Q4 2024 Meritage Homes Corp Earnings Call
Speaker Change: [music].
Greetings and welcome to the Meritage homes fourth quarter 2024 analyst call.
This time, all participants are in a listen only mode.
And answer session will follow the formal presentation.
If anyone should require operator assistance. Please press star zero from your telephone keypad.
During this conference is being recorded.
At this time, it's now my pleasure to introduce Emily Sudano, Vice President of Investor Relations and ESG. Emily you May now begin.
Emily Sudano: Thank you operator, good morning, and welcome to our analyst call to discuss our fourth quarter 2024.
Emily Sudano: Issued a press release yesterday after the market close you can find it along with the slides well refer to during this call on our website at investors that meritage homes dot com or by selecting the Investor Relations link at the bottom of our homepage.
Emily Sudano: Please refer to slide two crushing you better statements during this call as well as in the earnings release and accompanying slides contain forward looking statements those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
Emily Sudano: Any forward looking statements are inherently uncertain are.
Emily Sudano: Actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically, our 2023 annual report on Form 10-K, and subsequent 10-Qs.
Emily Sudano: Also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures.
Emily Sudano: As a reminder, on today's call and in our earnings presentation. The first quarter 'twenty 25 guidance reflects the two for one stock split completed on January 2nd 2025.
Emily Sudano: However, historical metrics for 'twenty 'twenty, four and earlier are not adjusted for the stock split.
Emily Sudano: With us today to discuss our results are Steve Hilton Executive Chairman Phillipe, Lord CEO and he was very bad executive Vice President and CFO of Meritage homes, We expect today's call to last about an hour a replay will be available on our website later today.
Emily Sudano: Now I'll turn it over to Mr. Hilton Steve.
Steve Hilton: Thank you Emily welcome to everyone listening in our call today I'll start by highlighting our 2024 results.
Steve Hilton: I'll cover how our new strategy drove our results and talk about our quarterly performance.
Steve Hilton: To provide a financial overview for the fourth quarter and forward looking guidance.
Speaker Change: First let me start by welcoming our newest board member mitigation Williams to Meritage.
Speaker Change: We look forward to her insights and contributions to our board. The board is committed to continuous and ongoing board refreshment and order your balance institutional knowledge from long tenured directors.
Speaker Change: His perspectives.
Speaker Change: So new members over the past five years, we've reduced the average tenure of our board members enhanced the diversity of perspectives experiences different board by adding five new directors.
Speaker Change: Now, let's turn to our results.
Speaker Change: The fourth quarter of 2024 capped off another record setting year for Meritage, our fourth quarter 2020 will deliveries of 4044 homes combined with home closing gross margin of 23, 2% and SG&A leverage of 10, 8% resulted in diluted EPS of $4.72.
Speaker Change: 2025 multiples the official start of the first full year of operations under our new strategy inherited this 44 year anniversary.
Speaker Change: Over the past four decades.
Speaker Change: <unk> been on an incredible journey.
Speaker Change: The first time, we built in Arizona, So now I'll be built nearly 200000 homes for families across 12 states.
Speaker Change: We have the we have a great management team the meritage and our commitment to growing the business, that's driven us to where we are today.
Speaker Change: Celebrates its <unk> anniversary I'd like to recap some highlights from the full year 2024 and reflect on <unk> success over the last several years.
Speaker Change: We generated our highest annual closing volume and 15611 homes.
Speaker Change: Our average sales price coming down to below 100000 much of the year.
Speaker Change: Still exceed the company high closing revenue of $6 3 billion in 2024.
Speaker Change: Our full year home closing gross margin of 24, 9% remained historically all day and it's still above our long term target.
We are proud of what we were able to accomplish this year as we navigate through a volatile mortgage rate environment.
Speaker Change: Our book value per share expanded 21%.
Speaker Change: A three year compounded average growth rate from 2022 to $142 98 per share.
Speaker Change: We have generated and maintained a mid to high double digit return on equity over the last three years ending 2024 with nor are we a 16, 1%.
Speaker Change: We earned over $1 billion in unions EBITDA reach year over the last three years.
Speaker Change: Our construction cycle the cycle times of return.
Speaker Change: Our historical average of 120 calendar days in the fourth quarter of 2024.
Speaker Change: Peak of the supply chain issues in 2023.
Speaker Change: We're over 190 days.
Speaker Change: That was also in our backlog to emerging dropped to around 50% and as of December 31st 2024, our backlog conversion reached a company record of 177%.
Speaker Change: We also demonstrated our commitment to returning capital to shareholders.
Speaker Change: We have purchased nearly 6% of our outstanding shares and Theyre just stocks starting 2022.
Speaker Change: And combined with quarterly cash dividends initiated in 2023.
Speaker Change: Turned almost half a billion dollars to shareholders in the last three years.
Speaker Change: Can you talk la Mer dispersed achieved top five builder status at the end of 2022 and has held that title for two years in a row.
Speaker Change: We know we will know definitely in the next couple of weeks or so but I believe we have retained the top five position based on 2024 closings.
Speaker Change: And we did all this while delivering our customers he first rate experience.
Speaker Change: We achieved our highest customer satisfaction scores in 2020 or.
Speaker Change: With an average score of 95%.
Speaker Change: As we move forward in 2025.
Speaker Change: About our opportunity to increase our market share as we compete against Newbuild and resale homes alike.
Felipe: I'll now turn it over to Felipe.
Felipe: Thank you Steve first let me start by saying that we at Meritage feel very grateful that our southern California employees and families are not directly impacted by the wildfires. Our hearts go out to everyone, who has been and continues to be.
Felipe: Or can you just are not directly affected our foundation will contribute 500000 to the relief efforts as we hope for a quick rebound and recovery.
Felipe: As we shared on our last call we entered the Gulf Coast markets at the end of October I can see.
Felipe: Leading the acquisition of valley at homes now I'll, let you add to that new footprint. We also recently expanded our Alabama operations.
Felipe: Our startup in Huntsville, a thriving market with economic expansion job growth and in migration.
Felipe: We've been acquiring land in the Haynesville area for several quarters and plan to open our first community sales. There later this year.
Felipe: Next I wanted to touch on the backdrop of Q4 as expected. The homebuilding industry has returned to somewhat historical patterns and we experienced relatively normal sales seasonality in the fourth quarter, although the volatility in the rate environment certainly added to the complexity.
Felipe: While the fed cut rates in September and November mortgage rates increased instead of decreasing such actions, causing us to extend and expand our financial incentives commitments to our customers.
Felipe: With a focus on affordability, we secured 3304 orders with an average monthly absorption of $3 nine slightly better than what we would've expected to see during the typical slower quarter the.
Felipe: As a result of our 60 day closing commitment, which includes carrying inventory to a more advanced construction stage prior to at least in the home for sale.
Felipe: Our backlog conversion rate was 177% this quarter, which generated 4044 home deliveries and home closing revenue of $1 6 billion.
Felipe: Home closing gross margin was 22, 2%, which combined with SG&A you got a 10, 8% resulted in diluted EPS of $4 72 for the fourth quarter of 2024.
Felipe: Now turning to slide four.
Felipe: Our sales force for the fourth quarter were 3003, and four homes with 91% of the volume coming from entry level homes, which was up from 88% in the prior year.
Felipe: Orders were 14% higher year over year due to an 8% increase in average absorption pace up from three six per month in the fourth quarter of 2023, and a 5% increasing average communities.
Felipe: Cancellation rate this quarter was 10%. This low rate is partially due to the implementation of a losing strategy, which shortens the time line from sale to close and reduces buyer hesitation.
Felipe: S. T on orders this quarter of 400000 were down 4% from prior year due to a greater utilization of financing incentives as well as product and geographic mix it.
Felipe: With our focus on affordability, we have been and will continue to offer financing incentives, including rate buy downs, so as long as they're needed for us to maintain our sales pace and helped by assaults on affordable payment.
Felipe: Fourth quarter 2020 for any community Count was 292, increasing 5% from 278 at September 32024, and 8% from two <unk> at December 31 2023.
Felipe: As of December 31, 2024 does not include any community.
Felipe: Homes acquisition, we spent the first couple of months post acquisition starting homes in our Gulf Coast Division.
Felipe: We will release these homes for sale I see there 60 days some completion.
Felipe: This quarter 39, new commute came online, bringing our total full year openings to 129.
Felipe: With our goal of 20000 units by 2027, we anticipate a double digit year over year increase in Cemig out by the end of 2025.
Felipe: Before I cover our operational performance this quarter I wanted to provide some high level commentary on what we're seeing so far in Q1 consistent with commentary from other builders. So far January started off a little slower, but we saw the return of demand and the backups.
Felipe: And continue to feel comfortable that the upcoming spring selling season will be healthy, especially with the recent rollout of our national sales event.
Felipe: Moving to the regional level trends on slide five.
Felipe: The average absorption pace improved year over year across all of our regions in the fourth quarter financing for the Central region comprised of our Texas markets had the highest regional average absorption pace of $4 seven per month in <unk>.
Felipe: Orderly backlog log conversion rate of over 200%, we have intentionally increased our completed spec inventory in advance of the screen selling season in this region and believe we are well positioned here.
In the fourth quarter of 2020 for the East region had an average absorption pace of three eight net sale for months and includes several other start divisions. Although we are experiencing more levels of retail in the Florida market existing homes are not necessarily comparable to our asps.
Felipe: Our offerings and typically don't lose that represents direct competition.
Felipe: West region experienced 10% year over year growth in average documentation to 3.3 net sales per month in Q4.
Felipe: While Colorado in Salt Lake City remain some of our more challenging markets due to affordability issues. We can't hear you see strength throughout the rest of the west region in Arizona and California.
Felipe: Looking to the balance of 2025, we believe favorable demographics for our product offering and under supply of homes at all price points and stability in the job market will drive solid housing demand for affordable homes at the right monthly payment, which aligns with our strategy now.
Felipe: Now turning to slide six.
Felipe: Our new strategy you look at the total specs in backlog to assess our desired inventory levels. Most of the orders in the first four to six weeks of the quarter will become intra quarter closings. We are comfortable with our approximately 8600 stack and backlog units as of December 31, 2024, as we head into the spring of 2025.
Felipe: We started nearly 3600 homes in the fourth quarter of 2024, which was down 6% sequentially since our cycle times are back to our historical averages. We can now align our spec starts more closely with sales we.
Felipe: We had over 7000 spec homes in inventory as of December 31, 24 up 20% from 5009 months back as of December 31, 2023. This represents a little more than 24 specs per community this quarter, which was on the upper end of our 46 months supply target as you care for the highest spring selling season demand Asics.
Felipe: That could work in completing our stacks to later stage of construction Pfizer lifting them for sale to ensure our customers can benefit from our 60 day clothing ready commitment.
Felipe: As such we increased the percentage of completed specs to 40% as of December 31 2024.
Felipe: We continue to execute on our new strategic yes, we will be reevaluating, our optimal complete spec targets of our home closings. This quarter, 98% came from previously started inventory up from 92% in the prior year.
Felipe: With over 50% of this course clothing also sold within the quarter.
Felipe: Backlog declining intentionally from about 2500 units as of December 31, 2023 to approximately 1500 homes at December 31 2024.
Felipe: We believe we are very near our Stablest Asian point of spec counts with our current backlog conversion case I'll.
Felipe: I'll now turn it over to Keith to walk through our financial results Sheila. Thank you for <unk>, let's turn to slide seven and cover our Q4 results in more detail.
Keith: We generated $1 6 billion.
Keith: I'm closing revenue this quarter, which was a 3% year over year decrease primarily resulted from 5% lower asps.
Keith: All set by a 2% pickup in closing volumes to 4044 units and drop in a S. P. But it's a combination of greater utilization in financing and Sanjay as well as product and geographic mix shifts on a greater percentage of our customers needed assistance with rates this quarter the cost per home was lower compared to Q4.
Keith: 2023, but it did increase sequentially from the third quarter of 2024 in line with a corresponding increase in mortgage rates as we mentioned previously we anticipate the use of financing incentives to remain elevated for the near future.
Keith: Clothing gross margins of 23, 2% in the fourth quarter of 2024 was down 200 bps from 25, 2% in the fourth quarter of 2023, or 2024 margin reflects greater utilization of financing incentives and higher lot costs, which were partially offset by lower direct costs and shorter.
Keith: Instruction cycle times, we are still targeting long term gross margins of 22.5 to 23, 5% breaking down the components of gross margin and land and development costs are still running above historical averages, we expect well costs to remain elevated in 2025 and 2026.
Keith: Conversely, we have been able to reduce direct costs on a per square foot basis, each quarter since the beginning of 2023 due to a combination of our purchasing teams ongoing cost negotiations the volume discounts from our increased production and the overall increased capacity and no supply chains on a year over year basis.
Keith: Our margins were slightly about 3% lower cost per square foot this quarter versus 2023.
Keith: Our cycle times improved another five days from Q3 to Q4, and we are now at our target of an average of 120 calendar days, which is also driving gross margin savings going forward, maintaining the cycle time, what allow us to turn on web inventory three times, a year to keep a lower volume of snacks on hand, and lastly during.
Keith: In the quarter.
Keith: Labor capacity remain consistent.
Keith: Right now our tariffs and the immigration policies, we don't have any clarity at this point, but as an industry. We have experienced extreme supply chain constraints. A couple of years, that's not routinely dealt with labor shortages, especially over the past decades for Meritage are all spec strategy has and will continue to allow us to offer a substitute.
Keith: And product availability or cost issues arise, we have been expanding our sourcing channels over the past several years, particularly since COVID-19.
Keith: A nimble and ready to adjust to any potential international trade applications.
Keith: Confident that our people and our strategy will help us successfully navigate any future highlights turning back to the P&L SG&A as a percentage of home closing revenue in the fourth quarter of 2024 was 10, 8% compared to 10, 7% in the fourth quarter of 2023, while Q4 represents a 19% increase from Q.
Keith: This year, we are pleased that we were able to maintain our leverage relatively in line with last year on lower revenue and in a tougher selling environment, which drove an increase in external commission wants the mortgage rates moved in the wrong direction. This quarter, we intentionally adjusted commissions as they are commonly use selling tool in challenging markets and can be used interchangeably.
Keith: With higher marketing spend or greater utilization of incentives to drive sales. We are confident that our strong relationships with the broker community continue to be a differentiator for us and we plan to use all available tools, including increased commissions or incentives to drive our desire orders volume.
Keith: Full year SG&A as a percentage of home closing revenue was 10, 1% fairly consistent with 2023 as higher commission impacted incremental leverage gained on higher revenue our long term target for SG&A as a percentage of home closing revenue.
Keith: The nine 5% or better as we grow our markets and leverage our overhead platform.
Keith: Our fourth quarter effective income tax rate was 22.1% this year compared to 23, 2% for the fourth quarter of 2020 threes, both periods benefited from energy tax credits on qualifying homes under the inflation reduction at this time.
Keith: Incremental qualifying homes in 2024, it's driving the tax savings for 2025, the IRS implemented higher thresholds to achieve these tax credits and we anticipate fewer of our homes will qualify while we are not planning to eliminate or call back on any of our energy efficiency offerings. We have elected not to add these are.
Keith: These new requirements to our homes and do not believe that the incremental costs to earn the energy tax credits will be viewed as value accretive by our customers and we will not meaningfully benefit our homes, especially as we continue to focus on affordability. We remained fully committed studying 100% energy efficient homes going forward.
Speaker Change: Overall, lower home closing revenue and gross profit led to a 12% year over year decrease in fourth quarter 2020 diluted EPS to $4.72 from $5 and 38 in 2023, I will add a little to Steve's comments about full year 2024 results as compared to 2023.
Speaker Change: Orders were up 11% closings were up 12% and our home closing revenue increased 5% to $6 3 billion.
Speaker Change: Full year 2020 for at home closing gross margin of 24, 9% was slightly up from 24, 8% for full year 2023, due to lower direct costs improved and improved cycle times, which were partially offset by greater utilization of financing incentives and higher lot costs net earnings increased.
Speaker Change: 6% to $786 million and our diluted EPS totaled $21 and 44 times for the year before we move on to the balance sheet I wanted to cover our Q4 2024 customer credit metrics as expected our buyer profile remain relatively consistent with our historical averages with FICO scores in the mid <unk>.
Speaker Change: 730, and DTI around 41 to 42 Ltvs were still in the mid eighties.
Speaker Change: On to slide eight we maintained a healthy balance sheet at December 31, 2024, with nothing drawn on our credit facility and a net debt to cap of 11, 7%.
Speaker Change: Continue to grow our land position, our net debt to cap ceiling remains in the mid twenties range. We ended the year with $652 million in cash compared to $921 million at December 31, 2023, and we increased our investments in real estate and also completed the acquisition this quarter.
Speaker Change: Capital allocation in the fourth quarter of 2024 remains centered on investing in growth and returning to share their shareholders' cash to shareholders. This quarter, we spent about $742 million on land acquisition and development, which was up 13% from prior year. This is inclusive of the Albea acquisition for <unk>.
Speaker Change: Full year 2024, our land spend totaled $2 $5 billion, we expect full year land spend to be around $2 $5 million for the next several years as we nearly tripled our quarterly cash dividend on a year over year basis 75 cents per share in 2024 from 27 per share in 2023, our cash.
Speaker Change: Evidence totaled $27 million this quarter and about $109 million for full year 2024.
Speaker Change: That $40 million to buy back nearly 220000 shares in Q4, well above our 15 million systematic quarterly commitments on a full year basis, we spent nearly $126 million in share buybacks repurchasing over 730000 shares or 2% of our shares outstanding at the beginning of the year.
Speaker Change: During the fourth quarter of 2024, our board approved an additional $250 million in authorized share repurchases and as of year end $309 1 million remain available to repurchase under the program.
Speaker Change: We returned a total of $235 million of cash to shareholders in 2024, and 138% increase year over year and as we announced earlier this month, given our confidence and married it with a long term growth trajectory subsequent to year end, we completed a two for one stock split on January <unk>.
Speaker Change: In 2025, turning to slide nine in the fourth quarter of 2024 and secured and put about 14400 net new lots under control. This included the approximately 5500 lots we obtained through the acquisition in the fourth quarter of 2023. He put just over 7600 net new lots under.
Speaker Change: Control as of December 31, 2024, we owned or controlled a total of about 85600 lots equating to five five years supply of 'twenty 'twenty four closings that's fairly in line with four to five years of forward looking 2025 demand. We also had nearly 33500 lots that were still.
Speaker Change: <unk> intelligence at the end of the fourth quarter as.
Speaker Change: As we accelerate our land acquisition to support our goal of 20000 units in about three Years' times, we are actively sourcing off balance sheet land financings to ensure our balance sheet is not overburden about 62% of our lot inventory at December 31, 2024. It was owned and 38% was the option compared to prior year, where we had a seven.
Speaker Change: Andy 2% owned inventory and a 28% owned lot position.
Speaker Change: Finally, I'll direct you to slide 10 for our guidance based on current market conditions. We are now guiding to full year 2025 closing of 6000 to 15 to 16750 units and six six to $6 9 billion.
Speaker Change: Home closing revenue we are projecting the following for Q1 2025 total closings between 32 and 3500 units home closing revenue of $1 96 to $1 4 billion home closing gross margin of around 22% and an effective tax rate of about 24% and diluted.
Speaker Change: And PFS in the range of $1 59 to $1 83.
Sally: I'll turn it back over to Sally.
Sally: To summarize on slide 11, looking at our full year 2024 results. We're proud of what we've been able to accomplish in a volatile market and attribute this success to our scale and strategic focus on delivering affordable move in ready homes.
Sally: If we look into the spring selling season, we will lean into pace over price and a new strategy to continue growing our market share and creating further long term value for our shareholders with that I'll now turn the call over to the operator for instructions on the Q&A operator.
Speaker Change: Thank you well now be conducting a question and answer session.
Speaker Change: To ask a question at this time, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press star two if they're to withdraw your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions. Thank you.
Speaker Change: Thank you and our first question today comes from the line of Michael Rehaut with J P. Morgan. Please proceed with your questions.
Michael Rehaut: Great. Thanks, so much for taking my questions good morning, everybody.
Speaker Change:
Speaker Change: I'd love to focus around your kind.
Speaker Change: Kind of the drivers of the gross margin trajectory, obviously incentives, having a huge part of a huge role in this and you know looking for a little bit of a further easing in the first quarter.
Speaker Change: How should we think about to the extent that you.
Speaker Change: Incentive stabilize here in the first quarter are there any other kind of puts.
Speaker Change: Puts and takes.
Speaker Change: That we should anticipate as.
Speaker Change: 40 25 progresses.
Speaker Change: Relative to lot costs or or or construction costs.
Speaker Change: And just kind of curious about even if you have.
Speaker Change: Upcoming community mix changes that might.
Speaker Change: Impact the 22% starting point that you see in the in the first quarter.
Speaker Change: Again, if if incentives kind of stay where they are currently.
Speaker Change: Thanks for the question, Mike I think overall this is just a function of the incentives.
Speaker Change: Remember clothing and selling so many of our homes in the same quarter of the current market is what we're modeling. So it's primarily an incentive issue, although I believe mentioned a slight pullback in.
Speaker Change: And demand in the first couple of weeks of January is causing us to model a slightly lower volume, which as you know also impacts the margin. So this is just modeled on what we're seeing in the market today. There is definitely opportunity for improvement if the volume picks up or if we can pull back.
Speaker Change: On the cost of financing incentives.
Speaker Change: Okay great.
Speaker Change: I guess secondly, you know with with maybe a little bit of a softer start to the year.
Speaker Change: Yeah.
Speaker Change: So just curious about.
Speaker Change: If again, if demand kind of stays where it is today.
Speaker Change: Are there other levers.
Speaker Change: Would you be on track in effect to hit the full year closings guidance or would you need to take other measures like perhaps even raising incentives further to get to that full year closings guidance, just trying to understand again like what the assumptions for the market backdrop would be when we can.
Speaker Change: That <unk> to <unk>.
Speaker Change: Yeah.
Speaker Change: Yes, Thanks, Mike asleep.
Speaker Change: I think we feel very comfortable with our full year closing guide based on current market conditions.
Speaker Change: Which are getting better as we move through January so we're optimistic that.
Speaker Change: January was just a little bit slow for other reasons and the spring selling season is starting to materialize in a way that makes more sense.
Speaker Change: Based on the current pattern, but I think we're still going to be relatively conservative given that we're operating in the 7% mortgage rate environment, and we're not expecting that to get any better. So we feel really comfortable that we can hit our number in that environment with current incentive structure.
Speaker Change: Based on the current demand we're seeing.
Speaker Change: I'm optimistic actually that rates are going to hopefully settle down here and maybe get a little bit better and then I think we can possibly recover in February and March and get back to you. A 17000 number overtime, we have the lots and the in 42 and the community to achieve 70000 units, but we're just being considered.
Speaker Change: Based on the 7% margin mortgage rate environment.
Speaker Change: Okay.
Speaker Change: Great understood. Thanks for the color appreciate it.
Speaker Change: Thank you. Our next question is from the line of Alan Ratner with Zelman and Associates. Please proceed with your question.
Alan Ratner: Hey, guys good morning.
Alan Ratner: Nice job in a tough sales environment in the quarter.
Speaker Change: Philippe I think you kind of somewhat answered the question I had in your last comment about having locked in the communities for 17000 closings, but I guess I'll ask it a little bit differently in the sense of.
Speaker Change: If I interpret your prior comments I think that you have a fairly similar strategy as.
Speaker Change: Some other spec builders in that year.
Speaker Change: Are you more volume focused and then pricing margin are going to be the lever to it to achieve a certain closing number or volume target.
Speaker Change: With your margin at 22% I guess my question is is there a level where.
Speaker Change: Shifting a little bit where you lightened up a bit on the volume.
Speaker Change: Or are you willing to take that margin lower if need be to achieve that target.
Speaker Change: Target.
Speaker Change: Yeah, Great question I don't know if the market is that elastic added 7% rate environment based on kind of what we're seeing today, we feel like achieving four to four five net sales per store at the 'twenty. Two 'twenty three is probably the sweet spot for us and Optimizes our land book.
Speaker Change: If rates get better I think we can lower incentives and possibly get a little bit more I would argue that if rates get better. We will go after volume more aggressively if rates get worse, we're just going to have Doug.
Speaker Change: Increase our incentives to achieve the same volume so that's how we're kind of looking at it.
Speaker Change: We obviously would take lower margins if rates got worse, because we still got to maximize our pace, but if rates got better I think we could get paid and margin at the same time.
Speaker Change: Thank you hear it from several of our peers already it's not a demand issue, there's definitely demand out there in the marketplace. It's an affordability issue.
Speaker Change: We're not going to cause margins to something that doesn't make sense, but we still have quite a bit of breathing room between where we are today anywhere you know what we think we'll need to do considering we're already at 7% interest rate. So I think that we're fairly comfortable that we'll be able to achieve the margins that we've set out there.
Speaker Change: Perfect that's helpful.
Speaker Change: And then as we just kind of think about the build up to 20000 closings in 2007. So if we take the midpoint of your 25 guide call it 5% growth plus or minus.
Speaker Change: Would seem to suggest that you need to accelerate that to 10% annually in 2006 and 2007.
Speaker Change: Do you feel like you have the organic growth for that or is M&A, a possibility or likelihood to contribute towards that.
Speaker Change: Yeah, I think with our.
Speaker Change: Our acquisition of Elliott homes.
Speaker Change: And then the entry into Huntsville, we have more than enough.
Speaker Change: <unk> market platform to get to 20000 units by increasing our market share across our existing footprint. So really no M&A and we might buy land portfolios here and there, but no real company M&A in that strategy 20000 units and we have all the land we need right now to achieve that growth in 2026.
Speaker Change: And 2027, we really are only buying land at this point to grow from 27 to 28 million.
Speaker Change: In books in place the community counts in place to get there.
Speaker Change: In our existing footprint as we mentioned we have about 86000 lots owned and under control of adding another 33000 lots that were working due diligence so separately each point that 100000 plus echelon.
Speaker Change: Our already available if we wanted to pull the trigger.
Speaker Change: I appreciate it thanks a lot.
Speaker Change: Thank you.
Speaker Change: Our next questions are from the line of John Lovallo with UBS. Please proceed with your questions.
Speaker Change: Good morning, guys. Thank you for taking my questions as well. The first one is at the midpoint sales guide implies about six 5% year over year growth. So if we think about SG&A and leverage I mean, how are you thinking about the ability to get to you know 10% or below.
Speaker Change: Sort of as you guys talked about in 2024.
Speaker Change: Yeah, I think our long term goals for SG&A as we go from here to 20000 units eight to get to nine and a half or better.
Speaker Change: The path on the way there just kind of really depends on the market and what we're seeing with commissions and then we're investing quite a bit in R&D.
Speaker Change: Our new strategy, we have infrastructure that we have to put into place.
Speaker Change: And technology that we have to put in place. So we think we can operate at 10 or better on our way up to the 20000 units, but the real goal is to set our business up to get Tonight in half or better at 20000 units.
Speaker Change: Yes.
Speaker Change: Understood and then obviously there is a lot of concern about certain markets in terms of inventory I mean, Texas being.
Speaker Change: One of the more broader markets I think Austin in particular I mean your performance. There was it was really strong with absorption in Texas up 14%. Just curious if you could give us any color on what youre seeing across the major markets in Texas in terms of the overall inventory.
Speaker Change: Just demand perhaps.
Speaker Change: Yes, Great question I'll fight answered a couple of different ways I mean, our absorptions in Texas was the strongest in the company in this current environment. So I think the market is still good and strong.
Speaker Change: Great locations in great communities and great price point, So I think we're doing quite well.
Speaker Change: It's really a subpar submarket by Submarket conversation versus a market by market conversation.
Speaker Change: There are certain submarkets in Austin, and San Antonio and even probably Houston and Dallas.
Speaker Change: Has slowed down a little bit more due to affordability, then I would say existing homes.
Speaker Change: But then you also in submarkets throughout the footprint and are doing quite quite well and the other thing I would say is when you look at the retail.
Speaker Change: Look at where retail is coming back it's really not coming back at our price point with our product offering and our community offerings. So the resale doesn't really compete directly with what we're offering.
Speaker Change: So from our perspective based on the research that we're doing even though resales retail environment is returning to a more normal state most of it's not really competitive to what we're offering and.
Speaker Change: Just to state the obvious.
Speaker Change: We are paying a 7% on the retail.
Speaker Change: Further mortgage Ed Richards.
Speaker Change: Again, why that Newbuild states continues to have an advantage in today's interest rate environment.
Speaker Change: Yeah makes sense. Thank you guys.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Trevor Allinson with Wolfe Research. Please proceed with your question.
Trevor Allinson: Hi, Good morning, Thank you for taking my questions.
Speaker Change: First we get a lot of questions from investors about homebuilder are completed the inventory levels. Clearly your business model is designed to have more completed or near completed inventory level. So that you can offer your 60 day guarantee the comment we hear from investors is that in a slower market completed inventory.
Speaker Change: Inventory capacity, a little riskier from a price discounting perspective. If the question is do you share that view and then if not can you talk about why you disagree with that view.
Speaker Change: Well at.
Speaker Change: At the macro level obviously.
Speaker Change: This is a supply and demand business in <unk>.
Speaker Change: My humble opinion demand is still much stronger than the current supply markets, even with new homebuilders filling the gap that the existing home market currently isn't feeling because of a lock in effect. So I think currently I don't I don't share that view I think we're feeling good we're meeting the demand that's out there because the existing.
Speaker Change: Home market is not.
Speaker Change: Over the long term.
Speaker Change: When we look at Meritage homes, specifically, we don't offer anything else, but completed inventory. So I think we're discounting becomes part of the equation is when you offer something else. When all you offer is stats you can't buy.
Speaker Change: Build to order and this is all we offer.
Speaker Change: Theres not as much discounting that's required but when you have a bunch of stacks in the community and you offer built order in that community, that's where we saw in the past downturns, where discounting really happened. So we kind of view our product very homogenous and therefore, we're not feeling that over time.
Speaker Change: We're going out to discount our product more because we have more inventory were competing directly with the retail market. We're providing you a new home opportunity instead of buying a used home and we don't feel like we will have to discount that yeah. I think I mean, there's two there's two ways, where folks that offer better see the penalty between spec and non spec.
Speaker Change: First as a traditional purchase if you have a spec home and then you can also go into the design studio and take everything exactly the way you want it for yourself, you're going to expect a discount if you didn't have the opportunity to do that if it's offered the second time is when they'll do everything except the home that maybe had gone through that channel and it was <unk>.
Speaker Change: So when it comes back now it's at a disadvantage to the existing home inventories there, but it's intentional and unintentional specs cause that margin gap for folks that offer both patterns for us at home Council great. We just have a completed inventory homes that we can sell fast so for US there is no variance because there is no compare.
Speaker Change: Bob.
Speaker Change: Yes, it makes a lot of sense I appreciate that color.
Speaker Change: And then second question is on community count in 2025 talked about double digit growth how should we think about the cadence of that community count growth throughout the year and does it skew.
Speaker Change: More heavily to any one of your regions. Thanks.
Speaker Change: Oh regionally.
Speaker Change: Do you think.
Speaker Change: To look at that and I can follow up with you. We can follow up with your 101 call I think it's probably happening more in the south and southeast and it is other parts, but I would say it's happening everywhere.
Speaker Change: Dan.
Speaker Change: The cadence is just pretty much.
Speaker Change: Starting in Q2 and beyond I think as we get Elliott homes up and running Youll see a pop starting in Q2 with all that activity popping in and then.
Speaker Change: So it's pretty steady growth from here.
Speaker Change: And.
Speaker Change: Mostly across all the regions, although probably skewed a little bit more to the south east.
Speaker Change: Alright, Thank you and good luck moving forward.
Speaker Change: Thanks.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Stephen Kim with Evercore. Please proceed with your question.
Stephen Kim: Yeah. Thanks, a lot guys I appreciate all the color I had to step off briefly so I hope I don't repeat anything but.
Stephen Kim: I guess my first question relates to your longer term land strategy Hela, you would've sort of hinted that there might be something innovative coming there I'm. Just curious if you could give us any update and I guess, it's a prompt I've been I've been hearing that.
Stephen Kim: You're you're looking into expanding your Jb's you know some folks in the industry have been talking about a level of financing availability, that's quite high I've been hearing in the multibillion dollar range and so I was curious if you could talk about what's your what youre doing there and how we might see that affect your own.
Stephen Kim: We're all land holdings.
Stephen Kim: And inventory balance.
Stephen Kim: In the next let's say two to three years.
Stephen Kim: Thanks for the question Stephen.
Youre a little Verde is telling you what's out there are cracks we actually have.
Stephen Kim: Signed our first relationship with a partner on a joint venture structure that will allow us to finance land, particularly in California and is significantly more efficient manner.
Stephen Kim: Everyone is aware in California is.
Stephen Kim: Fantastic place to buy land, but it's also one of the most difficult parts of the country to get that land ready to go vertical I would say, we have a partner who is extremely well.
Stephen Kim: Well versed with.
Stephen Kim: With California land development, who is providing financing for some off balance sheet structures for us so you'll definitely see it.
Stephen Kim: Increase of off balance sheet usage for us, particularly in California. The structure is a little bit different than the traditional land bank and we're not going to get into that.
Speaker Change: I mean, you said details on here, but it provides AIDS.
Speaker Change: Healthy returns for both parties in a way that slightly more accretive than traditional land based structure. So we're going to give it a shot running that we're going to roll with it for a little while see how it works.
Speaker Change: We've already had a couple of deals incidents ventures that were already up and running and then based on the success that you expect to be a fantastic we'll see how we can all something similar throughout the rest of the country.
Speaker Change: Got it so but yeah, okay. So.
Speaker Change: My sense is that California venture is probably like longer term.
Speaker Change: Longer duration kind of stuff I had a sense that you had already had some.
Speaker Change: Agreements in place for a broader across the country with maybe a couple of other players.
Is that is that something youre still sort of youre going to work on this California venture I guess as an incubator or whatever you're going to see it first before you go live with any other JV is that so I guess the question then would those other jv's.
Speaker Change: Also be longer duration, if you can kind of give us some sense of kind of the duration of these of these deals because everybody's got Melrose in mind.
Speaker Change: Much shorter duration kind of thing.
Speaker Change: So first of all we have not abandoned traditional land banking relationships do you have other land banking relationships across the country. The joint venture structure is really more something in California.
Speaker Change: Everything takes a little bit longer said is slightly longer duration, but I don't want to intimidate something's going in their pre entitlement. So it's not something that is.
Speaker Change: That is happening in a significantly extended basis on an extended basis, because everything in California and extended basis. So this is something that we're going to pilot, it's already working really well.
Speaker Change: And we're not abandoning existing land banking relationships.
Speaker Change: Structure proves to be true as fruitful as we expect it to be then it's probably something that will roll out in a similar fashion in other markets, Yes, I think Steven it's Felipe I'll just add the opportunity. We see merit homes is really some of these larger longer term deals across the country and then the.
Felipe: Longer term deals in California, just because of the regulatory environment. If we can place those in a JV structure, we can drive tremendous capital efficiency typically those longer bigger deals have more margin in them as well so theres an opportunity to bring in a JV partner and pay a JV partner, while also preserving our normal.
Speaker Change: Homebuilding margins.
Speaker Change: Yeah, that's awesome.
I'm really interested to see how that evolves regarding your operating margin. It was really kind of you to address and volunteer that long term sustainable level that you see for gross margin and SG&A and I was struck by the fact that.
Speaker Change: They were both basically the same as what you had told us about six or seven months ago, which I think is encouraging.
Speaker Change: But.
Speaker Change: I know that.
Speaker Change: The issue around longer term sustainable margins is a huge debate point right now for the Investor base and most people think that operating margins are going to go back to the high single digits, you know and so you're you're obviously seeing something very different here I was curious if you could talk about if.
Speaker Change: If you could contextualize below what we've seen in the last six to seven months, where there has been a very significant you know noticeable reduction in the profitability coming out of the builder community and you're seeing some of that to why that's not shaking your longer term sustainable margin outlook.
Speaker Change: Because I think that's going to be something that would be very helpful for the investors to understand.
Speaker Change: Yeah. Thanks for the question, Steve I think.
Speaker Change: It started this I would just say it all starts with how we buy land. So we bought 14000 bots here in the last quarter.
Speaker Change: 85000 Watts from 60000 watch and as we look at those lots. Although we ended certainly gotten more expensive we haven't had to compromise our long term underwriting and what those what the margin profile can be on that land based on our current operational structure now clearly.
Speaker Change: Operating in an elevated incentive environment right now, but that is largely driven by the 7% interest rates.
Speaker Change: That's really what's impacting the last two quarters of margin if those elevated incentive rates weren't running we'd be well above our structural long term and once again, we're not having any issues finding land across our geographic footprint to support the long term margins or better that we see.
Speaker Change: Going forward now if rates stay elevated for the next five years, when we bring all that land into the market.
Speaker Change: We have to continue to operating in this elevated incentive environment. They could be lower like they are right now, but long term in a normal rate environment.
Speaker Change: Feel very good about our long term per day.
Speaker Change: Prospects given the land that we're buying.
Speaker Change: I would say that the margins that we talked about for Q1, as we said or what we're seeing in the market literally right and also you can tell by the guidance at the units, it's not going to be a high volume.
Speaker Change: Corner for us with our with our midpoint target of 16, five so you shouldn't be able to hopefully come out of the year, even if conditions hold flat for the remainder of the year you should see an accretion in the margin on sheer volume leveraging allowance that you should be able to get back into that that long term margin even in today in today's tough environment by the end of the year.
Speaker Change: We delivered for the full year 2024, north of 24% margins and that was in a very competitive interest rate environment, where consumers were going through some bit of shock and really Q3, Q3, and Q4 was the impact of that but we still achieved well above our long.
Speaker Change: Term target. So I think we feel really comfortable based on our cost structure, our ability to drive efficiencies in this new operating model that we're going to be right, where we need to be long term.
Speaker Change: Okay.
Speaker Change: That's really helpful. Thanks, so much guys.
Speaker Change: The next question is from the line of Carl Reichardt with P. T O G C with your question.
Speaker Change: Hey, guys nice to talk to you thanks for taking the time.
Speaker Change: So you talked I think about cycle times vertically for house construction I'm curious about cycle times on the development turning dirt horizontal not entitlements, but just the process. Once you start digging dirt to when you get a finished lot how would those cycle times sort of peak post COVID-19 to now.
Speaker Change: Yes. They are they are still really elevated.
Speaker Change: There's just not enough.
Folks out there moving dirt.
Speaker Change: So.
Speaker Change: Land development game has shrunk dramatically.
Speaker Change: We do most of our land development in house and so those times are very very long right now <unk> got long through Covid and they really haven't shrunk since then they've sort of stabilized at that longer longer level, which is.
Speaker Change: Frankly about double.
Speaker Change: What they were.
That's kind of how we model our community count openings, when we're doing self development.
Speaker Change: They are stable, though that's the good news at least they're not moving around on us like they were for the last three years Theyre pretty predictable at this point that pretty consistent at that point they seem to be performing at.
Speaker Change: It got longer.
Speaker Change: Paul gave you the timeline.
Speaker Change: But we're not seeing anything out there that suggest that those will come down at least in the short term how.
Speaker Change: How many months Felipe could you tell me.
Speaker Change: I don't know exact I don't know exactly I don't want to just speak off the costs, but I know that there are at least double what they used to be when things were prior to COVID-19. So.
Speaker Change: You can get that to you on the wireline, but I don't know exactly what those are very.
Speaker Change: Barry I mean, you don't buy every piece of land in the state of completion and there's a different different timelines across the country. As we just mentioned, California is longer than maybe Arizona.
Speaker Change: And.
Speaker Change: If you buy a piece of Roger versus partially completed so it's hard to have a number it's just longer but what I do know as I look at every single land deal that comes through the company.
Speaker Change: And they're not coming down.
Speaker Change: Okay. Okay. Thank you and then just.
Speaker Change: Well think about you as an entry level builder building smaller houses, but you have at least that.
Speaker Change: Passel of moved down customers and I'm curious if you can share if you know maybe what percentage of your customer base is actually a move down previous owner of a home and whether or not that change during 'twenty for you expect it to change as you go forward.
Speaker Change: Yes, I mean move down is not necessarily just the previous owner Bahamas also have first time move up that much.
Speaker Change: <unk> is a smaller percentage of our total business, maybe about a third of all in.
Speaker Change: Okay. Thanks, a lot appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Susan Mcclary with Goldman Sachs. Please proceed with your questions.
Speaker Change: Thank you good morning, everyone.
Speaker Change: Yes.
Speaker Change: My first question is just thinking high level about demand if we do see fewer fed rate cuts this year and perhaps that brings just more stability to mortgage rates, regardless of what the level is do you think that that could be enough to get some people off the sidelines and to see perhaps some relative easing on some.
Speaker Change: The headwinds in the demand pressures that you've seen or do you think that <unk> need to come down in order to see a bigger increase in activity.
Speaker Change: Yes, great question.
Speaker Change: Feel like if they just stabilized.
Speaker Change: That would be very very helpful.
Speaker Change: The spread is still way too wide as well, which makes it very expensive to buy the rate buy down so that would certainly be a tailwind for margins.
Speaker Change: And then if they came down while stabilizing it would only be a huge benefit but I certainly agree with your thesis that a more predictable stable less volatile rate environment gives consumers confidence in what their numbers are going to be first and then trying to time the market deciding whether it's a good time to buy.
Speaker Change: Or not would be very helpful stabilization in interest rate market at whatever level also helps our cost Andre box right. They're also based on volatility expectation. So this stability, but not just how consumer consumer.
Speaker Change: Confidence will also help our cost structure Andre ox.
Speaker Change: Yeah. Okay. That's helpful. And then when you think about the year ahead and just the conditions that you are facing out there any thoughts on how we should think about that conversion rate as we move into <unk>.
Speaker Change: Past, the first quarter and into the rest of the year just anything there that we should be aware of or thoughtful of as we're going through this.
Speaker Change: Are you talking about our backlog conversion rate yeah, yeah yeah.
Speaker Change: Yes, I think.
Speaker Change: We feel pretty good about where it's at where our strategy is fully rolled out at this point. So we're basically selling move in ready homes across the country, except for probably Elliot homes that we just acquired it will take a little time for us to get there. So what you're seeing in the last couple of quarters, probably where we're going to run the only thing thats out there that could.
Speaker Change: Impact that potentially any cycle time expansion and right now we're not seeing anything that would suggest our cycle times will get longer, but we'll see how the year, but we appreciate that our current run rate is significantly north of our long term guidance and Thats, probably part of the Genesis of the question.
Speaker Change: The reason that we're not changing our long term guidance that has been the only had two or three quarters. After that partial rollout of the strategy I think we need to have the strategy. The live under a couple of other items.
Speaker Change: Economic cycles, and then we will have confidence to say if our if our prior long term target is the right one or if we need to bring it back up.
Speaker Change: Okay, you got to my point.
Speaker Change: Thank you very much and good luck to everyone there.
Speaker Change: Thank you.
Speaker Change: Our next question is from the line of Alex Barron with housing Research Center. Please proceed with your question.
Speaker Change: Yes. Thank you.
Speaker Change: I was hoping you could help me understand your thought process.
Speaker Change: Around starts versus incentives versus.
Speaker Change: Our sales pace, what I mean is.
Speaker Change: What what sort of the main.
Speaker Change: Driver that you guys focus on.
Speaker Change: In this sense you know, if let's say you're targeting <unk>.
Speaker Change: Four sales a month.
Speaker Change: Which would also imply roughly four starts a month, but if the market isn't doing that.
You then you know if you start to pile up let's say a few specs more than you were hoping.
Do you increase the incentive or do you slowed down the start space. How are you guys sort of thinking about that balancing act.
Speaker Change: Yeah, Great question I think at the end of day, we wanted to do four or more among first subdivision and that drives everything else.
Speaker Change: So if we're achieving four per month, we're trying to maximize our margins at four months.
If we're not achieving four months, we're adjusting incentives appropriately to get to four months.
Speaker Change: This starts pace at any day, we just want to align with our sales pace.
Speaker Change: We're able to use slowdown starts modestly this year because our cycle times are much standards. So we can know mirror, our sales pace exactly but if any of the day, it's for a month and maximize margins.
Speaker Change: We can't get four months make adjustments to get to four months and then align our starts pace appropriately.
Speaker Change: And does the.
Speaker Change: Competitive environment.
Speaker Change: No.
Speaker Change: Have a lot to do with that in other words like well you mentioned interest rates right. So interest rates are at seven but.
Speaker Change: But like let's say if some other competitors are willing to drop their advertised rates too.
Speaker Change: No, let's say, 3.5%, even though that's a big hit.
Speaker Change: On margins are you guys willing to chase that or is there some point, where you say well.
Speaker Change: Maybe I won't get four sales a month, but.
Speaker Change: I'm not going to drop my margins that low to try to get there.
Speaker Change: I mean, obviously, it's again, it's market by market community by community, but if.
Speaker Change: If we're surrounded by a bunch of competitors that are willing to make adjustments and that is impacting our ability to get for mud.
Speaker Change: We're going to do what we need to do to get four months.
Speaker Change: So we will do whatever it takes to get for a month.
Speaker Change: Based on the competitive environment, but.
Speaker Change: Our sense in general is that.
Speaker Change: It's not so much the competition right now it's the it's the interest rate.
Speaker Change: It's affecting our ability on a community by community basis to get for a month.
Speaker Change: Got it thank you so much.
Speaker Change: Thank you our next I always go up.
Speaker Change: Pardon me. Please go ahead Sir.
Speaker Change: No go ahead I thought that was the last one please make sure. Your last question I think that's the cost question will come from the line of Jade Rahmani with K B W.
Speaker Change: Thank you very much and Phoenix, new listings look to be up about 10% year over year. According to one broker have you seen that and do you have any color as to what's driving that.
Speaker Change: If it's affecting your markets.
Speaker Change: So in Phoenix particular.
Speaker Change: The existing home market the retail inventory is up year over year.
Speaker Change: So it's out there, but again as we said in our opening comments a lot of that existing home product is not really in our price point or in our submarkets. Some of it's further out.
Speaker Change: So it's impacting a couple of communities here and there for sure we're having to make adjustments appropriately to compete with that but overall the Phoenix market is extremely strong we're seeing tremendous job growth tremendous in migration. So overall, our Phoenix prospects are looking really really good.
Speaker Change: Dorothy I would say is once again, we offer rate locks and.
Speaker Change: And rate buy downs, while the existing home market isn't really offering that so that gives that creates a kind of competitive again as even as retail starts to grow in these markets.
Speaker Change: We have a strategic advantage that we can leverage to capture sales.
Speaker Change: Okay.
Speaker Change: Thank you and then secondly, I think in your comments you said there was a 4% sales price decline, reflecting incentives and.
Speaker Change: I just wanted to check if the mortgage buy-down incentive which I believe is the predominant incentive.
Speaker Change: <unk> net realized sales price at all.
Speaker Change: Further the incentive does directly affect the average sales price that we report although that's not the entire job. There was also a notable shift out of our higher ASP region of the west into the Eastern region. So it's both a shift in geographies also a shift in product mix. We also.
Speaker Change: Noted that we have a higher percentage of our homes in the entry level versus the first time move up and the increased.
Speaker Change: Component that relates to the incentive so we're not going to break out the different components, but it's the combination, but we are verifying that our.
Speaker Change: Our confirming I should say that any incentives that we offer financing or otherwise for Meredith runs through average sales price.
Speaker Change: Thanks for that clarification I appreciate it.
Speaker Change: Perfect.
Speaker Change: Thank you operator, I'd like to thank everyone, who joined this call today for your continued interest in <unk> homes. We hope you have a great rest of your day.
Speaker Change: Goodbye.
Speaker Change: This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.