Q1 2025 Meritage Homes Corp Earnings Call
Speaker Change: Greetings and welcome to the Meritage Homes First Quarter 2025 Analyst Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.
Speaker Change: If you require operator assistance during the conference, please press star zero on your telephone keypad .
As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce you to your host, Emily Tadano, VP of Invest Relations and External Communications. Thank you, Emily. You may begin.
Speaker Change: Thank you, operator. Good morning and welcome to our analyst call to discuss our first quarter 2025 results.
We issued the press release yesterday after the market closed
Speaker Change: You can find it, along with the slides, will refer to during this call
Speaker Change: on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to slide two cautioning you that our statements during this call, as well as in the earnings release and accompanying slides contained forward looking statements.
Speaker Change: Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them.
Any forward-looking statements are inherently uncertain.
Speaker Change: Our 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 in most recent filings with the Securities and Exchange Commission, specifically our 2024 Annual Report on Form 10K.
Speaker Change: We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release, as compared to their closest related GAAP measures . All share and per share amounts have been retroactively restated to reflect the stock split for the first quarter of 2024 period.
Speaker Change: With us today to discuss our results are Seat Hilton, Executive Chairman, Philippe Lord, CEO , and Hilla Sferruzza, Executive Vice President, and CFO of Meritage Homes and CFO of Meritage Homes Corp.
Speaker Change: We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Thank you, Emily. Welcome to everyone listening in our call.
Phillippe Lord: Today, I'll start by highlighting our first quarter results in current market trends. Fleet will cover our strategy and quarterly performance, Hilla will provide a financial overview of the first quarter and forward-looking guidance.
Phillippe Lord: Meritage had a healthy start to 2025, selling almost 3,900 homes in the first quarter despite January starting off slower than anticipated.
Phillippe Lord: We delivered our second highest first quarter orders and closings in company history and achieved an average absorption pace of 4.4 net sales per month, this quarter as we capitalized in the higher demand of the spring selling season.
Phillippe Lord: We had a powerful supply of available inventory ready in attractive financing incentives, allowing us to overcome volatile and elevated mortgage rates and fragile consumer sentiment due to increasing macroeconomic concerns.
Phillippe Lord: Although we're 60% of this quarter's closings also sold during this quarter, our backlog conversion rate was yet another all-time high for the company of 221%. Reflecting the benefit of a strategic pivot.
Phillippe Lord: We're releasing homes for sale when the 60 days of completion allows us to shrink the sale of the closed timeline and we're able to quickly move finish specumentory during the quarter.
Phillippe Lord: Our 3,416 deliveries this quarter generate home-close revenues of $1.3 billion and we achieve home-close
Phillippe Lord: With the Lutored EPS of $1.69, we increased our book value for share 11% year over year, delivered to return out equity of 14.5% as of March 31st, 2025.
Phillippe Lord: We acknowledge that the current macroeconomic conditions have increased uncertainty, resulting in some softening of the housing market as a buyer's psychological, as buyer's psychology and the cost of ownership are being challenged.
Phillippe Lord: Yet as a result of favorable demographic trends and the limited supply of homes that are affordable price points, the new home market, especially at lower price points, is capturing a large portion of total home-mired demand.
Our strategy is focused on 60-day closings
Phillippe Lord: 60-day closing, ready, commitment, and move and ready inventory to create a different trader for us by providing certainty to our customers in a highly unpredictable market. And with that, I will now turn it over to Phillippe.
Phillippe Lord: Thank you, Steve. As Steve mentioned, there continues to be healthy traffic at our communities, despite affordability being stretched and deterioration of consumer confidence due to challenging macro
Phillippe Lord: This quarter, we successfully balanced both case and price as we were focused on optimizing returns.
Phillippe Lord: Our business strategy was designed around a sales place of four net sales per month. So as needed, we utilized more incentives and or increased external commissions to achieve that target.
Phillippe Lord: From there, we look to optimize our margins and land positions, sub-market by sub-market and community by community. Given the current macro volatility, this daily discipline ensures that we are not overacting to short-term market swings, and that we preserve the long-term value of our landbook.
Phillippe Lord: Our strategy is intentionally agile and we constantly are reviewing our starched cadence and land spend and will adjust them based on expected long-term housing dynamics while reprioritizing our capital deployment.
Phillippe Lord: Now turning to slide four, amidst the tougher economic backdrop, we are proud of our team's efforts in the first quarter of 2025 to secure sales orders of 3,876 homes, which was only 3% lower than the prior year.
Phillippe Lord: As we mentioned on our last call, Gianni were against lower than anticipated, but as we progressed through the balance of the first quarter, the traditional spring season demand felt fairly normal, despite heightened levels of macro uncertainty.
Phillippe Lord: Average absorption pace decreased from 4.9 per month in the prior year for 4.4 in the first quarter of 2025, inline with our expectations, which was partially offset by a 7% increase in average community count.
Phillippe Lord: The cancellation rate of 9% is quarter, remain lower than historical averages. Primarily due to our 60-day closing rate of commitment, which shortens the timeline from sale to close and provides certainty to our customers and realtor partners.
Phillippe Lord: ASP on orders is quarter of 402,000 was down 2% from prior year due to greater utilization of rate-by-down financing incentives to assist our customers in solving for a monthly payment, which was partially offset by small price increases in markets and communities that could absorb that.
Phillippe Lord: First quarter 2025 ending community count was 290 compared to 292 at December 31, 2024 and 275 at March 31, 2024, up 8% year over year.
Phillippe Lord: During the quarter, 30 new communities came online, a hample of which are related to the Elliot Homes acquisition.
Phillippe Lord: We anticipate additional golf course communities to come online throughout the rest of 2025.
Phillippe Lord: Also in the first quarter we completed an additional acquisition of land from a small builder in Nashville, adding to our existing land book in a growing market.
Phillippe Lord: The acquisition told it about 2,500 loss, some of which represent long-term communities. We were successful in having a landmaker close on the majority of these communities on our behalf and expect to see the incremental volume from this acquisition in later 2025 and fully in 2026.
Phillippe Lord: We continue to expect a double-digit year-over-year increase in community count by the end of 2025, which sets us on our path to achieve our state of goal of 20,000 units by 20-27 . . . . . . . . . .
Phillippe Lord: Before I cover our operational performances quarter, I wanted to provide some high level commentary on what we are seeing in Q2.
Phillippe Lord: The first few weeks of the second quarter feel fairly consistent with March, and while the sales environment has definitely cooled from the elevated spring selling seasons of the last few years.
Phillippe Lord: We are still experiencing a healthy level of interest in our inventory of affordable, move-in-ready homes in line with our historical averages.
Phillippe Lord: Now moving to the regional level trends on slide five. First, I want to note that the center region now includes Nashville, along with our Texas markets, aligning our external reporting structure with our internal operations.
Phillippe Lord: The central reading had a highest average absorption case of 5.3 net sales per month in the first quarter
Phillippe Lord: With every division achieving a backlog conversion well north of 200%, the central region had our highest conversion rate customers took advantage of our removing ready inventory in these markets with an average sales of closing timeline of about 40 days in the region.
Phillippe Lord: During the first quarter of 2025, we saw more diversity of performance across the country in the west and east regions With some of our markets still experiencing strong demand, while others were more impacted by the current macro economic conditions.
Phillippe Lord: The West region had an average absorption pace of 4.1 in the first quarter. In the West, Colorado and Utah remained two of the more challenging markets where the volatile rate environment has meaningfully impact fire urgency.
Phillippe Lord: The East region had an average absorption pace of 4.0 net sales per month as compared to 4.6 last year. The region sales pace was impacted by our startup divisions in Huntville and the Gulf Coast, which are not yet fully operational.
Phillippe Lord: We believe our solid sale effort demonstrates that through our strategy we are committed to affordability and certainty, which allows us to provide clarity in uncertain times and creates a meaningful competitive advantage against the returning, resailing inventory. Thank you very much.
Phillippe Lord: We could pilot our move-in-ready homes at affordable price points with a 60-day closing commitment and then layer in our engagements with the realtor community and financing incentives for the totality of which creates a home ownership opportunity with distinct advantages.
Now turn to slide six.
Phillippe Lord: Under our new strategy, we look at total specs and backlog combined to determine the right inventory levels, as most of the orders from the first half of a quarter will become inter-quarter closings
Phillippe Lord: We had approximately 8,800 specs and backloin units at March 31, 2025 as compared to 9,000 units at March 31, 2024.
Phillippe Lord: We calibrate our starts to achieve our targeted 4-to-6-month supply of inventory, including the appropriate amount of 60-day move-in ready inventory.
Phillippe Lord: We started approximately 3,600 homes in the first quarter of 2025.
Phillippe Lord: 13% less than last year's Q1, fairly in line with our sales volume. We look to light our specs, starts with sales to ensure we have sufficient supply of available inventory without overburdening our balance sheet.
Phillippe Lord: We had nearly 6,800 spec homes in inventory as of March 31, 2025, up 13% from about 6,000 spec as is March 31, 2024, but slightly down from Q4 have been managed with the current experience on the ground.
Phillippe Lord: This represented approximately 20th, three specs per community discordor, which corresponds to about five months' supply in line with our target of range. Our inventory per store is normally greater in the early half of the year to address the peak spring-selling season demand, and then lower in the later half of the year.
Phillippe Lord: As expected, we have been completing our specs to a later stage of construction, prior to releasing to member sale to offer our customers our 60-day closing-ready commitment.
Phillippe Lord: We maintain our percentage of complete specs at 39% at March 31, 2025, the same level as of December 31, 2024.
Phillippe Lord: with over 60% of this quarter closings also sold within the quarter. Our ending backlog declined from about 3,000 as of March 31, 2024 to approximately 2,000 homes as of March 31, 2025.
Phillippe Lord: As a reminder, the lower any backlog balance day is an output of our strategy as we were able to convert sales to closings much quicker
Phillippe Lord: The higher back law conversions and shorter cycle times are also generating improved whip affet turns.
Phillippe Lord: As we continue to execute under our new strategy, we will be reevaluating targets for the optimal complete spec level and backlog conversion rates [inaudible]
Phillippe Lord: I will now turn it over to Hilla to walk through our final results. Hilla? Thank you, Phillippe. Let's turn to slide seven and cover our Q on results in more detail.
Hilla Sferruzza: We generated $1.3 billion of home closing revenue this quarter, which was an 8% eerie or decrease the resulted from declines in both home closing volumes and a lower ASP and closings of $393,000 due to increased utilization of financing incentives.
Hilla Sferruzza: While a greater percentage of our customers needed assistance with rates this quarter, the incentive cost per home was lower compared to prior year, but increased sequentially from the fourth quarter of 2024, given market volatility impacting great lock pricing.
Hilla Sferruzza: We anticipate the use of pricing incentives to remain elevated for the near future.
Hilla Sferruzza: We demonstrated margin resiliency this quarter, hitting our target percentage despite a tougher sales environment than we had initially expected.
Hilla Sferruzza: Home Closing Gross Margin of 22% in the first quarter of 2025 was down 380 bits.
Hilla Sferruzza: Per square foot year of year. Our higher volume, combined with our purchasing teams negotiations, translated to additional savings. Both the current land values and savings indirects are reflected in our Q2 margin guidance.
Hilla Sferruzza: Given the cadence of tariff announcements and the evolving start and stop nature of these discussions ever since, we don't yet know to what degree if any tariff related cost increases will impact our gross margin in the second half of 2025. However, the current status quo of no tariff on lumber should get us most of our expected 2025 closing is completed at current market lumber prices.
Hilla Sferruzza: Giving our increased scale and ongoing efforts to streamline our operations, we are confident in our ability to work with our partners to minimize the impact of supply chain challenges. With the top five builder with limited floor plans and a high level of product visibility, we intend to continue to leverage our bargaining power with national vendors.
Hilla Sferruzza: During the quarter, labor capacity remained consistent as demonstrated by our cycle times remaining stable at our historical average of 120 calendar days.
Hilla Sferruzza: We have not experienced any labor impact from recent immigration actions, then we believe there's slack in the system right now due to slower multi-family construction and reduced starts in the industry.
Hilla Sferruzza: As a reminder, our long-term gross margin target is still 22.5% to 23.5% under normal marketing conditions, which is about 300 bits higher than our historical average.
Hilla Sferruzza: We are a larger-scale company with a different operating model today, which we believe permanently improves our gross margin trajectory from our pre-COVID experience.
Hilla Sferruzza: As GNA, as a percentage of home closing revenue in the first quarter of 2025 was 11.3% compared to 10.4% in the first quarter of 2024. Primarily, as a result, a reduced leverage of fixed costs on lower home closing revenue as well as greater spend on technology and start-up overhead costs.
Hilla Sferruzza: Commissions were relatively flat year-over-year as a percentage of home closing revenues despite the tougher-stilling environment.
Hilla Sferruzza: We increased our co-broke percentage to 92%, but we're able to secure other offsets as part of our strategic shift to maintain stability and total commission rates. However, if the market slows further, one of our lovers is to lean in to our external realtor relationships as a small increase in commission rates or bonuses can drive an outside impact in sales value.
Hilla Sferruzza: The financial services profit of $4 million included a diminished write-off related to rate-by-down expiration costs in the first quarter of 2025.
Hilla Sferruzza: The Financial Services' loss of $1 million in the first quarter of 2024 had $6 million of similar writeouts.
Hilla Sferruzza: The first quarter's effective income tax rate was 23.3% this year compared to 20.5% for the first quarter of 2024 The first quarter's effective income tax rate was 23.5% for the first quarter of 2024.
Hilla Sferruzza: giving the new higher construction thresholds required to earn the tax credits this year.
Hilla Sferruzza: Overall, lower home closing revenue and gross margins and a higher tax rate led to a 33% Eurorear decrease in first quarter 2025, the Looted EPS, to $1.69 from $2.53 in 2024.
Hilla Sferruzza: Before we move to the balance sheet, I wanted to cover our customers first quarter credit metrics.
Hilla Sferruzza: as expected, our buyer profile remain relatively consistent with our historical averages, with FICO scores in the mid-730s and DTI around 41-42.
LTV's were still in the mid-80s.
Hilla Sferruzza: This validates our belief that there is still a deep buyer pool that can qualify for our homes, and that the hesitation is primarily coming from consumer sentiment and the desire to feel confident about a home purchase decision rather than the inability to afford a monthly payment. On to slide 8 . . . . . . . . . . .
Hilla Sferruzza: We maintained a healthy balance sheet at March 31, 2025, with nothing drawn under our credit facility, and a net debt to cap of 13.7%.
Hilla Sferruzza: As we continue to grow our land position, our net that the cap ceiling remains in the mid-20% range.
Hilla Sferruzza: We ended the first quarter with $1 billion in cash compared to $662 million at December 31, 2024, reflecting our new $500 million debt issuance this quarter.
Hilla Sferruzza: Our new 10-year senior notes were priced at an attractive 5.6%, demonstrating the benefits of our investment-grade status and the market's confidence in our sustainable business model.
Hilla Sferruzza: This additional debt offering will help Meritage fund long-term growth trajectory and capital return goals Also, as we mentioned on our last call, we completed a two-for-one stock split on January 2nd this year
Hilla Sferruzza: totaled 465 million and 363 million for the first two quarters of 2025 and 2024 respectively, a 28% increase year over year.
Hilla Sferruzza: We continue to expect full-year land spend of around 2.5 billion for 2025 in the next several years, but we are mindful of current economic uncertainties and will shift our capital dollars if further market disruptions were to occur.
Hilla Sferruzza: We increased our quarterly cash dividend 15% year-over-year to 43 cents per share in 2025, from 37.5 cents per share in 2024, and we spent 45 million to buy back over 600,000 shares in Q1, tripling our $15 million systematic quarterly commitment.
Hilla Sferruzza: We have demonstrated that we can and will repurchase shares opportunistically based on market conditions As of March 31st, 2025, 264 million remain available to repurchase under our share authorization program
Hilla Sferruzza: We returned a total of $76 million of cash to shareholders in the first quarter of 2025, continuing to prioritize both internal growth and shareholder returns.
Slide 9
Hilla Sferruzza: In the first quarter of 2025, we secured approximately 2,200 net new lots under control, inclusive of the Nashville Acquisition Lot.
Hilla Sferruzza: This balance is net as about 1600 lot contracts, but we terminated as part of our routine quarterly review.
Hilla Sferruzza: In the first quarter of 2024, we put nearly 6,300 net new lots under control.
Hilla Sferruzza: We have a discipline land acquisition process where local market dynamics, including our anticipated incentives and pricing, are captured in our land underwriting.
Hilla Sferruzza: with our Healthy Land Portfolio. We can increase or pull back online acquisitions for the next several quarters based on market demand.
Hilla Sferruzza: As of March 31, 2025, we owned or controlled a total of about 84,200 lots, equating to 5.4 years supply of the last 12 months' closings, but in line with four to five years of forward-looking 2025 demand.
Hilla Sferruzza: We also had over 29,600 lots that were still undergoing diligence at the end of the quarter.
Hilla Sferruzza: As we prepare for our goal of 20,000 closings in 2027, we are actively sourcing both on and off balance sheet land to ensure our balance sheet is not overburdened during our growth cycle. About 62% of our total lot inventory at March 31st 2025 was owned and 38% was optioned compared to prior year, where we had a 69% owned inventory and a 31% option lot position. Thank you very much.
Finally, I'll direct you to site 10 for our guidance.
Hilla Sferruzza: Looking into the future, there is a greater amount of market uncertainty dependent on the outcomes of pending federal actions.
Hilla Sferruzza: Based on current visibility and market conditions, we are maintaining our full year 2025 guidance of home closings of 16,250 to 16,750 units and home closing revenue of 6.6 to 6.9 billion.
Hilla Sferruzza: As for Q2 2025, we are projecting total closings between 3,800 to 4,100 units.
Hilla Sferruzza: Home Closing Revenue of 1.5 to 1.65 billion, Home Closing Gross Margin of around 21.5%
Phillippe Lord: An effective tax rate of about 24.5% and eluded EPS in the range of $1.85 to $2.10. With that, I'll turn it back over to Phillippe
Phillippe Lord: Thank you, Hilla. To summarize, I'm Flight 11. We are proud of our team's efforts and our first quarter 2025 operational and financial results, which demonstrated the effectiveness of our new strategy in the challenging housing market.
Phillippe Lord: and as our spec building and streamlined operations for the flexibility and efficient cost structure, our business model was resilient in good market conditions and even more critical when the market slows.
Phillippe Lord: We believe that our moving ready supply for quick closings and our balanced approach toward pace and price will enable us to optimize returns and grow our market share while effectively navigating the uncertainty economic environment because we are offering consumers affordability and certainty in their home ownership journey.
Phillippe Lord: With that, I will now turn over the call to the operator for instructions on the Q.A. Operator.
Speaker Change: Thank you. We will now be conducting a question and an answer session. If you would like to ask a question, please set a start on your telephone key pattern.
Speaker Change: So, what indicate your line is in the question cue. You may press R2 if you would like to remove your question from the cue. For participating speaker equipment, you may be necessary to pick up your headset before pressing the star keys. You may press R2 if you would like to remove your headset before pressing the star keys.
One moment, please, while we pull for questions.
Hellman & Associates. Please proceed.
Speaker Change: Hey guys, good morning. Nice job in a very tough market, so congrats on the continued progress there.
Speaker Change: First question on the guidance. If I look at the midpoint of your range, I think I'm getting to an average closing price of around $410,000, which would be quite a bit from first quarter of levels, and I didn't hear in your comments any real indication of pricing power.
Speaker Change: So I'm just curious if you could walk us through what the expectation is there.
Speaker Change: Sure, so if we're looking at our ending backlog, appreciating that our closings were at 393R ending backlogs, actually at 405, so we're starting to see...
and R.A.S.P.
Speaker Change: Yeah, function of mix. It's not necessarily pricing power, although we have taken price increases in markets that can allow it. So, it's a combination of both, but primarily mix.
Speaker Change: Yeah, that's helpful. And then I guess just more broadly on that as far as the pricing power and incentive environment, we've heard from a number of builders so far.
Speaker Change: that I would say more cautious commentary on April activity compared to what you guys expressed and I think a number of them have indicated there either in the process of increasing incentives or expect to increase incentives to try to get volume jump started. So I'm curious, you know, as you think, I know you're not getting marked guidance in the back half of the year, but what is your broad based expectation for your incentive levels? You get through the spring selling season and ultimately in the seasonally slower months in order to achieve your...
Your Volume Targets
Speaker Change: Yeah, thanks Alan. So as we look into April , we have one more weekend left and a few days. And as we said in our opening comments, it feels pretty much similar to kind of February and March.
Speaker Change: So, you know, with that being the current trend in the market, that's really our current expectation for Q2. As we think about as we move throughout the year, it's hard to tell, right? Rehaut continue to move up and down.
Speaker Change: When rates move lower, we see increased demand, when rates move higher.
Speaker Change: We see softness, so it's hard to say what's going to happen towards the back half of the year but as we sit here with one week and less in April if you're feeling pretty good about you do and we just sold four and a half or 4.4 in Q1 when things were really challenging. Thank you.
Speaker Change: So we're pretty confident there. The other piece of this for us is just we have a lot of new communities opening in the back half of the year. We're finally starting to land our community count growth. We're going to have double digit community count growth.
Speaker Change: By the end of this year, and those communities are opening up in some of our strongest markets and traditionally our new communities have a really strong demand even in non seasonal times. [inaudible]
Speaker Change: So that's how we're sort of feeling about the rest of this year.
Speaker Change: and our confidence as we move forward. Just to reiterate what Felicia said, I know some folks are having to dig deeper on incentives to hit there.
Speaker Change: Targeted Per Store Volumes, we hit our target per store volume this quarter. So I think that we're comfortable at the current incentive threshold. We understand what it is that we need to do to hit that four plus target since we were already there in the first quarter. Here we go.
Makes sense. I appreciate the thoughts there guys. Good luck.
Michael Rehaut, Michael Rehaut, Michael Rehaut
Thank you. Our next question?
Stephen King, with Evercore ISI, please proceed.
Speaker Change: I just want to thank you for the opportunity to indicate that new communities are opening up to a strong market.
Speaker Change: of communities. Would it be as early as this quarter, in the second quarter, or is it more likely [inaudible]
Speaker Change: The reason I'm asking is because in order to hit your targeted closing sky, it looks like absorptions need to rise from the level they were in the first quarter. That doesn't usually happen. I just wanted to push on that a little bit and see whether or not you could elaborate a little bit more on these new communities coming in.
Speaker Change: Yeah, definitely a little bit more although timing of community openings on a quarter of my chlorpaces are very hard to predict.
Speaker Change: But as we look out over the next three-quarters, we're very confident in our double-digit year-over-year growth to end the year and move into the next spring shall we season?
Speaker Change: It should be relatively from where we are, to where we want to end, pretty consistent from here. You'll sort of see it stairs up.
Speaker Change: But obviously most of the growth is going to come in the second half of the year, third quarter, fourth quarter [inaudible]
Speaker Change: But we're going to be opening up those communities with move and ready inventory.
Speaker Change: We're going to be opening up those communities with things that can close within 60 days.
Speaker Change: and we personally believe that there's a strong demand for that product right now. So as you're looking at your modeling, my suggestion is that it's more about the community count growth that's driving our full year guidance than it is about us assuming that the market's going to get better.
Speaker Change: Yeah, that's helpful. Do you guys do much in the way of bulk sales to investors? What percent of your sales were bulk sales to investors? What do we expect from those kinds of sales on a go-forward basis?
Speaker Change: I don't have that number in front of us right now, but traditionally, we've always sold somewhere around 5% of our product.
Speaker Change: Not to bulk investors, but to just investor community. Some of them could be bulk. Some of them could be just mom and pops.
and we've never really increased that amount.
Speaker Change: As we stated in the past, we have done some things with some built-of-red operators [inaudible]
Speaker Change: We continue to try to do that but that stuff has somewhat slowed here as you are aware so we're running probably right around 5% if I had to guess but we can definitely get you a more accurate number but I would say it's definitely not increased recently [inaudible] I'm sorry I'm sorry I'm sorry I'm sorry
Speaker Change: Okay, great. That's good to hear. Thanks very much, guys. Appreciate it. Thanks.
Thank you.
Speaker Change: Our next question comes in line of Michael Rehaut with J.P. Morgan. Please proceed.
Thanks, good morning everyone, thanks for taking my questions.
. . . .
Speaker Change: You know, I wanted to first just kind of revisit, you know, the
Speaker Change: really, you know, and hats off to you the ability that you've demonstrated to reiterate your guidance.
Speaker Change: Amid, you know, what other builders are seeing is a decent level of volatility and some downward revisions on both volumes and margin.
Speaker Change: You know, and I wanted to drill down a little bit, you know, you talked in the past about the positioning of your communities, and I was wondering if you could try and dial in to the extent you have the best sense.
Speaker Change: You know, the ability to, you know, kind of maintain that target sales pace in the face of some of the challenges the industry has seen.
Speaker Change: If you feel that it's driven more by your price point, which is already at the lower end of the range.
you know, positioning within markets.
Speaker Change: or the way you go about the incentive levels as well or increase in some of the sales commissions.
Speaker Change: Could be a combination of all, but just trying to get a sense from your perspective of what's kind of driven the performance here today from a competitive standpoint.
Speaker Change: Yeah, try to answer that a couple different ways. First of all, our confidence as it relates to maintaining our full-year guidance is based on really three factors.
Speaker Change: The first one is that we just did exactly what we thought we were going to do in Q1. [inaudible]
Speaker Change: The second is that April's trending positively for us, so we're feeling confident in our Q2. And the third is that we believe in our double-digit growth in our community count. So that's really our confidence. Our...
Speaker Change: Crystal Balls are about as murkies as everyone else is right now on what the incentive environment is going to look like, the rate environment is going to look like as we progress through that, but the fact that we were able just to do what we did in Q1 gives us confidence that we can manage in these conditions.
Speaker Change: As it relates to what we're doing differently, I'm not sure we're doing anything differently than the rest of the folks, they all manage their businesses really, really well.
But I do believe that offering move in ready inventory [inaudible]
Speaker Change: is really offering customers something today that isn't high demand. They're looking for certainty, they're looking for confidence in their home purchase.
Speaker Change: and we're able to manage and solve for affordability in a different way with that window. And so my belief is that that has allowed us to secure the demand that we needed to in key one.
Speaker Change: and we're confident as we move forward that it'll continue to be that case.
Speaker Change: Great. Thanks for that, Thalif. I guess secondly, you highlighted an acquisition during the quarter of law to assets.
Speaker Change: I was wondering if you could kind of speak to perhaps more broadly, you know, the M&A backdrop and how you view to the extent that the landscape might have changed over the last three or six months [inaudible]
Speaker Change: with regards to deal flow, small builders or assets that are on the table, and that could be by the way also including not just
Speaker Change: You know, home builder operations or smaller private builders in certain markets, but also even in the land market side, if any deals are coming back to the table, people are starting to walk away from things.
Thank you very much.
Yeah, so deal flow.
Speaker Change: is high right now. Well, I'd say there's a lot of deals out there. It does feel like deal flow last year was pretty high. We were working on this one for a while. It's a small builder called Willough Branch. They're a great operator in the Nashville market. Great locations.
Speaker Change: and it was an all land purchase which was perfect for us because we could build our product on it and it was in a market that we feel very, very strongly about.
Speaker Change: So, there's a lot of those out there. We're trying to pick our spots. We bought, you know, Elliot Homes last year which caught us into the Gulf Coast which is a market we wanted to be in.
Speaker Change: and then the ability to double down in Nashville, we thought was a unique opportunity on some really great locations.
Speaker Change: So we'll continue to look at all that stuff. I think there's going to be a lot of a lot of that stuff out there.
Speaker Change: It's hard to underwrite stuff today, and I think it's getting harder with the current sort of uncertainty that's out there, incentives running as high as they are.
Speaker Change: So, you know, land isn't getting any cheaper, and these builders believe that their land has a lot of value, so it's getting more challenge to underwriting the building.
in the land market out there the same day.
Speaker Change: What we are seeing with the current kind of uncertainty in the market is there is an opportunity to renegotiate.
Speaker Change: We're seeing the ability to renegotiate terms mostly, push deals out, take them down over a longer period of time.
Speaker Change: And in some cases, we are seeing some price concessions, but not a ton, just yet.
Speaker Change: If this were to continue, I would expect to see more of that. We walked away from 1,600 lots, and Q1, a lot of that was because the sellers wouldn't renegotiate, and we felt like we needed to get that land at a lower price to make the current environment work.
Speaker Change: So, you know, we'll see how that goes as we go along here, but land is traditionally sticky. They're very patient. They'll wait for the market to get better. I don't think anyone thinks that this is going to be a multi-year event at this point. If it's not a multi-year event, land tellers are going to hold onto their land prices. Thank you.
Great. Thank you.
Speaker Change: Thank you. Our next question comes from a line of Trevor Allison with Wolf Research. Please proceed.
Hi, good morning, thank you for taking my questions.
Trevor Allison: We've all wanted to follow up on this comments you were just making about early reads on your your realtor and via appetite for the 60-day boobing guarantee. Have you seen the mix of realtor attachment rates that you guys were anticipating with that? And in markets that you are seeing higher level of resale inventory, you guys finding...
Trevor Allison: your 60-day guarantee to be a competitive advantage in those markets and that's perhaps what's differentiating you to some degree in this current market.
Trevor Allison: Well, our co-group is now 92%, which means we're obviously partnering with the realtors more strongly than we were when we were 75%, but that's intentional as part of our strategy. It's our commitment to those folks.
Trevor Allison: We believe a lot of those folks drive the activity on the existing home market, and we're giving them the opportunity to do more business with us, which is really the goal.
Trevor Allison: Look, I think the competitive advantage with resale, is that where a new home? [inaudible]
Trevor Allison: We're a new home. We build our home's energy efficient. No one's lit them. You can get them the way you want it.
Trevor Allison: The additional cherry on top, if you will, is the 60-day move-in ready kind of commitment and the move-in ready homes, which...
helps realtors, help their customers with the process.
Trevor Allison: When they can tell their customer that the home is going to be done, done, done, ready for them to move in? There's going to be no compromise of their lifestyle and there's a guarantee behind that. That's a really strong selling tool for our realtors with the customers they're bringing to us.
Trevor Allison: and I do think that creates a competitive advantage against the retail market. [inaudible]
Trevor Allison: Just one more point, Trevor, and maybe we'll start sharing this next quarter here.
Trevor Allison: Part of the reason that we got to the 4.4 net sales per month is not just the 92% co-broke, it's not the repeat business from those same agents, it's not individual transactions with one-time transactions with a broker, it's multiple transactions with the same set of brokers who are seeing us as a partner and bringing their customers to us instead of us having to solicit business from them. So maybe we'll start sharing some of those stats in future periods.
Trevor Allison: about the repeat business versus just the co-broke percentage. That's really kind of the advantage that we're seeing with our, with our, our eyes strategic zest.
Yeah, they'd be very helpful and sounds like that.
the strategy is having a lot of desired impacts.
Speaker Change: The second question is, you're the really the only builder in recent weeks who's maintained your full-year guidance. It's encouraging. It sounds like you're also hearing labor loosen up. So just with the softer market overall, are you expecting to see more direct-cost savings with your trades moving forward and then from an order of magnitude standpoint? Do you think it's possible that these direct-cost savings could be enough to offset any potential?
Terrif, Impact, whenever those may occur. Thanks
Speaker Change: Yeah, that's a great question. Really too early to tell.
Speaker Change: Currently, Labor is performing extremely well. As Hilla mentioned in her comments, we think they're slack in the system because
Speaker Change: People have pulled back on starts, multi-family continues to be slow for now.
Speaker Change: So we expect Labor to continue to perform well. The supply chain is somewhat of an unknown as we sit here today. We haven't layered any tariffs into our forecast because we don't have any cost increase. Please.
Speaker Change: We're the fifth largest homebuilder, so the relationships we have today with our national vendors are very strong. They provide us more high certainty and clarity because of our scale.
Speaker Change: Our streamlined operating model allows us to pull in different products if things get...
Stuck in supply chain, our vendors are allowed to [inaudible]
Speaker Change: Replace those products with other products that are similar. You got to remember we're 100% spec builders so the customer isn't picking out what's going in the homes. We're picking out what goes in the homes so as long as the home looks good. Our customers happy. They don't have the buyers remorse if they don't get the carpet they picked out. We're picking out what's going in the homes. We're picking out what's going in the homes.
and then finally... Um...
Speaker Change: You know, we have, we have eight, almost 8,000 homes, we just closed another 35 or so, so the next three starts, the next four months or so of starts are going to go out here at today's cost, we believe, which really secures our 2025 year.
Speaker Change: So tariffs are probably going to be more of a 2020-16 for us if all of that happens the way has it stated and that's kind of currently what we're forecasting our business to be.
Appreciate all the color and good luck moving forward.
Thank you.
Speaker Change: Thank you. Our next question comes to the line of Susan Maklari with Goldman Sachs. Please proceed.
Charles: Good morning, this is Charles Perron and for Susan. Thanks for taking my question.
Thank you very much.
Speaker Change: I guess, you know, we're always going to go out there and focus on trying to get foreign that sales per month as our base pays.
and then we're going to maximize returns from there.
Speaker Change: We were able to just, again, achieve 4.4 and what I believe to be very difficult market conditions.
Speaker Change: and then execute on 22% margins, which I think is pretty solid in what we thought we were going to do. And it feels, again, similar to what we're dealing with here in Q2. As we move into the back half of the year, if things were to get worse.
Speaker Change: We're going to focus on getting four net sales per month and then maximize returns from there. That's that's the baseline think the other question was what would we do with our community openings? Thank you.
Speaker Change: Nothing. Our community openings are scheduled based on when we have the lots and when we have the homes in production and we're going to open those up based on that, not based on market conditions.
Speaker Change: When we open up new communities, we typically do really, really well no matter what the market conditions are. We believe strongly in the land that we've bought and where those communities are going to be opening up. So there wouldn't be anything, any pullback in our community count growth. Thank you.
Speaker Change: Any sort of pause on rolling out new community openings doesn't really make sense. It's additive, it's not a substitution.
Got it. That's super helpful color.
Speaker Change: And I understand you don't have a lot of visibility on potential tariffs, but I guess my question is more on, you know, the risk from both potential tariffs across the supply chain for you, you know, you obviously make significant improvement in cycle and time over the last few years, and you know, how would you address, you know, the risk of, you know, potential supply chain disruption from tariffs and how would you be preparing ahead of that to make sure that, you know, you could keep your production pace intact. [inaudible]
Thank you for tuning in.
Speaker Change: Yeah, I think you're 100% right. There's a lot of risk out there. We're communicating constantly with our vendors. We have day-to-day conversations with those folks, both locally and at the national
So...
Speaker Change: Our main plan is to over communicate, so we understand what's coming [inaudible]
Speaker Change: So that we can plan accordingly, but we're committed to our starts, which I think is critical. If we don't continue to start homes, we don't have move in ready inventory, and we don't really have the ability to execute on our strategy. So that commitment from us on the starts allows them to plan their business accordingly. Anyway,
Speaker Change: and we're over-communicating, and then if things are changing out there in the future, we could hopefully source from different places and come up with substitute products where possible.
Speaker Change: and just continue to plant our business. So, we're not immune . . .
Speaker Change: to these tariffs any more than any other folks out there, both inside our industry and outside of industry, but we're just trying to be more strategic, and I think we have the ability to kind of plan out our business a little bit differently given our strategy. Thank you.
Speaker Change: Operator? Thank you. Yes, thank you. Our next question comes from a line of John Lovallo with UBS. Please proceed.
Good morning guys, thanks for taking my question.
Speaker Change: I guess this is the first one I just wanted to go back and maybe put a final point on what Stephen, Michael, were getting at.
Speaker Change: You know, to achieve the midpoint of the 2025 outlook, you know, it seems like you need to sell about 11,000.
Speaker Change: Moore Homes in the remainder of the year. And I get the fact that the community account is ramping nicely, but it does still seem like it would assume better than normal seasonality and absorption. I just want to make sure that we're thinking about that, right? And if so, what sort of gives you confidence in the ability to execute on that? [inaudible]
Speaker Change: Yeah, thanks John . So it's definitely not better than normal seasonality. We would say the number one driver in that number is the increased community count.
Speaker Change: So, just the timing of when you're modeling it and the volume of that increase is driving the majority of that performance. The other piece, until we've mentioned it, I'll just mention it one more time, we typically seem to have a pop.
Speaker Change: A lot of these communities opening will have a larger pop in that initial month, is driving the confidence we have to the full year number of the year.
Speaker Change: Okay, that's helpful. And then if we think about just the gross margin guide of 21.5 in the second quarter, I mean with 60% of your sales, you know, into a quarter, it seems like you would have a pretty real time view on gross margin. So I guess the question is, are you seeing the 21.5 now, or is it making it a little cushion for potentially having to offer a greater level of incentives? [inaudible]
Speaker Change: We're not too far from the end of what we're going to do, right? Everything's in backlog. Again, we're three weeks in, little over three weeks into the quarter. We only have a couple more weeks.
Speaker Change: of volume that's still going to close in the current quarter. So, yeah, I mean, this is live. You're seeing it live. Our current strategy is very real time. Number, so what you're seeing today is what we're experiencing. We have a high level of confidence in that number.
Okay, thank you guys [inaudible]
Speaker Change: Thank you. Our next question comes from the line of Carl Reichardt with BTIG.
Karl Breithardt: Please proceed. Thanks, everybody. Nice to talk to you. Thanks for taking my questions.
Speaker Change: So, what percentage Hilla of your current option mix, I think it's like 32,000 lots, is from Lancelars, Davies, versus land bankers, and I know Phillippe talked about land being sticky, but how do you think about the owned option mix on a go-forward basis given the happiness and the market where opportunities might be and what the cost of these lots or the cost of the option might be?
Speaker Change: than where we are today. But I think you raised a great point, Carl, which is all off-book is not truly off-book. We're not paying a landbanker lift.
Speaker Change: on all of the off-book lots. There's not, you know, 38-39 percent that that's off-book at a very high premium to us. A lot of that is just structured terms.
Speaker Change: with the initial seller. So most of those don't have a heavy lift, the percentage that's true third party charging us a fee to take something off book is a very small percentage of that true off balance sheet number that we've given. Thank you very much.
Karl Breithardt: Okay, great. I appreciate that. Thank you, Hilla. And then to go back to something you said and also the Trevor asked about which is slack in the in the in the label. I mean the worry was immigration reform would create problems with availability or cost and and now it's feeling maybe the opposite is occurring. Can you maybe specify there's some specific regions in the country where the slack is most noticeable and some specific trades where it is. Thanks.
Yeah, thank you.
specifically in construction and specifically in the south.
Karl Breithardt: where I think it's acute. And as of right now, we haven't seen that.
Karl Breithardt: I think, again, part of it is just the pullback on starts and we're not all increasing starts from here, which has created that opportunity. So, for now, it's business that's used at our cycle times, seem to be remaining consistent with what we reported.
Karl Breithardt: As it relates to other specific regions or categories, they're not really. Generally everything is sort of status quo right now. We're not seeing it impact framers differently than foundation folks, the different than roofers.
Karl Breithardt: As of right now, it's kind of a steady state across all that.
Thanks, Phillippe. Thanks, Hilla.
Speaker Change: Thank you. Our next question comes from the line of Alex Barron with Housing Research Center. Please proceed.
Speaker Change: doing also specs and focus on entry levels seem to be leaning heavily on price cutting, so I'm wondering how you guys...
Speaker Change: Are dealing with that or can you avoid it or can you just deal with it through offering lower interest rates to not do that?
Yeah, great question.
Speaker Change: You know, again, it's commuted by community, depending on where we are and who our customers and who our competitors are. We have places where we're adjacent to some of those competitors you refer to and we have to adjust accordingly, but generally we're not really cutting prices.
Speaker Change: Across our business, we're solving and competing with those folks through Ray Bidowns.
Speaker Change: and some other incentives that we're using with external realtors, etc.
Speaker Change: So for now, we don't have a lot to report on actual price cutting, but at the end of the day, I think incentives are the same as a price cut. It's all what's the house price.
Speaker Change: But the main tool we're using is Rape Brydown's affordability and payment seem to be the key to all of it as long as we can solve for payment.
and provide that 60-day move-in window.
We're able to compete without cutting our prices.
Speaker Change: You know, as we sit here today. Yeah, Alex, cutting pride. At the end of the day, a customer is trying to solve for a monthly payment, right? The price of the home is a headline number, but can they afford the monthly payment? So a price cut?
Speaker Change: does not go as far in your monthly payment as a reduction in interest rate that you can get through a rate buy down. So for us offering a rate buy down helps the customer solve the affordability question much much more efficiently cost us a lot less money than trying to reduce the price down to a monthly payment that makes sense. So I think that we're kind of combating against those those offers with the right monthly payments.
Speaker Change: and I really believe that for that balanced approach is most important.
Speaker Change: If you're in a situation where you have to cut your prices dramatically to solve for that foreign that sales per month, maybe that's not the right decision for that community, depending on all the competitors, what's going on with competitors, and how much your land costs and whatnot. So, that's really...
Speaker Change: How you need to find that balance. If you can solve for four without cutting your prices, you know, that's a much better outcome.
Speaker Change: Yeah, no, I mean, I agree with you 110%, which is why I'm surprised they're going in that route, because mathematically and financially it makes a ton more sense to buy down the rate, like-
I saw you guys in Texas offering 4.5% [inaudible]
Speaker Change: which is great for the consumer and it goes a long way towards making the payment affordable but you know nearby there's competitors cutting prices 10% which I'm like why are they doing that it doesn't?
Speaker Change: Yeah, so far we haven't had to operate that way, but we're not immune to a bunch of competitors around as cutting prices, but for now we've been able to achieve our four net sales per month without having to cut prices.
Okay, we're best of luck guys, thank you.
Speaker Change: Thank you so much. Is there one more operator? No, there are no further questions.
Speaker Change: Okay, thank you so much operator. I'd like to thank everyone who joined us call today for your continued interest in Meritage Homes. We hope you have a wonderful rest of your day and a great weekend. Thank you.
Speaker Change: This concludes today's teleconference. You made this connect your lines at this time. Thank you for your participation.
Speaker Change: Zola Levide Institute of Navigation Medieval and Modern History Texas A&M University Museum StudENTS Texas A&M University American Museum of Art
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