of our stock and implied volatility from our traded options. The risk-free rate for periods within the contractual life of the stock option award is based on the rate of a zero-coupon Treasury bond on the date the stock option is granted with a maturity equal to the expected term of the stock option. We use historical data to estimate stock option exercises and forfeitures within our valuation model. The expected life of our stock option awards is derived from historical experience under our share-based payment plans and represents the period of time that we expect our stock options to be outstanding. A 10% decrease in our forfeiture rate would have increased our stock compensation by approximately $31,000 in 2013.

32 --------------------------------------------------------------------------------Home Closing Revenue, Home Orders and Order Backlog - Segment Analysis The composition of our closings, home orders and backlog is constantly changing and is based on a dissimilar mix of communities 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): 33 -------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2013 2012 Chg $ Chg % Home Closing Revenue Total Dollars $ 1,783,389 $ 1,184,360 $ 599,029 50.6 % Homes closed 5,259 4,238 1,021 24.1 % Average sales price $ 339.1 $ 279.5 $ 59.6 21.3 % West Region Arizona Dollars $ 329,855 $ 221,100 $ 108,755 49.2 % Homes closed 1,041 825 216 26.2 % Average sales price $ 316.9 $ 268.0 $ 48.9 18.2 % California Dollars $ 427,886 $ 264,388 $ 163,498 61.8 % Homes closed 989 732 257 35.1 % Average sales price $ 432.6 $ 361.2 $ 71.4 19.8 % Colorado Dollars $ 158,793 $ 96,807 $ 61,986 64.0 % Homes closed 405 292 113 38.7 % Average sales price $ 392.1 $ 331.5 $ 60.6 18.3 % Nevada Dollars $ 8,900 $ 11,444 $ (2,544 ) (22.2 )% Homes closed 38 61 (23 ) (37.7 )% Average sales price $ 234.2 $ 187.6 $ 46.6 24.8 % West Region Totals Dollars $ 925,434 $ 593,739 $ 331,695 55.9 % Homes closed 2,473 1,910 563 29.5 % Average sales price $ 374.2 $ 310.9 $ 63.3 20.4 % Central Region - Texas Central Region Totals Dollars $ 492,777 $ 390,642 $ 102,135 26.1 % Homes closed 1,834 1,655 179 10.8 % Average sales price $ 268.7 $ 236.0 $ 32.7 13.9 % East Region Carolinas Dollars $ 93,210 $ 41,888 $ 51,322 122.5 % Homes closed 239 117 122 104.3 % Average sales price $ 390.0 $ 358.0 $ 32.0 8.9 % Florida Dollars $ 264,066 $ 158,091 $ 105,975 67.0 % Homes closed 691 556 135 24.3 % Average sales price $ 382.2 $ 284.3 $ 97.9 34.4 % Tennessee Dollars $ 7,902 N/A $ 7,902 N/M Homes closed 22 N/A 22 N/M Average sales price $ 359.2 N/A $ 359.2 N/M East Region Totals Dollars $ 365,178 $ 199,979 $ 165,199 82.6 % Homes closed 952 673 279 41.5 % Average sales price $ 383.6 $ 297.1 $ 86.5 29.1 % 34-------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2012 2011 Chg $ Chg % Home Closing Revenue Total Dollars $ 1,184,360 $ 860,884 $ 323,476 37.6 % Homes closed 4,238 3,268 970 29.7 % Average sales price $ 279.5 $ 263.4 $ 16.1 6.1 % West Region Arizona Dollars $ 221,100 $ 150,258 $ 70,842 47.1 % Homes closed 825 594 231 38.9 % Average sales price $ 268.0 $ 253.0 $ 15.0 5.9 % California Dollars $ 264,388 $ 120,319 $ 144,069 119.7 % Homes closed 732 355 377 106.2 % Average sales price $ 361.2 $ 338.9 $ 22.3 6.6 % Colorado Dollars $ 96,807 $ 83,095 $ 13,712 16.5 % Homes closed 292 258 34 13.2 % Average sales price $ 331.5 $ 322.1 $ 9.4 2.9 % Nevada Dollars $ 11,444 $ 12,593 $ (1,149 ) (9.1 )% Homes closed 61 59 2 3.4 % Average sales price $ 187.6 $ 213.4 $ (25.8 ) (12.1 )% West Region Totals Dollars $ 593,739 $ 366,265 $ 227,474 62.1 % Homes closed 1,910 1,266 644 50.9 % Average sales price $ 310.9 $ 289.3 $ 21.6 7.5 % Central Region - Texas Central Region Totals Dollars $ 390,642 $ 395,278 $ (4,636 ) (1.2 )% Homes closed 1,655 1,660 (5 ) (0.3 )% Average sales price $ 236.0 $ 238.1 $ (2.1 ) (0.9 )% East Region Carolinas Dollars $ 41,888 N/A $ 41,888 N/M Homes closed 117 N/A 117 N/M Average sales price $ 358.0 N/A $ 358.0 N/M Florida Dollars $ 158,091 $ 99,341 $ 58,750 59.1 % Homes closed 556 342 214 62.6 % Average sales price $ 284.3 $ 290.5 $ (6.2 ) (2.1 )% East Region Totals Dollars $ 199,979 $ 99,341 $ 100,638 101.3 % Homes closed 673 342 331 96.8 % Average sales price $ 297.1 $ 290.5 $ 6.6 2.3 % 35-------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2013 2012 Chg $ Chg % Home Orders (1) Total Dollars $ 1,982,303 $ 1,414,772 $ 567,531 40.1 % Homes ordered 5,615 4,795 820 17.1 % Average sales price $ 353.0 $ 295.1 $ 57.9 19.6 % West Region Arizona Dollars $ 346,278 $ 256,684 $ 89,594 34.9 % Homes ordered 1,070 916 154 16.8 % Average sales price $ 323.6 $ 280.2 $ 43.4 15.5 % California Dollars $ 410,761 $ 361,328 $ 49,433 13.7 % Homes ordered 899 965 (66 ) (6.8 )% Average sales price $ 456.9 $ 374.4 $ 82.5 22.0 % Colorado Dollars $ 201,088 $ 123,403 $ 77,685 63.0 % Homes ordered 465 364 101 27.7 % Average sales price $ 432.4 $ 339.0 $ 93.4 27.6 % Nevada Dollars $ 5,795 $ 13,473 $ (7,678 ) (57.0 )% Homes ordered 24 70 (46 ) (65.7 )% Average sales price $ 241.5 $ 192.5 $ 49.0 25.5 % West Region Totals Dollars $ 963,922 $ 754,888 $ 209,034 27.7 % Homes ordered 2,458 2,315 143 6.2 % Average sales price $ 392.2 $ 326.1 $ 66.1 20.3 % Central Region - Texas Central Region Totals Dollars $ 606,115 $ 429,465 $ 176,650 41.1 % Homes ordered 2,126 1,759 367 20.9 % Average sales price $ 285.1 $ 244.2 $ 40.9 16.7 % East Region Carolinas Dollars $ 119,087 $ 50,613 $ 68,474 135.3 % Homes ordered 298 142 156 109.9 % Average sales price $ 399.6 $ 356.4 $ 43.2 12.1 % Florida Dollars $ 282,328 $ 179,806 $ 102,522 57.0 % Homes ordered 696 579 117 20.2 % Average sales price $ 405.6 $ 310.5 $ 95.1 30.6 % Tennessee Dollars $ 10,851 N/A $ 10,851 N/M Homes ordered 37 N/A 37 N/M Average sales price $ 293.3 N/A $ 293.3 N/M East Region Totals Dollars $ 412,266 $ 230,419 $ 181,847 78.9 % Homes ordered 1,031 721 310 43.0 % Average sales price $ 399.9 $ 319.6 $ 80.3 25.1 % 36-------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2012 2011 Chg $ Chg % Home Orders (1) Total Dollars $ 1,414,772 907,922 $ 506,850 55.8 % Homes ordered 4,795 3,405 1,390 40.8 % Average sales price $ 295.1 266.6 $ 28.5 10.7 % West Region Arizona Dollars $ 256,684 163,510 $ 93,174 57.0 % Homes ordered 916 627 289 46.1 % Average sales price $ 280.2 260.8 $ 19.4 7.4 % California Dollars $ 361,328 132,672 $ 228,656 172.3 % Homes ordered 965 392 573 146.2 % Average sales price $ 374.4 338.4 $ 36.0 10.6 % Colorado Dollars $ 123,403 89,624 $ 33,779 37.7 % Homes ordered 364 276 88 31.9 % Average sales price $ 339.0 324.7 $ 14.3 4.4 % Nevada Dollars $ 13,473 11,300 $ 2,173 19.2 % Homes ordered 70 52 18 34.6 % Average sales price $ 192.5 217.3 $ (24.8 ) (11.4 )% West Region Totals Dollars $ 754,888 397,106 $ 357,782 90.1 % Homes ordered 2,315 1,347 968 71.9 % Average sales price $ 326.1 294.8 $ 31.3 10.6 % Central Region - Texas Central Region Totals Dollars $ 429,465 377,165 $ 52,300 13.9 % Homes ordered 1,759 1,593 166 10.4 % Average sales price $ 244.2 236.8 $ 7.4 3.1 % East Region Carolinas Dollars $ 50,613 8,616 $ 41,997 N/M Homes ordered 142 24 118 N/M Average sales price $ 356.4 359.0 $ (2.6 ) N/M Florida Dollars $ 179,806 125,035 $ 54,771 43.8 % Homes ordered 579 441 138 31.3 % Average sales price $ 310.5 283.5 $ 27.0 9.5 % East Region Totals Dollars $ 230,419 133,651 $ 96,768 72.4 % Homes ordered 721 465 256 55.1 % Average sales price $ 319.6 287.4 $ 32.2 11.2 % (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.

N/A - Not Applicable N/M - Not Meaningful 37 -------------------------------------------------------------------------------- December 31, 2013 2012 2011 Active Communities Total 188 158 157 West Region Arizona 40 38 37 California 22 17 20 Colorado 14 12 10 Nevada - 1 2 West Region Totals 76 68 69 Central Region - Texas Central Region Totals 70 65 67 East Region Carolinas 17 7 3 Florida 20 18 18 Tennessee 5 - - East Region Totals 42 25 21 Years Ended December 31, 2013 2012 2011 Cancellation Rates (1) Total 12.8 % 13.2 % 17.0 % West Region Arizona 12.7 % 10.3 % 9.9 % California 12.8 % 14.1 % 22.8 % Colorado 8.6 % 7.1 % 12.9 % Nevada 11.1 % 19.5 % 22.4 % West Region Totals 12.0 % 11.7 % 15.2 % Central Region - Texas Central Region Totals 14.9 % 15.0 % 18.2 % East Region Carolinas 8.3 % 9.0 % N/A Florida 11.2 % 14.3 % 19.1 % Tennessee 7.5 % N/A N/A East Region Totals 10.3 % 13.3 % 18.3 % (1) Cancellation rates are computed as the number of canceled units for the period divided by the gross sales units for the same period.

38-------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2013 2012 Chg $ Chg % Order Backlog (1) Total Dollars $ 686,672 $ 479,266 $ 207,406 43.3 % Homes in backlog 1,853 1,472 381 25.9 % Average sales price $ 370.6 $ 325.6 $ 45.0 13.8 % West Region Arizona Dollars $ 97,239 $ 80,816 $ 16,423 20.3 % Homes in backlog 278 249 29 11.6 % Average sales price $ 349.8 $ 324.6 $ 25.2 7.8 % California Dollars $ 107,463 $ 124,588 $ (17,125 ) (13.7 )% Homes in backlog 225 315 (90 ) (28.6 )% Average sales price $ 477.6 $ 395.5 $ 82.1 20.8 % Colorado Dollars $ 92,384 $ 50,089 $ 42,295 84.4 % Homes in backlog 202 142 60 42.3 % Average sales price $ 457.3 $ 352.7 $ 104.6 29.7 % Nevada Dollars $ - $ 3,105 $ (3,105 ) (100.0 )% Homes in backlog - 14 (14 ) (100.0 )% Average sales price N/A $ 221.8 N/A N/A West Region Totals Dollars $ 297,086 $ 258,598 $ 38,488 14.9 % Homes in backlog 705 720 (15 ) (2.1 )% Average sales price $ 421.4 $ 359.2 $ 62.2 17.3 % Central Region - Texas Central Region Totals Dollars $ 245,655 $ 132,317 $ 113,338 85.7 % Homes in backlog 792 500 292 58.4 % Average sales price $ 310.2 $ 264.6 $ 45.6 17.2 % East Region Carolinas Dollars $ 43,218 $ 17,341 $ 25,877 149.2 % Homes in backlog 108 49 59 120.4 % Average sales price $ 400.2 $ 353.9 $ 46.3 13.1 % Florida Dollars $ 89,272 $ 71,010 $ 18,262 25.7 % Homes in backlog 208 203 5 2.5 % Average sales price $ 429.2 $ 349.8 $ 79.4 22.7 % Tennessee Dollars $ 11,441 N/A $ 11,441 N/M Homes in backlog 40 N/A 40 N/M Average sales price $ 286.0 N/A $ 286.0 N/M East Region Totals Dollars $ 143,931 $ 88,351 $ 55,580 62.9 % Homes in backlog 356 252 104 41.3 % Average sales price $ 404.3 $ 350.6 $ 53.7 15.3 % (1) Our backlog represents net sales that have not closed.

39 -------------------------------------------------------------------------------- Years Ended December 31, Year Over Year 2012 2011 Chg $ Chg % Order Backlog (1) Total Dollars $ 479,266 $ 248,854 $ 230,412 92.6 % Homes in backlog 1,472 915 557 60.9 % Average sales price $ 325.6 $ 272.0 $ 53.6 19.7 % West Region Arizona Dollars $ 80,816 $ 45,232 $ 35,584 78.7 % Homes in backlog 249 158 91 57.6 % Average sales price $ 324.6 $ 286.3 $ 38.3 13.4 % California Dollars $ 124,588 $ 27,648 $ 96,940 350.6 % Homes in backlog 315 82 233 284.1 % Average sales price $ 395.5 $ 337.2 $ 58.3 17.3 % Colorado Dollars $ 50,089 $ 23,493 $ 26,596 113.2 % Homes in backlog 142 70 72 102.9 % Average sales price $ 352.7 $ 335.6 $ 17.1 5.1 % Nevada Dollars $ 3,105 $ 1,076 $ 2,029 188.6 % Homes in backlog 14 5 9 180.0 % Average sales price $ 221.8 $ 215.2 $ 6.6 3.1 % West Region Totals Dollars $ 258,598 $ 97,449 $ 161,149 165.4 % Homes in backlog 720 315 405 128.6 % Average sales price $ 359.2 $ 309.4 $ 49.8 16.1 % Central Region - Texas Central Region Totals Dollars $ 132,317 $ 93,494 $ 38,823 41.5 % Homes in backlog 500 396 104 26.3 % Average sales price $ 264.6 $ 236.1 $ 28.5 12.1 % East Region Carolinas Dollars $ 17,341 $ 8,616 $ 8,725 101.3 % Homes in backlog 49 24 25 104.2 % Average sales price $ 353.9 $ 359.0 $ (5.1 ) (1.4 )% Florida Dollars $ 71,010 $ 49,295 $ 21,715 44.1 % Homes in backlog 203 180 23 12.8 % Average sales price $ 349.8 $ 273.9 $ 75.9 27.7 % East Region Totals Dollars $ 88,351 $ 57,911 $ 30,440 52.6 % Homes in backlog 252 204 48 23.5 % Average sales price $ 350.6 $ 283.9 $ 66.7 23.5 % (1) Our backlog represents net sales that have not closed.

N/M - Not Meaningful 40-------------------------------------------------------------------------------- Fiscal 2013 Compared to Fiscal 2012 Companywide. Home closings revenue for the year ended December 31, 2013 increased 50.6% to $1.8 billion when compared to the prior year, due to a 1,021-unit increase in units closed and a $59,600 increase in average closing price. Home orders also increased significantly to $2.0 billion on 5,615 units in 2013 as compared to $1.4 billion on 4,795 units in 2012, reflecting similar increased average sales prices of $57,900. This improved demand helped to maintain our low cancellation rate of 12.8% in 2013 as compared to 13.2% in 2012. Additionally, the positive demand resulted in a 381-unit, or 25.9%, increase in our year-end backlog, ending 2013 with 1,853 homes as compared to 1,472 homes in 2012. Our strong operating results throughout the country reflect the improved economic state of the nation during the year, coupled with increased consumer confidence and mortgage rates that are still near historic lows. We also benefited from our successful land positions, desirable home designs and industry-leading energy efficiency innovations. Our higher average prices in 2013 reflect a shift in our mix to higher priced markets and states, including those in our newer divisions in Raleigh, Tampa and Charlotte as well as our overall ability to implement sales price increases in many communities.

Our active community count increased 19.0% to 188 communities at the end of 2013 as compared to 158 in 2012.

West. In 2013, home closings improved to 2,473 units with a value of $925.4 million, an increase of $331.7 million or 55.9%, attributable to 563 additional units closed, up 29.5% from 2012. Eight additional communities and a $66,100 increase in average order price translated to a $209.0 million increase in 2013 order value to $963.9 million. These results, coupled with the high closing volume, led to ending backlog in the Region of $297.1 million on 705 units. We believe the desirability of our community locations and the Meritage Green product offering and general mortgage affordability helped drive up demand, which positively impacted the overall performance of this Region. Improvements in the Region from all states (excluding the wind-down operations in Nevada) reflect our ability to achieve meaningful price increases.

We believe the successes in California, Arizona and Colorado are a testament to our strategy that emphasizes well-located lot and land positions, innovative product design and our energy-efficient features. While our California results are still some of the highest in the company, they declined slightly in orders and backlog units as a result of a faster sell-out of communities early in the year. We have since brought online additional California communities, ending the year with 22 or a 29.4% increase in our ending California community count over 2012. Arizona volumes increased in both closings and orders by 26.2% and 16.8%, respectively, over 2012, which already demonstrated significant growth over 2011. Arizona's pricing power contributed to a 15.5%, or $43,400 increase in average sales price per home on orders, which generated $16.4 million of additional backlog at December 31, 2013 as compared to the prior year. Colorado contributed 405 closings and $158.8 million of associated revenue, a 64.0% increase in revenue over the prior year. A corresponding 63.0%, or $77.7 million increase in order dollars, the largest state increase in the Region due to both a 101-unit order increase and a $93,400 increase in average order prices, led to the 84.4% or $42.3 million increase in Colorado's backlog at December 31, 2013 versus December 31, 2012.

Central. The Central Region, made up of our Texas markets, closed 1,834 units totaling $492.8 million in revenues, 10.8% and 26.1% increases over 2012, respectively. Texas remained our largest volume market in the country during 2013, experiencing an increase in orders to 2,126 units as compared to 1,759 units for the same period a year ago. The orders increase was primarily due to improved market conditions and strategic repositioning of key assets, as orders per average active community increased to 31.5 per community, up 18.0% during 2013 as compared to the prior year. As we closed out of older communities and opened up new communities in more desirable locations, our average order price also increased $40,900, or 16.7% in the current year as compared to 2012.

Maintaining a low 14.9% cancellation rate, the Region translated higher orders into an 85.7% or $113.3 million increase in backlog at December 31, 2013 as compared to the prior year on 292 additional backlog units. As with the rest of the country, strong general economic metrics and increased consumer confidence, coupled with our unique offerings and key locations, all contributed to the Region's 2013 performance.

East. Our East Region generated 952 closings with $365.2 million of home revenue in 2013, a 41.5% and 82.6% increase, respectively, from the same period in 2012.

The Region also experienced impressive results in orders generating an increase of $181.8 million in order dollars, due to both a 43.0% increase in units as well as an $80,300 increase in average sales price in 2013 versus 2012. This is mainly attributable to our 45.7% increase in the number of average actively selling communities, mostly due to the ramp-up of our new markets in Raleigh, Charlotte and Tampa, and to a lesser extent our August 2013 acquisition in Nashville. We believe our relatively flat average orders per community of 30.8 over 31.3 in prior year signals the stability of this market. The Florida market was the largest contributor to the Region's results, although operations in the Carolinas contributed 239 units, or $93.2 million in closings and 298 units, or $119.1 million, in order volume from 17 actively-selling communities at year end. In its four months of operations, our Tennessee acquisition contributed $7.9 million of closing revenue on 22 homes, and ended 2013 with a backlog of 40 homes from its five actively-selling communities.

41 -------------------------------------------------------------------------------- The performance in this Region is a testament to our commitment of focusing our efforts to enter highly sought-after markets with strong buyer demand. We ended 2013 with 356 units in backlog in the Region valued at $143.9 million, 41.3% and 62.9% increases over 2012, respectively. We believe that our offering of primarily larger move-up product with Meritage Green features that appeal to our buyers and the superior location of our communities have helped the overall performance of this Region.

Land Closing Revenue and Gross Profit From time to time, we may sell certain 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 $31.3 million, and $9.3 million for the years ending December 31, 2013 and 2012, respectively. We also recognized impairments related to land sales and on parcels marketed for future sale in the amount of $0.6 million, and $0.7 million for the years ending December 31, 2013, and 2012, respectively. The majority of our 2013 impairments and all of our 2012 impairments related to parcels we sold or intend to sell in connection with our wind-down of our Las Vegas operations.

Fiscal 2012 Compared to Fiscal 2011 Companywide. Home closings revenue for the year ended December 31, 2012 increased 37.6% to $1.2 billion when compared to 2011, due to a 970-unit increase in units closed and a $16,100 increase in average closing price. Home orders also increased significantly to $1.4 billion on 4,795 units in 2012 as compared to $907.9 million on 3,405 units in 2011, reflecting increased average sales prices of $28,500, or 10.7%, and our lower cancellation rate of 13.2% as compared to 17.0% in 2011. This improved demand resulted in a 557-unit, or 60.9%, increase in our year-end backlog, ending 2012 with 1,472 homes as compared to 915 homes in 2011. Additionally, the increase in the value of orders in backlog increased 92.6% due to a $53,600 or 19.7% increase in average sales price for the year ended December 31, 2012 versus the same period in 2011. Our improved closings revenues and orders results reflected our ability to capitalize on the homebuilding recovery then underway, while benefiting from our successful land positions, desirable home designs and industry-leading energy efficiency innovations. Our average price increase in 2012 was a result of a shift in our mix to higher-priced markets and states and attractive closer-in locations, as well as our overall ability to implement sales price increases in many communities. Our active community count was flat at 158 communities at the end of 2012 as compared to 157 in 2011.

West. In 2012, home closings were 1,910 units with a value of $593.7 million, an increase of $227.5 million or 62.1%, attributable to 644 additional units closed, up 50.9% from 2011. Average orders per community increased 61.0% from 21.0 in 2011 to 33.8 in 2012, which led to a 968-unit or $357.8 million increase in orders as compared to 2011, resulting in an ending backlog in the Region of 405 additional units, a 128.6% increase. These results, coupled with the $49,800 increase in average sales price, led to ending backlog in the Region valued at $258.6 million on 720 units. We believe the desirability and affordability of our community locations and the Meritage Green product offering helped drive up demand, which positively impacted the overall performance of this Region, and California in particular. Improvements in the California markets were the major drivers for the performance in this Region, although each of our markets experienced significant growth compared to the prior year.

We believe that the demand and consumer confidence in California and Arizona in 2012 were at least partially the result of significantly-improved affordability created by the decline in home prices and pent-up demand from recession-related home price decreases in these states. Average orders per active community in California for 2012 increased 126.0% over the prior year, a strong indicator that this market was experiencing a recovery that was translating to some of our most impressive comparative trends. The increases in orders per community led to faster sell-out of, and a drop in, the number of actively selling communities in California, from 20 in 2011 to 17 in 2012.

Arizona volumes increased in both closings and orders by 38.9% and 46.1%, respectively, over the same period a year ago, with recent significant pricing power as consumer confidence increased. Arizona has benefited from the shift to newer communities in highly desirable locations offering energy efficient green features in larger square footage homes, contributing to a 7.4%, or $19,400 increase in average sales price per home on orders, which aided the overall increase in order dollars and backlog to $256.7 million and $80.8 million, respectively. Colorado contributed 292 closings and $96.8 million of associated revenue, a 16.5% increase in revenue over the same period a year ago. Colorado also experienced an increase in orders during 2012, rising to $123.4 million on 364 units, a 37.7% and 31.9% respective increase over 2011, with the average sales price increasing $14,300 on orders. This directly contributed to the increase in backlog order value in Colorado at December 31, 2012 of 113.2% versus 2011, ending the year with 142 homes valued at $50.1 million. The bolstered orders and backlog in Colorado year over year were due both to an increase in the number of actively-selling communities of 12 at December 31, 2012 versus 10 at year-end 2011 and also to a 13.7% increase in orders pace.

42 -------------------------------------------------------------------------------- Nevada was relatively flat in closings, while experiencing increases in orders and backlog units in 2012 of 34.6% and 180.0%, respectively, as compared to 2011. As previously discussed, we wound down operations in Nevada in 2013.

Central. The Central Region, made up of our Texas markets, closed 1,655 units totaling $390.6 million in revenues, flat with those reported in 2011, reflecting a slower sales pace in the first half of 2012. Texas was our largest volume market in the country during 2012, experiencing an increase in orders to 1,759 units as compared to 1,593 units in 2011 as sales picked up in latter 2012. The orders increases were achieved despite a slight decrease in active communities in Texas during 2012, which was a result of a faster sell-out of communities as indicated by our 24.8% increase in average orders per community.

During 2011 and 2012, we initiated a strategic redeployment of capital to other markets that presented opportunities to generate higher average sales prices and margins. This strategy resulted in the rebalancing of assets from Texas into other markets, primarily California, Arizona, Colorado and Florida, although Texas continued to be an important contributor to our financial results, and we contracted for 32 additional communities there in 2012.

The Central Region's increase in orders of 166 units occurred later in 2012 and translated to a 104-unit increase in ending backlog of 500 versus 396 units at December 31, 2012 and 2011, respectively, aided by a $7,400 average sales price increase on orders, which contributed to a higher-ending backlog value of $132.3 million, an increase of $38.8 million.

East. Our East Region generated 673 closings with $200.0 million of home revenue in 2012, a 96.8% and 101.3% increase, respectively, from the same period in 2011. The Region also experienced impressive results in orders generating $96.8 million of additional order dollars, due to both a 55.1% increase in units as well as an $32,200 increase in average sales price in 2012 versus 2011. This was mainly attributable to our 48.4% increase in the number of average actively selling communities, with the addition of our new markets in Raleigh, Charlotte and Tampa. The Florida market was the largest contributor to the Region's results, although operations in the Carolinas contributed 117 units, or $41.9 million in closings and 142 units, or $50.6 million, in order volume from seven actively-selling communities at year end. In 2012, our Carolinas operations built homes with some of our highest sales prices, contributing to an average sales price on orders during 2012 of $356,400. Operations in our Tampa division also provided their first two closings in the fourth quarter of 2012, and ended the year with 34 orders and 32 homes in backlog valued at $14.8 million. We ended 2012 with 252 units in backlog in the Region valued at $88.4 million, 23.5% and 52.6% increases over 2011, respectively.

Land Closing Revenue and Gross Profit As a result of land sales, we recognized land closing revenue of $9.3 million, and $0.4 million for the years ending December 31, 2012 and 2011, respectively. We also recognized impairments related to land sales and on parcels marketed for future sale in the amount of $0.7 million and $6.5 million for the years ending December 31, 2012, and 2011, respectively. All of our 2012 impairments and $5.9 million of our 2011 impairments related to parcels we sold or intend to sell in connection with our wind-down of our Las Vegas operations.

Other Operating Information (dollars in thousands) Years ended December 31, 2013 2012 2011 Dollars Percent Dollars Percent Dollars Percent Home Closing Gross Profit Total (1) $ 391,914 22.0 % $ 217,976 18.4 % $ 147,448 17.1 % Add back impairments 350 1,340 8,870 Adjusted Gross Margin (2) $ 392,264 22.0 % $ 219,316 18.5 % $ 156,318 18.2 % West $ 217,289 23.5 % $ 108,608 18.3 % $ 60,796 16.6 % Add back impairments 64 949 5,405 Adjusted Gross Margin (2) $ 217,353 23.5 % $ 109,557 18.5 % $ 66,201 18.1 % Central $ 96,508 19.6 % $ 69,623 17.8 % $ 66,149 16.7 % Add back impairments 48 219 2,769 Adjusted Gross Margin (2) $ 96,556 19.6 % $ 69,842 17.9 % $ 68,918 17.4 % East $ 78,117 21.4 % $ 39,745 19.9 % $ 20,503 20.6 % Add back impairments 238 172 696Adjusted Gross Margin (2) $ 78,355 21.5 % $ 39,917 20.0 % $ 21,199 21.3 % (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 43-------------------------------------------------------------------------------- community costs (such as model complex costs and architectural, legal and zoning costs), interest, sales tax, impact fees, warranty, construction overhead and closing costs.

(2) We provide gross margins excluding impairments - a non-GAAP term - as we use it to evaluate our performance and believe it is a widely-accepted financial measure by users of our financial statements in analyzing our operating results and provides comparability to similar calculations by our peers in the homebuilding industry. However, gross margins excluding impairments as presented may not be fully comparable to similarly titled measures reported by other companies because not all companies calculate this metric in an identical manner. This measure is not intended to represent GAAP gross margins and it should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Fiscal 2013 Compared to Fiscal 2012 Companywide. Home closing gross margin increased to 22.0% for the year ended December 31, 2013 as compared to 18.4% for the year ended December 31, 2012. Our margin increases are mainly due to strong demand which allowed us to increase prices in many of our markets and the shift to more desirable locations and larger product offerings, which typically generate higher profitability. These gains were somewhat offset by increases in various cost components. Our impairment charges reflect the write-down to fair value of certain real-estate and related assets of $0.4 million in 2013 and $1.3 million in 2012.

West. Our West Region experienced a significant increase in home closing gross margin to 23.5% for 2013 from 18.3% in 2012. The Region's gross margins benefited from strong buyer demand which allowed us to successively increase pricing throughout the year as well as the impact of better leverage of construction overhead costs due to a greater number of home closings.

Central. The Central Region saw an increase in home closing gross margin to 19.6% in 2013, as compared to 17.8% in 2012. This improvement is mostly due to our shift in product offering in new and desirable locations that are generating increased demand and higher profitability as previously discussed, as well as construction efficiencies of scale similar to the West Region.

East. The East Region increased gross margins in 2013 to 21.4% versus 19.9% in 2013. The year-over-year increase is mainly due to improved pricing power throughout the Region as evidenced in our increased sales prices coupled with relatively consistent year over year orders pace. In addition, the shift in mix to the Carolinas aided the increase in gross margin, as that market tends to earn slightly higher gross margins than our Florida communities.

Fiscal 2012 Compared to Fiscal 2011 Companywide. Home closing gross margin increased to 18.4% for the year ended December 31, 2012 as compared to 17.1% for the year ended December 31, 2011.

Gross margins excluding impairments were 18.5% and 18.2% for 2012 and 2011, respectively. Our margin increases were mainly due to the price increases we were able to initiate in many of our markets, somewhat offset by increases in various cost components and the shift to more desirable locations. Our impairment charges reflected the write-down to fair value of certain real-estate and related assets of $1.3 million in 2012 and $8.9 million in 2011. Our impairments in 2011 largely reflected the wind down of operations in our Nevada market.

West. Our West Region experienced a significant increase in home closing gross margin to 18.3% for 2012 from 16.6% in 2011. These margins included impairments of $0.9 million in 2012 versus $5.4 million in the prior year. The impairments in 2011 were primarily related to our Las Vegas assets as previously discussed.

Excluding these impairments, the gross margins for 2012 and 2011 were 18.5% and 18.1%, respectively. The Region's gross margins benefited from the impact of better leverage of construction overhead costs due to a greater number of home closings from the same period a year ago and price increases, partially offset by higher construction costs.

Central. The Central Region saw an increase in home closing gross margin of 17.8% in 2012 as compared to 16.7% in 2011. The Central Region's home closing gross margins include $0.2 million of real estate-related impairments for 2012 compared to $2.8 million for 2011. Excluding these impairments, the gross margin in this Region was 17.9% in 2012, compared to 17.4% in 2011. This slight improvement was mostly due to our shift in product offering in new and desirable locations that are generating higher profitability as previously discussed.

East. While the East Region generated the highest gross margins for us in 2012, we saw a decrease in the 2012 gross margin to 19.9% versus 20.6% in 2011 and 20.0% in 2012 versus 21.3% in 2011, excluding impairments. The year-over-year decrease was mainly due to the closeout of communities that were acquired during the early stages of the downturn, which provided higher comparative gross margins due to their low land basis based on when they were acquired. These communities made up a smaller portion of our actively selling communities in 2012 as compared to 2011.

44 -------------------------------------------------------------------------------- Years Ended December 31, ($ in thousands) 2013 2012 2011 Financial services profit $ 15,954 $ 10,255 $ 6,563 Financial services profit. 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 mortgage and title joint ventures. Currently, the majority of our financial services profit stems from these mortgage and title joint ventures. In the future, we expect Carefree Title to comprise a greater portion of our financial services profit as we became fully operational in all of our applicable markets throughout 2013. The $5.7 million increase year over year in 2013 as compared to 2012 is attributable to the increase in the number of closings processed through our joint ventures as well as the addition of markets that Carefree Title serves as the year progressed. 2012 results were $3.7 million higher than 2011 also due to the increase in number of closings processed through our joint ventures as well as 2011 results not having any Carefree Title profit as it's operations commenced in 2012.

Years Ended December 31, ($ in thousands) 2013 2012 2011 Commissions and Other Sales Costs Dollars $ 126,716 $ 94,833 $ 74,912 Percent of home closing revenue 7.1 % 8.0 % 8.7 % General and Administrative Expenses Dollars $ 91,510 $ 68,185 $ 64,184 Percent of total closing revenue 5.0 % 5.7 % 7.5 % Loss from Unconsolidated Entities, Net Dollars $ 378 $ 224 $ 714 Interest Expense Dollars $ 15,092 $ 24,244 $ 30,399 Other (Income)/Loss, Net Dollars $ (2,792 ) $ 6,342 $ (2,162 ) Loss on Early Extinguishment of Debt Dollars $ 3,796 $ 5,772 - Provision for/(Benefit from) Income Taxes Dollars $ 53,208 $ (76,309 ) $ 730 Fiscal 2013 Compared to Fiscal 2012 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 $31.9 million for 2013 versus 2012, but decreased to 7.1% as a percentage of home closing revenue compared to 8.0% in 2012. The dollar increase relates to increased commission expense attributable to higher closing units and revenue dollars, while the decrease year-over-year as a percentage of revenue is primarily the result of leverage from higher revenue on the fixed component of selling costs.

General and Administrative Expenses. General and administrative expenses represent corporate and divisional overhead expenses such as salaries and bonuses, occupancy, insurance and travel expenses. General and administrative expenses increased to $91.5 million for 2013 versus $68.2 million in 2012, or 5.0% and 5.7% of total closing revenue, respectively. The increased expenses are mostly due to increased employee count and higher stock-based compensation expense and performance-based compensation related to the attainment of multiple metrics on which divisional management compensation is partially based, as well as the ramp-up of our new divisions and Nashville acquisition. The decrease as a percentage of revenue is due to the higher revenue earned in 2013 as compared to 2012.

Loss from Unconsolidated Entities, Net. Loss from unconsolidated entities, net represents our portion of pre-tax earnings from non-financial services joint ventures. Included in this amount is both the pass through of (losses)/earnings from the joint venture's most recently available financial statements as well as any accrued expected (losses)/earnings for the periods presented that might not have been reflected in the joint venture's financial statements provided to us.

The slight loss in 2013, consistent with 2012, is primarily attributable to operating expenses for our two active land joint ventures.

45 -------------------------------------------------------------------------------- Interest Expense. Interest expense is comprised of interest incurred, but not capitalized, on our senior, senior subordinated, convertible notes, and other borrowings. During 2013 and 2012, our non-capitalizable interest expense was $15.1 million and $24.2 million, respectively. The decrease in expense year over year is a result of a higher amount of assets under development that qualify for interest capitalization.

Other (Income)/Loss, Net. Other income/(expense), net primarily consists of (i) interest earned on our cash, cash equivalents, investments and marketable securities, (ii) sub lease income, (iii) forfeited deposits from potential homebuyers who canceled their purchase contracts with us, and (iv) payments and awards related to legal settlements. The reported net other expense in 2012 as compared to net other income in 2013 is primarily due to a $8.7 million increased litigation reserve amount recorded in the third quarter of 2012. See Note 13 in the accompanying notes to the consolidated financial statements for additional information.

Loss on Early Extinguishment of Debt. Loss on extinguishment of debt in 2013 is attributable to the charges associated with the tender of our $99.8 million senior subordinated notes due 2017 ("2017 Notes"). The charges represent both the loss on the extinguishment as well as the write off of remaining unamortized capitalized costs related to the tendered notes. The charge in 2012 is due to the tender of our 6.25% senior notes due 2015 ("2015 Notes") and $26.1 million of our 2017 notes.

Income Taxes. Our overall effective tax rates were a provision of 29.9% for 2013, compared to a benefit of 264.5% for 2012. Our tax rate was favorably impacted by the reversal of a substantial portion of the valuation allowance.

Our effective tax rate in 2013 is lower than expected due to a further reversal of the valuation reserve and manufacturing and other federal tax credits.

Fiscal 2012 Compared to Fiscal 2011 Commissions and Other Sales Costs. Commissions and other sales costs increased by $19.9 million for 2012 versus 2011. This primarily related to increased commission expense attributable to higher closing units and revenue dollars. The decrease year-over-year as a percentage of revenue was primarily the result of leverage from higher revenue on the fixed component of selling costs.

General and Administrative Expenses. General and administrative expenses increased to $68.2 million for 2012 versus $64.2 million in 2011, or 5.7% and 7.5% of total closing revenue, respectively. The increased expenses were mostly due to higher stock-based compensation expense and performance-based compensation. The significant decrease as a percentage of revenue was due to the higher revenue earned in 2012 as compared to 2011.

Loss from Unconsolidated Entities, Net. The losses in 2012 and 2011 were primarily the pass-through of operating expenses for our land joint ventures.

Interest Expense. During 2012 and 2011, our non-capitalizable interest expense was $24.2 million and $30.4 million, respectively. The decrease in expense year over year was a result of a higher amount of active assets under development that qualify for interest capitalization.

Other Income/(Loss), Net. We reported net other expense in 2012 as compared to net other income in 2011 primarily due to the $8.7 million increased litigation reserve amount recorded in the third quarter of 2012. See Note 13 in the accompanying notes to the consolidated financial statements for additional information.

Loss on Early Extinguishment of Debt. Loss on extinguishment of debt in 2012 is attributable to the charges associated with the tender of our $285.0 million 2015 notes and $26.1 million of our senior subordinated notes due 2017. The charges represent both the loss on the extinguishment as well as the write off of remaining unamortized capitalized costs related to the tendered notes. There were no such debt extinguishment charges in 2011.

Income Taxes. Our overall effective tax rates were a benefit of 264.5% for 2012, compared to a provision of 3.6% for 2011. The change in our tax rate is primarily attributable to reversal of most of our deferred tax valuation allowance in 2012.

Liquidity and Capital Resources Overview Our principal uses of capital for 2013 were the acquisition and development of new and strategic lot positions, operating expenses, home construction, and the payment of routine liabilities. We used funds generated by operations and our cash reserves - which we bolstered in 2013 by our capital transactions - to meet our short-term working capital requirements. We remain focused on acquiring desirable land positions, generating positive margins in our homebuilding operations and maintaining a strong balance sheet to support future needs and growth, while leveraging land options where possible.

46 -------------------------------------------------------------------------------- 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, plat and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our inventory and not recognized in our 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 to fund operations in several of our new markets. As demand for new homes improves and we continue to expand our business, we expect cash outlays for land purchases, land development and home construction will continue to exceed our cash generated by operations in the near term.

During 2013, we closed 5,259 homes, purchased about 7,000 lots for $338.4 million, spent $227.5 million on land development, $27.7 million on lot options, and started about 5,700 homes. The opportunity to purchase substantially finished lots in desired locations is becoming increasingly more limited and competitive. As a result, we are spending more dollars on land development as we are purchasing more undeveloped land and partially-finished lots than in recent years. 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 2013 with $363.8 million of cash and cash equivalents, investments and securities, a $68.4 million increase from December 31, 2012, primarily a result of cash generated from home closings and the net effect of our various capital transactions partially offset by land acquisitions and land development dollars spent and increases in our home inventory under construction. As we have no debt maturities until 2018, we will generate cash from the sale of our inventory, but we intend to redeploy that cash to acquire and develop strategic and well-positioned lots to grow our business.

In addition to expanding our business in existing markets, we continue to explore opportunities to expand outside of our existing markets. Consistent with our efforts, over the last several years we entered Raleigh-Durham, North Carolina, Tampa, Florida, and Charlotte, North Carolina. In August 2013, we also completed our first acquisition since 2005, entering the Nashville, Tennessee market through the purchase of a local homebuilder. These opportunities expand our footprint into new markets with positive growth potential and offer the ability to leverage our existing East Region resources.

Additionally, we continue to evaluate our capital needs in light of the improving homebuilding markets and our existing capital structure. In the first quarter of 2013, we completed a new $175 million senior debt issuance and in the fourth quarter of 2013, we completed a $100 million add-on to our 2020 senior debt. We also increased the capacity of our unsecured revolving credit facility in the fourth quarter of 2013 from $125 million to $200 million and completed a $110.5 million, net of offering costs, public equity offering in January 2014.

Considering the impact of our 2013 capital transactions, 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. Reference is made to Note 5 in the accompanying notes to the consolidated financial statements.

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): 47-------------------------------------------------------------------------------- At December 31, At December 31, 2013 2012 Notes payable and other borrowings $ 905,055 $ 722,797 Stockholders' equity 841,392 694,210 Total capital $ 1,746,447 $ 1,417,007 Debt-to-capital (1) 51.8 % 51.0 % Notes payable and other borrowings $ 905,055 $ 722,797 Less: cash, cash equivalents, restricted cash and investments and securities (363,823 ) (295,469 ) Net debt 541,232 427,328 Stockholders' equity 841,392 694,210 Total net capital $ 1,382,624 $ 1,121,538 Net debt-to-capital (2) 39.1 % 38.1 % (1) Debt-to-capital is computed as senior, senior subordinated and convertible notes divided by the aggregate of total senior, senior subordinated and convertible notes and stockholders' equity.

(2) Net debt-to-capital is computed as net debt divided by the aggregate of net debt and stockholders' equity. 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.

Senior and Senior Convertible Notes 7.15% Senior Notes During the second quarter of 2010, we completed an offering of $200 million aggregate principal amount of 7.15% senior notes due 2020. The notes were issued at 97.567% of par value to yield 7.50%. In the fourth quarter of 2013, we completed a $100 million add-on offering to these notes at 106.699% of par value to yield 5.875%.

7.00% Senior Notes In April 2012, we completed an offering of $300.0 million aggregate principal amount of 7.00% Senior Notes due 2022. The notes were issued at par and their associated proceeds were primarily used to pay down the remaining balance of $285 million of our 6.25% senior notes due 2015.

1.875% Convertible Senior Notes In September 2012, we issued $126.5 million aggregate principal amount of 1.875% Convertible Senior Notes due 2032. The notes will initially be convertible into shares of our common stock at a conversion rate of 17.1985 shares of our common stock per $1,000 principal amount of Convertible Notes. This corresponds to an initial conversion price of $58.14 per share and represents a 47.5% conversion premium based on the closing price of our common stock on September 12, 2012.

The conversion rate is subject to adjustments upon the occurrence of specific events. The notes may be redeemed by the note-holders on the fifth, tenth and fifteenth anniversary dates of the notes. We may call the notes at any time after the fifth anniversary, and before the notes mature on September 15, 2032.

4.50% Senior Notes In March 2013, we issued $175 million aggregate principal amount of 4.50% senior notes due 2018. These notes were issued at par and the proceeds were partially used to pay down the remaining $99.8 million balance of our 7.731% senior subordinated notes due 2017.

The indentures for our 7.15%, 7.00% and 4.50% senior notes contain covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions of non-model home assets and mergers.

$200 million Unsecured Revolving Credit Facility In July 2012, we entered into a $125.0 million unsecured revolving credit facility ("Credit Facility"), of which $50.0 million was to be available for letters of credit. We subsequently amended our facility, increasing the capacity to $200.0 48 -------------------------------------------------------------------------------- million, extending the amount available for letters of credit to $120.0 million and extending the maturity date to July 2016. Borrowings under the Credit Facility are unsecured but availability is subject to, among other things, a borrowing base. No amounts were drawn under the Credit Facility during 2012 or 2013. As of December 31, 2013 we had outstanding letters of credit issued under the Credit Facility totaling $42.1 million, leaving $157.9 million available under the Credit Facility to be drawn.

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 $360.0 million (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 had no borrowings drawn on the facility during the twelve months ended December 31, 2013. We were in compliance with all Credit Facility covenants as of December 31, 2013. Our actual financial covenant calculations as of December 31, 2013 are reflected in the table below.

Financial Covenant (dollars in thousands): Covenant Requirement Actual Minimum Tangible Net Worth > $528,175 $815,568 Leverage Ratio < 60% 32% Interest Coverage Ratio (1) > 1.50 4.72 Minimum Liquidity (1) > $51,152 $521,755Investments other than defined permitted investments < $264,670 $11,638 (1) We are required to meet either the Interest Coverage Ratio or Minimum Liquidity, but not both.

See Note 5 of the consolidated financial statements included in this Annual Report on Form 10-K for further information on our senior and convertible senior notes.

Land under Control We enter into various purchase and option contracts for land in the normal course of business. Generally, our lot options remain effective so long as we purchase a pre-established minimum number of lots each month or quarter, as determined by the respective agreement. The pre-established number is typically structured to approximate our expected rate of home construction starts, although as demand slows, in some instances starts may fall below the pre-established minimum number of lot purchases. Additional information regarding our purchase agreements and related deposits is presented in Note 3 in the accompanying consolidated financial statements in this Annual Report on Form 10-K.

The total number of lots under control at December 31, 2013 was 25,662 as compared to 20,817 at December 31, 2012. In 2013 and 2012, respectively, 73.6% and 84.0% of our controlled lots were owned. The increase in our land holdings from prior year was due to an intentional effort to grow our lot positions during 2013, as we entered into new land contracts for approximately 11,200 lots for $560.1 million as compared to approximately 9,000 lots for $375.4 million in 2012. Our increased usage of land options reduced our owned land percentage in 2013. We intend to continue to pursue such option opportunities in the future, where economically feasible, as we believe they reduce risk and help manage our balance sheet and cash flows. At December 31, 2013, our total option and purchase contracts had purchase prices in the aggregate of approximately $554.9 million, on which we had made deposits of approximately $51.6 million in cash.

Off-Balance Sheet Arrangements Reference is made to Notes 1, 3 and 13 in the accompanying Notes to the consolidated financial statements included in this Annual Report on Form 10-K.

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.

49 -------------------------------------------------------------------------------- Contractual Obligations The following is a summary of our contractual obligations at December 31, 2013, and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands): Payments Due by Period Less than More Than Total 1 Year 1-3 Years 4-5 Years 5 Years Principal, senior and senior subordinated notes $ 905,055 $ - $ - $ 175,000 $ 730,055 Interest, senior and senior subordinated notes 375,476 52,697 105,394 98,174 119,211 Operating lease obligations 27,219 4,394 7,694 6,519 8,612 Other contractual obligations (1) 660 330 330 Total (2) $ 1,308,410 $ 57,421 $ 113,418 $ 279,693 $ 857,878 (1) Represents other long-term obligations for items such as software licenses and sponsorships.

(2) See Notes 4 and 13 to our consolidated financial statements included in this report for additional information regarding our contractual obligations.

We do not engage in commodity trading or other similar activities. We had no derivative financial instruments at December 31, 2013 or 2012.

Recent Accounting Standards See Note 1 to our consolidated financial statements included in this report for discussion of recently-issued accounting standards.

50--------------------------------------------------------------------------------

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