Q2 2026 Meritage Homes Corp Earnings Call

July 30, 2026

Speaker #2: Please stand by. Your meeting is about to begin. Greetings, and welcome to the second quarter 2026 Meritage Homes analyst call. At this time, all participants are in a listen-only mode.

Operator 3: Please stand by. Your meeting is about to begin. Greetings, welcome to the Q2 2026 Meritage Homes Analyst Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Operator: Greetings, welcome to the Q2 2026 Meritage Homes analyst call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Speaker #2: After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero.

Speaker #2: I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Speaker #3: Thank you, operator. Good morning, and welcome to our analyst call to discuss our second quarter 2026 results. We issued the press release yesterday after the market closed.

Emily Tadano: Thank you, operator. Welcome to our analyst call to discuss our Q2 2026 results. We issued the press release yesterday after the market closed. You can find it, along with the slides we'll refer to during this call, 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, contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time. We assume no obligation to update them. Any forward-looking statements are inherently uncertain.

Speaker #3: You can find it, along with the slides we'll refer to during this call, on our website at investors.meritagehomes.com, or by selecting the Investor Relations link at the bottom of our homepage.

Speaker #3: Please refer to slide two, cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward-looking statements.

Speaker #3: 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.

Speaker #3: Any forward-looking statements are inherently uncertain. Our actual results may be materially different from 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 our most recent filings with the Securities and Exchange Commission, specifically our 2025 Annual Report on Form 10-K and Form 10-Q for subsequent quarters.

Emily Tadano: 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 and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K and Form 10-Q for subsequent quarters. 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. With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, 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. I'll now turn it over to Mr. Hilton. Steve?

Speaker #3: 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.

Speaker #3: With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes.

Speaker #3: 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.

Speaker #3: Steve.

Speaker #4: Thank you, Emily. Welcome to everyone joining today's call. Today I'll begin with a brief overview of market conditions and our second quarter results. Phillippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance.

Steven Hilton: Thank you, Emily. Welcome to everyone joining today's call. Today, I'll begin with a brief overview of market conditions and our Q2 results. Phillippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions, driving quarterly sales orders of 3,575, which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration, as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in Q1. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first move-up price points.

Steve Hilton: Thank you, Emily. Welcome to everyone joining today's call. Today, I'll begin with a brief overview of market conditions and our Q2 results. Phillippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions, driving quarterly sales orders of 3,575, which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration, as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in Q1. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first move-up price points.

Speaker #4: Consistent with what others have shared about the spring selling season, we also experienced slower-than-normal selling conditions driving quarterly sales orders of 3,575, which were 9% below prior year.

Speaker #4: Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration as average absorption pace of 3.5 net sales per month this quarter was in line with a 3.6 in the first quarter.

Speaker #4: Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first move-up price points.

Speaker #4: And we believe that our strategy of having sufficient available home inventory combined with our growing community count positions us to quickly convert demand into sales this quarter during brief periods of rate relief.

Steven Hilton: We believe that our strategy of having sufficient available home inventory, combined with our growing community count, positions us to quickly convert demand into sales this quarter during brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times, and working down our finished inventory levels. These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6% and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of 30 June 2026, book value per share increased 5% year over year. With that, I'll now turn it over to Phillippe.

Steve Hilton: We believe that our strategy of having sufficient available home inventory, combined with our growing community count, positions us to quickly convert demand into sales this quarter during brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times, and working down our finished inventory levels. These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6% and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of 30 June 2026, book value per share increased 5% year over year. With that, I'll now turn it over to Phillippe.

Speaker #4: Operationally, we continue to focus on what's within our control delivering a 200% backlog conversion rate further improving cycle times and working down our finish inventory levels.

Speaker #4: These efforts generated 3,725 home closings and 1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6%, and adjusted diluted EPS was $1.42, excluding 3.9 million of real estate inventory impairments and terminated land deal walk-away charges.

Speaker #4: As of June 30th, 2026, book value per share increased 5% year over year, and with that, I'll now turn it over to Phillippe. Thank you, Steve.

Phillippe Lord: Thank you, Steven. Our strategy of pre-started inventory, streamlined operations, and go-to-market tenants enables us to be agile in our reactions to current market conditions. We leveraged this strategy to generate additional direct cost savings to enhance our returns as incentives remained elevated this quarter. Our move-in-ready homes and strong realtor relationships help us compete in an environment where the homebuyer values a quick close through clarity and certainty in the home buying process. While market conditions remain softer than normal, we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1,100 homes year over year as we replaced older inventory with an increased volume of new product with lower direct costs.

Speaker #4: Our strategy of pre-started inventory streamlined operations and go-to-market tenants enables us to be agile in our actions to current market conditions. We leveraged this strategy to generate additional direct cost savings to enhance our returns.

Speaker #4: As incentives remained elevated this quarter, our move-in-ready homes and strong realtor relationships helped us compete in an environment where the home buyer values a quick close through clarity and certainty in the home buying process.

Speaker #4: While market conditions remained softer than normal, we continued to position the business for improved financial metrics by managing our whip inventory. We successfully reduced our finished home position by over 1,100 homes year over year as we replaced older inventory with an increased volume of new product with lower direct costs.

Speaker #4: At the same time, we have kept our cycle times sub-110 calendar days for the fifth consecutive quarter, and even found a few more days of improvement allowing us to start homes later while still supporting our 60-day closing guarantee.

Phillippe Lord: At the same time, we have kept our cycle time sub 110 calendar days for the fifth consecutive quarter and even found a few more days of improvement, allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improve liquidity while allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of 30 June 2026 was up 9% year over year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Despite the small dip, we are reiterating our expectation of a 5% to 10% full year 2026 community count growth year over year.

Speaker #4: These shorter cycle times benefit our carry cost burden and improve liquidity, while allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of June 30th, 2026, was up 9% year over year, and 1% lower than the 345 in Q1.

Speaker #4: Due to timing with a few early closeouts and some delayed openings into July. Despite the small dip, we are reiterating our expectation of a 5 to 10 percent full-year 2026 community count growth year over year.

Speaker #4: We also achieved another quarter of lower construction costs per foot, as our purchasing teams collaborated with our strategic trades to find incremental savings and efficiencies that benefited all parties.

Phillippe Lord: We also achieved another quarter of lower construction cost per foot as our purchasing teams collaborated with our strategic trades to find incremental savings and efficiencies that benefited all parties. We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year over year to $357 million in Q2 from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings in H2 2026 and into 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases.

Speaker #4: We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors.

Speaker #4: All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year over year to $357 million in the second quarter from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings in the second half of 2026 and into 2027.

Speaker #4: We also returned 131 million this quarter to shareholders through dividends and share repurchases. By maintaining our operational and financial discipline we believe we are well positioned to navigate uncertainty today uncertainties today while preparing for growth and increased shareholder returns as the market conditions improve.

Phillippe Lord: By maintaining our operational and financial discipline, we believe we are well-positioned to navigate uncertainties today while preparing for growth and increased shareholder returns as the market conditions improve. As part of that longer-term plan includes an intentional shift of a portion of our business to first-time move-up homes as we continue to serve one of our key buyer demographics, the millennial customer, as they begin to look toward their next home purchase, while still continuing to offer our entry-level product for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends. Our goal is to be around one-third, two-thirds mix of first move-up and entry-level homes consistent with the demographics of the US population.

Speaker #4: As part of that longer-term plan includes an intentional shift of a portion of our business to first-time move-up homes as we continue to serve one of our key buyer demographics the millennial customer as they begin to look toward their next home purchase.

Speaker #4: While still continuing to offer our entry-level product for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends.

Speaker #4: Our goal is to be around one-third, two-thirds mix of first move-up and entry-level homes consistent with the demographics of the US population. We are intentionally rebalancing our portfolio to achieve that over time starting with a heavier allocation to the acquisition of land for first move-out customers.

Phillippe Lord: We are intentionally rebalancing our portfolio to achieve that over time, starting with a heavier allocation to the acquisition of land for first move-up customers. Q2 2026 orders were 9% lower year over year, primarily due to a 19% decline in average absorption pace, which was partially offset by a 14% increase in average community count. Cancellation rate of 13% was a little higher than the 11% in Q1, but still remained below typical industry averages as we benefit from a quick sale to close process. Our average absorption pace was 3.5 homes per community per month during Q2, compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation.

Speaker #4: Second quarter 2026 orders were 9% lower year over year primarily due to a 19% decline in average absorption pace, which was partially offset by a 14% increase in average community count.

Speaker #4: Cancellation rate of 13% was a little higher than the 11% in Q1, but still remained below typical industry averages as we benefit from a quick sale-to-close process.

Speaker #4: Our average absorption pace was 3.5 homes per community per month during the second quarter, compared to 4.3 a year ago and 3.6 in Q1.

Speaker #4: Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation. While long-term objective remains an average of 4 net sales per month for the year, we will not sacrifice profitability or deplete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic.

Phillippe Lord: While our long-term objective remains an average of four net sales per month for the year, we will not sacrifice profitability or deplete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385,000 was down 3% from prior year due to geographic mix shifting from higher ASP west region into the lower ASP east region. Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per home incentive costs. We grew our active communities 9% year over year from 312 in the prior year to 340 by 30 June. Q2 was 1% lower than 345 active communities in Q1 as timing played a factor this quarter.

Speaker #4: ASP on orders this quarter of $385,000 was down 3% from the prior year due to geographic mix shifting from the higher ASP West region into the lower ASP East region.

Speaker #4: Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per-home incentive costs. We grew our active communities 9% year over year, from 312 in the prior year to 340 by June 30th. Q2 was 1% lower than 345 active communities in Q1, as timing played a factor this quarter.

Speaker #4: Our early closeouts occurred as we took advantage of pockets of stronger demand, and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter, and 67 year to date.

Phillippe Lord: Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter and 67 year to date. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2. Although very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in Q2. Although the needed volume incentives varied notably. Parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolinas were among our strongest performers, demonstrating more market strength in geographies with limited inventory.

Speaker #4: In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2. Although very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back.

Speaker #4: We continue to see highly localized demand patterns, with all regions encompassing markets of both strength and weakness in Q2. Although the needed volume incentives varied notably.

Speaker #4: Parts of Texas, Southern California, Atlanta, Raleigh, and the coastal Carolinas were among our strongest performers, demonstrating more market strength than geographies with limited inventory. We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into a potential path for recovery longer term.

Phillippe Lord: We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into a potential path for recovery longer term. In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace. Demand trends were softer in Orlando, Denver, Salt Lake City, and Northern California. Now turning to slide six. Q2 starts totaled approximately 3,900 homes, down 4% year over year, yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick close strategy and within our targeted range of 175% to 200%.

Speaker #4: In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace, on sales pace, demand trends were softer in Orlando, Denver, Salt Lake City, and Northern California.

Speaker #4: Now turning to slide 6. Q2 starts totaled approximately 3,900 homes down 4% year over year, yet are yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures.

Speaker #4: With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick-close strategy and falling within our targeted range of 175% to 200%.

Speaker #4: Our ending backlog was approximately 1,720 as of June 30, 2026, compared to approximately 1,750 homes as of June 30, 2025. As for the combined total of specs and backlog, we had around 6,800 units at June 30, 2026, 22% less than the approximate 8,700 specs and backlog we had at June 30, 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions.

Phillippe Lord: Our ending backlog was approximately 1,720 as of 30 June 2026, compared to approximately 1,750 homes as of 30 June 2025. As for the combined total of specs and backlog, we had around 6,800 units at 30 June 2026, 22% less than the approximate 8,700 specs in backlog we had at 30 June 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. We ended the quarter with approximately 5,100 spec homes, down 27% from approximately 6,900 specs in the prior year and up 7% sequentially from Q1. The 15 specs per store this quarter translated to about 4 months supply, intentionally near the lower end of our target 4 to 6 months supply due to today's demand environment and our improved cycle times. Comparatively, in Q2 2025, we had 22 specs per store or 5 months of supply.

Speaker #4: We ended the quarter with approximately 5,100 spec homes down 27% from approximately 6,900 specs in the prior year and up 7% sequentially from Q1.

Speaker #4: The 15 specs per store this quarter translated to about 4 months supply intentionally near the lower end of our target 4 to 6 months supply due to today's demand environment and our improved cycle times.

Speaker #4: Comparatively, in the second quarter of 2025, we had 22 specs per store or 5 months of supply. We reduced our completed specs to 1,500 units in Q2, which was 42% lower than prior year and 30% of our total specs.

Phillippe Lord: We reduced our completed specs to 1,500 units in Q2, which was 42% lower than prior year and 30% of our total specs, our lowest percentage in two years and right around our target of one-third. This compared to 38% in the prior year and 46% in Q1. A balanced approach of reducing aged inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes per store. Although we are starting Q3 with lower backlog, we believe the spec home inventory provides the path to achieve our Q3 guidance. With that, I'll now turn it over to Hilla to walk through our financial results. Hilla?

Speaker #4: Our lowest percentage in 2 years and right around our target of one-third. This compared to 38% in the prior year and 46% in the first quarter.

Speaker #4: Our balanced approach of reducing aged inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes per store.

Speaker #4: Although we are starting Q3 with a lower backlog, we believe this spec home inventory provides us the path to achieve our Q3 guidance. With that, I'll now turn it over to Hilla to walk through our financial results.

Speaker #4: Hila?

Speaker #2: Thank you, Phillippe. Let's turn to slide 7 and cover our Q2 results in more detail. Second quarter 2026 home closing revenue of $1.4 billion was 14% lower than prior year due to an 11% lower home closing volume and a 4% decrease in ASP on closings to $373,000.

Hilla Sferruzza: Thank you, Phillippe. Let's turn to slide seven and cover our Q2 results in more detail. Q2 2026 home closing revenue of $1.4 billion was 14% lower than prior year due to 11% lower home closing volume and a 4% decrease in ASP on closings to $373,000. While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, the decline in ASP was primarily due to geographic mix. To a lesser extent, product mix within our communities also impacted ASP, with lower priced homes outselling higher priced ones, and in certain markets where we had a greater amount of aged spec inventory, we used incremental incentives this quarter to sell those homes. With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends.

Speaker #2: While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, the decline in ASP was primarily due to geographic mix.

Speaker #2: To a lesser extent, product mix within our communities also impacted ASP, with lower-priced homes outselling higher-priced ones. In certain markets where we had a greater amount of aged spec inventory, we used incremental incentives this quarter to sell those homes.

Speaker #2: With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends. During the temporary dips in rate this quarter, we sold and closed homes with lower cost incentives, which reduced our per-home incentive burden.

Hilla Sferruzza: During the temporary dips in rate this quarter, we sold and closed homes with lower cost incentives, which reduced our per home incentive burden. Looking ahead, incentive cost and utilization will continue to be inversely correlated to interest in mortgage rates, which remain highly volatile and move on both domestic and international political developments. Home closing gross margin of 18.3% in Q2 2026 was 280 bps lower than prior year's 21.1% as a result of loss leverage on lower home closing revenue and higher lot costs, both of which were partially offset by improved direct costs and faster cycle times. Q2 2026 home closing gross margin included $3.6 million of real estate inventory impairments and about $300,000 in terminated land deal walkaway charges, compared to no impairments in $4.2 million in terminated land deal walkaway charges in the prior year.

Speaker #2: Looking ahead, incentive cost and utilization will continue to be inversely correlated to interest and mortgage rates which remain highly volatile and move on both domestic and international political developments.

Speaker #2: Home closing gross margin of 18.3% in the second quarter of 2026 was 280 bips lower than prior year's 21.1% as a result of loss leverage on lower home closing revenue and higher lot costs, both of which were partially offset by improved direct costs and faster cycle times.

Speaker #2: Second quarter 2026, home closing gross margin included 3.6 million dollars of real estate inventory impairments and about 300,000 in terminated land deal walkaway charges, compared to no impairments and 4.2 million in terminated land deal walkaway charges in the prior year.

Speaker #2: Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for the second quarters of 2026 and 2025 respectively, we are encouraged that the volume of impairments remains relatively limited and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price.

Hilla Sferruzza: Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for Q2 2026 and 2025, respectively. We are encouraged that the volume of impairments remains relatively limited, and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price. Our current land basis is primarily comprised of higher cost land vintages from the 2022 to 2025 timeframe. Although this higher basis will continue to be a margin headwind in the near term, we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged.

Speaker #2: Our current land basis is primarily comprised of higher cost land vintages from the 2022 to 2025 time frame. Although this higher basis will continue to be a margin headwind in the near term, we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged.

Speaker #2: In Q2, direct costs per square foot were down nearly 6% year over year, reflecting the disciplined purchasing and vendor negotiations Phillippe already covered, with savings generated by both labor and materials.

Hilla Sferruzza: In Q2, direct costs per square foot were down nearly 6% year over year, reflecting the disciplined purchasing and vendor negotiations Phillippe already covered, with savings generated by both labor and materials. As we've noted, our newer starts should benefit from this lower cost basis and will be reflected in our margins in H2 of this year. Sequentially, adjusted gross margin improved 80 bps to 18.6% from 17.8% in Q1, driven primarily by better leverage on higher home closing revenue and improved direct costs from newer inventory. While we do not anticipate a significant gross margin recovery this year, our long-term target remains 22.5% to 23.5% under normalized market conditions where incentives and interest rates are more in line with historical averages.

Speaker #2: As we've noted, our newer starts should benefit from this lower cost basis and will be reflected in our margins in the second half of this year.

Speaker #2: Sequentially, adjusted gross margin improved 80 basis points to 18.6% from 17.8% in Q1, driven primarily by better leverage on higher home closing revenue and improved direct costs from newer inventory.

Speaker #2: While we do not anticipate a significant gross margin recovery this year, our long-term target remains 22.5% to 23.5% under normalized market conditions, where incentives and interest rates are more in line with historical averages.

Speaker #2: Selling, general, and administrative expenses as a percentage of second quarter 2026 home closing revenue were 10.4%, compared to 10.2% in the second quarter of 2025, as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the loss leverage on lower home closing revenue.

Hilla Sferruzza: Selling, general, and administrative expenses as a percentage of Q2 2026 home closing revenue were 10.4% compared to 10.2% in Q2 2025 as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the lost leverage on lower home closing revenue. Despite the tougher sales environment, we did not increase sales and marketing spend on a per sale basis. Our longstanding realtor relationships continue to provide a competitive advantage, generating a consistent level of repeat business from our broker network. External commissions remain stable both year over year and sequentially, while our co-broke percentage continues to run in the low 90% range. We remain committed to growing our annual closing volume, which should drive operating leverage and support our longer-term SG&A target of 9.5%.

Speaker #2: Despite the tougher sales environment, we did not increase sales and marketing spend on a per-sale basis. Our long-standing realtor relationships continue to provide a competitive advantage, generating a consistent level of repeat business from our broker network.

Speaker #2: External commissions remain stable, both year over year and sequentially, while our cobook percentage continues to run in the low 90% range. We remain committed to growing our annual closing volume, which should drive operating leverage and support our longer-term SG&A target of 9.5%.

Speaker #2: The second quarter's effective income tax rate was 24.8% this year, compared to 23.9% for the second quarter of 2025, due to higher state income taxes.

Hilla Sferruzza: The Q2's effective income tax rate was 24.8% this year, compared to 23.9% for Q2 2025 due to higher state income taxes. As a reminder, we expect only a limited impact from the June 2026 expiration of the energy tax credits for the balance of this year and into the future, as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credits. Overall, lower home closing revenue and gross profit led to a 33% year-over-year decrease in Q2 2026 diluted EPS to $1.37 from $2.04 in 2025. Adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walkaway charges. To highlight the key results for H1 2026, on a year-over-year basis, orders were down 7%, closings were down 12%, and our home closing revenue decreased 16% to $2.5 billion.

Speaker #2: As a reminder, we expect only a limited impact from the June 2026 expiration of the energy tax credits for the balance of this year and into the future as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credits.

Speaker #2: Overall, lower home closing revenue and gross profit led to a 33% year over year decrease in second quarter 2026 diluted EPS to $1.37 from $2.04 in 2025, adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walkaway charges.

Speaker #2: To highlight the key results for the first half of 2026, on a year over year basis, orders were down 7%, closings were down 12%, and our home closing revenue decreased 16% to 2.5 billion.

Speaker #2: Adjusted home closing margin of 18.2% was 350 bips lower than 2025, SG&A is a percentage of home closing revenue was 11%, and net earnings 146 million.

Hilla Sferruzza: Adjusted home closing margin of 18.2% was 350 bps lower than 2025. SG&A as a percentage of home closing revenue was 11%, and net earnings decreased 46% to $146 million. Adjusted diluted EPS was $2.24 for the first six months of 2026, excluding impairments and walkaway charges. Before we turn to the balance sheet, it's worth noting that our customer credit metrics remain healthy and unchanged during Q2. FICO scores, DTIs, and LTVs all track closely with historical averages, continuing a trend we've seen for several years. Lack of deterioration in customer credit quality validates that amid ongoing market volatility, consumer psychology continues to play a strong role alongside affordability concerns in home buying decisions. On to slide eight.

Speaker #2: Adjusted diluted EPS was $2.24 for the first six months of 2026, excluding impairments and walkaway charges. Before we turn to the balance sheet, it's worth noting that our customer credit metrics remain healthy and unchanged during the second quarter, FICO scores DTIs and LTVs all track closely with historical averages, continuing a trend we've seen for several years.

Speaker #2: Lack of deterioration in customer credit quality validates that, amid ongoing market play, credit continues to play a strong role alongside affordability concerns in home buying decisions. On to slide 8.

Speaker #2: As of June 30, 2026, we maintained a healthy balance sheet supported by 807 million dollars in cash, no outstanding borrowing under our credit facility, and a net debt to cap ratio of 17.1%.

Hilla Sferruzza: As of 30 June 2026, we maintained a healthy balance sheet supported by $807 million in cash, no outstanding borrowing under our credit facility, and a net debt to cap ratio of 17.1%. Additionally, in June, we refinanced our revolving credit facility to increase the facility size to $980 million, extend the maturity from 2030 to 2031, and increase the accordion feature to permit a facility size of up to $1.47 billion. We are committed to supporting our long-term growth trajectory while prudently managing our capital structure and maintaining our investment-grade credit rating. As such, our net debt to cap ceiling remains in the mid-20s range. Our capital allocation strategy looks to balance both growth and shareholder returns. As we have been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $357 million in Q2.

Speaker #2: Additionally, in June, we refinanced our revolving credit facility to increase the facility size to $980 million, extend the maturity from 2030 to 2031, and increase the accordion feature to permit a facility size of up to $1.47 billion.

Speaker #2: We are committed to supporting our long-term growth trajectory while prudently managing our capital structure and maintaining our investment-grade credit rating, as such, our net debt to cap ceiling remains in the mid-20s range.

Speaker #2: Our capital allocation strategy seeks to balance both growth and shareholder returns, as we have been more selective with land deals and the timing of land development.

Speaker #2: Our land spend was down 30% year over year this quarter, totaling 357 million in Q2. With slower demand, we are focused only on the most attractive land opportunities increasing our land spend for first-time move-up communities and optimizing development schedules.

Hilla Sferruzza: With lower demand, we are focused only on the most attractive land opportunities, increasing our land spend for first-time move-up communities and optimizing development schedules. Our forecasted land acquisition and development spend is expected to be between $1.7 and $2 billion for full year 2026. We returned $131 million of capital to shareholders via buybacks and dividends this quarter, up 74% from $76 million in the same period last year. We bought back over 1.5 million shares or 2.3% of shares outstanding at the beginning of the quarter for $100 million. We repurchased the shares this quarter at an average 16% discount to book. To date, in 2026, we have spent $230 million on share buybacks, reducing our 31 December 2025 outstanding share count by nearly 5%. As of 30 June 2026, $284 million was available under the repurchase program.

Speaker #2: Our forecasted land acquisition and development spend is expected to be between $1.7 and $2 billion for the full year 2026. We returned $131 million of capital to shareholders via buybacks and dividends this quarter, up 74% from $76 million in the same period last year.

Speaker #2: We bought back over 1.5 million shares, or 2.3% of shares outstanding at the beginning of the quarter, for $100 million. We repurchased the shares this quarter at an average 16% discount to book.

Speaker #2: To date, in 2026, we have spent $230 million on share buybacks, reducing our December 31, 2025, outstanding share count by nearly 5%. As of June 30, 2026, $284 million was available under the repurchase program.

Speaker #2: Given the instability of the current environment and with the path for interest rate trends remaining uncertain, we will continue to execute on our share repurchase commitment, prepared back slightly to a minimum of 55 million per quarter for the balance of the year while continuing to increase that opportunistically repurchasing incremental shares on cash flows and dips in our stock price.

Hilla Sferruzza: Given the instability of the current environment and with the path for interest rate trends remaining uncertain, we will continue to execute on our share repurchase commitment, but pare it back slightly to a minimum of $55 million per quarter for the balance of the year while continue to increase that opportunistically, repurchasing incremental shares on cash flows and dips in our stock price. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $31 million and $63 million year-to-date. For H1 2026, we returned $292 million of capital to shareholders, or 201% of our total earnings to date this year. Slide nine. In Q2 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of about 300 terminated lots.

Speaker #2: We increased our quarterly cash dividend 12% year over year, to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $31 million, and $63 million year to date.

Speaker #2: For the first half of 2026, we returned $293 million of capital to shareholders, or 201% of our year. Slide 9. In the second quarter of 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of about 300 terminated lots.

Speaker #2: These lots primarily reflect communities for 2028 and beyond as we own or control most of the lots we need to meet our community count targets through 2027.

Hilla Sferruzza: These lots primarily reflect communities for 2028 and beyond, as we own or control most of the lots we need to meet our community count targets through 2027. In Q2 2025, we put nearly 1,800 net new lots under control. As of 30 June 2026, we owned or controlled a total of about 73,200 lots, equating to 5.2-year supply of the last 12 months' closings, slightly above our target of four to five-year supply, but reflective of the upcoming community count growth we expect over the next 18 months. We also had approximately 15,300 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control. We continue to target around a 40% option lot ratio.

Speaker #2: In the second quarter of 2025, we put nearly 1,800 net new lots under control. As of June 30, 2026, we owned or controlled a total of about 73,200 lots equating to 5.2 years' supply of the last 12 months closings, slightly above our target of 4 to 5 years' supply but reflective of the upcoming community count growth we expect over the next 18 months.

Speaker #2: We also had approximately 15,300 lots that were still undergoing diligence at the end of the quarter which is another potential one-year supply in the pipeline that we can choose to control.

Speaker #2: We continue to target around a 40% option lot ratio. About 69% of our total lot inventory at June 30, 2026 was owned and 31% was optioned.

Hilla Sferruzza: About 69% of our total lot inventory at 30 June 2026 was owned and 31% was optioned. This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% option lot position in the prior year, reflecting our terminated lots in late 2025. We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits, as we do not believe every land deal can absorb the incremental cost of an off-balance sheet structure. Finally, I'll direct you to slide 10. Based on current market conditions and year-to-date results, we are upping our guidance for full-year 2026 home closings and revenue to around 5% below full-year 2025 results. Although home closing revenue could trend a bit lower if market conditions require higher incentives.

Speaker #2: This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% option lot position in the prior year, reflecting our terminated lots in late 2025.

Speaker #2: We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits as we do not believe every land deal can absorb the incremental cost of an off-balance sheet structure.

Speaker #2: Finally, I'll direct you to slide 10. Based on current market conditions and year-to-date results, we are updating our guidance for full-year 2026 home closings and revenue to around 5% below full-year 2025 results, although home closing revenue could trend a bit lower if market conditions require higher incentives.

Speaker #2: For Q3 2026, we are projecting total home closings between 3,300 and 3,600 units, home closing revenue of 1.26 to 1.35 billion, home closing gross margin around 18%, and effective tax rate of 24.5 to 25% and diluted EPS in the range of $1.10 to $1.30.

Hilla Sferruzza: For Q3 2026, we are projecting total home closings between 3,300 and 3,600 units, home closing revenue of $1.26 to $1.35 billion, home closing gross margin around 18%, an effective tax rate of 24.5% to 25%, and diluted EPS in the range of $1.10 to $1.30. With that, I'll turn it back over to Phillippe.

Speaker #2: With that, I'll turn it back over to Phillippe.

Speaker #1: Thank you, Hilla. In closing, we believe our second quarter results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from the first quarter to the second quarter.

Phillippe Lord: Thank you, Hilla. In closing, we believe our Q2 results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from Q1 to Q2. Throughout this quarter, we remain focused on controlling what we can control, strategically reducing age inventory as we target the right level of inventory per store, balancing pace and price, and allocating capital thoughtfully to maximize returns. Looking ahead, with community count expected to grow in H2 2026, we believe we have the units to achieve our full-year revenue guidance despite ongoing market challenges. Combined with our balanced approach to capital allocation, we believe Meritage is well-positioned to navigate the current uncertain environment and deliver strong shareholder value long term. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Speaker #1: Throughout this quarter, we remained focused on controlling what we can control, strategically reducing aged inventory as we target the right level of inventory per store, balancing pace and price, and allocating capital thoughtfully to maximize returns.

Speaker #1: Looking ahead, with community count expected to grow in the second half of 2026, we believe we have the units to achieve our full-year revenue guidance despite ongoing market challenges.

Speaker #1: Combined with our balanced approach to capital allocation, we believe Meritage is well positioned to navigate the current uncertain environment and deliver strong shareholder value long-term.

Speaker #1: With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Speaker #3: Thank you. To ask a question, you will need to press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2.

Operator 3: Thank you. To ask a question, you will need to press star one on your telephone keypad. If you want to remove yourself from the queue, please press star two. In the interest of time, we ask that you limit yourself to one question and one follow-up. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Trevor Allinson with Wolfe Research. Please go ahead. Your line is open.

Operator: Thank you. To ask a question, you will need to press star one on your telephone keypad. If you want to remove yourself from the queue, please press star two. In the interest of time, we ask that you limit yourself to one question and one follow-up. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Trevor Allinson with Wolfe Research. Please go ahead. Your line is open.

Speaker #3: In the interest of time, we ask that you limit yourself to one question and one follow-up. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.

Speaker #3: And we'll take our first question from Trevor Allensen with Wolf Research. Please go ahead. Your line is open.

Speaker #4: Hi, good morning. Thank you for taking my questions. First one's on the better-than-expected gross margin in the quarter despite rates going higher. Can you talk about what drove the beat in the quarter?

Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First one's on the better-than-expected gross margin in the quarter despite rates going higher. Can you talk about what drove the beat in the quarter? It sounds like maybe you're getting some better cost structure come through to perhaps quantify those tailwinds in the quarter. Then should we expect incremental savings on the cost structure moving forward?

Speaker #4: It sounds like maybe you're getting some better cost structure come through. Can you perhaps quantify those tailwinds in the quarter and then should we expect incremental savings on the cost structure moving forward?

Speaker #3: Thanks, Trevor. I'll take the gross margin question. So for us, it's a combination of a couple things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition.

Hilla Sferruzza: Thanks, Trevor. I'll take the gross margin question. For us, it's a combination of a couple things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition. We also had that 6% year-over-year improvement on direct cost, which is helpful. Then also, we mentioned this, but because such a high percentage of our homes sell and close in the same period, there was a nice dip in interest rates in the middle of the quarter where we were able to sell homes at a lower incentive and still close them in the same quarter. We saw all of those benefits come together despite the higher lot cost that's still rolling through the financials. We were able to harness all of those benefits together and deliver that 18.6 adjusted gross margin.

Speaker #3: But we also had that 6% year-over-year improvement on direct cost, which is helpful. And then also, we mentioned this, but because such a high percentage of our homes sell and close in the same period, there was a nice dip in interest rates in the middle of the quarter where we were able to sell homes at a lower incentive and still close them in the same quarter.

Speaker #3: So we saw all of those benefits come together. Despite the higher lot cost that's still rolling through the financials, we were able to harness all of those benefits together and deliver that 18.6% adjusted gross margin on a go-forward basis.

Hilla Sferruzza: On a go-forward basis, I don't know that we're modeling continuing improvement on direct margin, although, or on direct cost, I should say. The savings that we've had so far should continue to push through the financial statement. The rest of the gross margin for the balance of the year and into next year is really a discussion of volume of incentives and overall volume of closings.

Speaker #3: I don't know that we're modeling continuing improvement on direct margin—or on direct cost, I should say—but the savings that we've had so far should continue to push through the financial statement.

Speaker #3: So the rest of the gross margin for the balance of the year and into next year is really a discussion of volume of incentives and overall volume of closings.

Speaker #4: Okay, makes sense. Thanks for that, Hilla. And then the second question's on your shift back for a portion of your business more towards first-time move-up.

Trevor Allinson: Okay. Makes sense. Thanks for that, Hilla. Then the second question is on your shift back for a portion of your business more towards first-time move-up. I think from a demographic outlook by age cohort, that makes a lot of sense. What is the timeline to make that shift? Is it still your expectation you are going to offer a 60-day guaranteed fully spec model on those homes? Are any changes to your go-to-market strategy as you serve a little bit higher-end buyer?

Speaker #4: I think from a demographic outlook by age cohort that makes a lot of sense. What's the timeline to make that shift and is it still your expectation you're going to offer a 60-day guaranteed fully-spec model on those homes or any changes to your go-to-market strategy as you serve a little bit higher-end buyer?

Speaker #1: Yeah, great question. It'll take a little bit of time. Because we pivoted pretty meaningfully to entry-level during the last five years. So as we pivot back to a more balanced 30 to 70 percent, it's really about sourcing some new land and bringing that land on the market.

Phillippe Lord: Yeah, great question. It will take a little bit of time because we pivoted pretty meaningfully to entry-level during the last five years. As we pivot back to a more balanced 30% to 70%, it is really about sourcing some new land and bringing that land on the market. More of a 2028 and beyond type of impact. As it relates to the operating strategy, it is going to be pretty aligned with what we do as it relates to not offering choice and options. We are going to tweak the go-to-market when it comes to when we release the homes. We will probably be releasing the homes earlier because many of those folks have homes to sell. There will be some tweaks on sort of our focus around the closing-ready guarantee, as well as pieces of the realtor strategy.

Speaker #1: So, more of a 2028 and beyond type of impact. And as it relates to the operating strategy, it's going to be pretty aligned with what we do as it relates to not offering choice and options, but we are going to tweak the go-to-market when it comes to when we release the homes. We'll probably be releasing the homes earlier because many of those folks have homes to sell.

Speaker #1: And so there will be some tweaks on our focus around the Closing-Ready Guarantee, as well as pieces of the realtor strategy.

Trevor Allinson: Makes a lot of sense. Thanks for all the coloring. Good luck moving forward.

Speaker #4: Makes a lot of sense. Thanks for all the clarity. Good luck moving forward.

Speaker #3: Thank you. We'll take our next question from Stephen Kim with Evercore ISI. Please go ahead. Your line is open.

Operator 3: Thank you. We will take our next question from Stephen Kim with Evercore ISI. Please go ahead. Your line is open.

Operator: Thank you. We will take our next question from Stephen Kim with Evercore ISI. Please go ahead. Your line is open.

Speaker #5: Yeah, thanks a lot, guys. Just a follow-up on this shift. So I know you guys when you first rolled out this very significant shift to the move-in-ready homes, I mean, it was something that you had spent a lot of time thinking about and preparing for.

Stephen Kim: Yeah, thanks a lot, guys. Just a follow-up on this shift. I know you guys, when you first rolled out this very significant shift to the move-in-ready homes, it was something that you had spent a lot of time thinking about and preparing for. I just wanted to try to understand this pivot or tweak, let's say, to move a third back to the first-time move-up. Was this something that you always envisioned you would eventually do and maybe something has just precipitated or caused you to maybe advance that a little earlier? Is there something that fundamentally has changed your thinking about maybe being 100% first time, and so this was not initially contemplated, but you are contemplating it now? If so, what was that change or this thing that you've seen in the market?

Speaker #5: And so I just wanted to try to understand this pivot or tweak, let's say, to move a third back to the first-time move-up. Was this something that you always envisioned you would eventually do, and maybe something has just precipitated or caused you to maybe advance that a little earlier?

Speaker #5: Or is there something that fundamentally has changed your thinking about maybe being 100% first-time, and so this was not initially contemplated, but you are contemplating it now?

Speaker #5: And what, if so, what was that change or this thing that you've seen in the market?

Speaker #1: Yeah, it really was something we'd always intended it to be. Even when we rolled out our strategy seven years ago and tweaked our strategy four years ago, we always believed that the second consumer segment for us was the first move-up.

Phillippe Lord: Yeah. It really was something we already had always intended to be. Even when we rolled out our strategy seven years ago and tweaked our strategy four years ago, we always believed that the second consumer segment for us was the first move-up. Someone still looking for a move-in ready home, someone still looking for a home that they can move in quickly, but buying their second home, potentially buying their second new home, potentially. It's always been part of our strategy. What's really changed is fundamentally the land market has changed, right? As land has gotten more expensive, prior, we could really underwrite a lot of entry-level land, and now there's a more balanced opportunity out there in the market, and we see more opportunities to source 1MU land, and that's really the change in the market.

Speaker #1: Someone still looking for a move-in-ready home, someone still looking for a home that they can move in quickly, but buying their second home potentially—buying their second new home potentially.

Speaker #1: So, it's always been part of our strategy. What's really changed is, fundamentally, the land market has changed, right? As land has gotten more expensive—prior, we could really underwrite a lot of entry-level land, and now there's a more balanced opportunity out there in the market. We see more opportunities to source 1MU land, and that's really the change in the market.

Speaker #1: I think that's been just sort of something that's been happening over time. But this has always been part of our strategy and now the land market is really lending itself to that opportunity.

Phillippe Lord: I think that's been just sort of something that's been happening over time. This has always been part of our strategy, and now the land market is really lending itself to that opportunity.

Speaker #3: I would add one more thing, Stephen. We talked a little bit about it in the script but the shift in the age of the population cohorts in the US, millennials are the largest population cohort.

Hilla Sferruzza: I would add one more thing, Steven. We talked a little bit about it in the script, the shift in the age of the population cohorts in the US, millennials are the largest population cohort. We were initially targeting our efforts towards that group, and as they were buying their first home, they were obviously an entry-level buyer. Here we are 10 years later, and they're ready to buy their next home. We're continuing to follow the same demographic groups across their homebuyer journey. Obviously, as younger cohorts enter their home buying stage, they're continuing the entry-level push, but we're also following the millennial buyer, and hopefully we'll be their first and second-time home provider.

Speaker #3: So we were initially targeting our efforts toward that group, and as they were buying their first home, they were obviously an entry-level buyer. Here we are, 10 years later.

Speaker #3: And they're ready to buy their next home. So we're continuing to follow the same demographic groups across their home buyer journey. So obviously as younger cohorts enter their home buying stage, they're continuing the entry-level push but we're also following the millennial buyer and hopefully we'll be their first and second time home provider.

Speaker #5: Gotcha. Yeah, lots of interesting things there. So I guess just I guess following up on that, Felipe, you said that the land market, I guess, has gotten a little bit looser perhaps at the first-time move-up.

Stephen Kim: Got you. Yeah. Lots of interesting things there. I guess following up on that, Phillippe, you said that the land market, I guess, has gotten a little bit looser, perhaps, at the First Time Move-Up, and you see some opportunities there. You also indicated that this is something that you've contemplated even years in advance, that you would eventually do this kind of pivot. One of those sounds opportunistic and could also change back.

Speaker #5: And so you see some opportunities there. And you also indicated that this is something that you've contemplated, even years in advance, that you would eventually do this kind of pivot.

Speaker #5: One of those sounds opportunistic and could also change back, right? Next year, the land markets may become—there may be less opportunity at first-time, move-up, and so forth.

Stephen Kim: Next year, the land markets there may be less opportunity at First Time Move-Up and so forth. I'm just trying to understand how much of this is opportunistic, in terms of the land strategy and opening up, and how much of it is something that regardless of what the land market stratification looks like, you just think that this is the right time to move to that higher price point. You have talked a lot about how the cycle time is reduced and it enables you to build more quickly. I just wanted to see if you could elaborate a little further on maybe some of the tweaks that you're going to make to your product if you're building a bigger product that takes a little longer. I would think the customer maybe wants a little more personalization and things of that nature.

Speaker #5: So I'm just trying to understand how much of this is opportunistic in terms of the land strategy and opening up? And then how much of it is something that regardless of what the land market stratification looks like, you're just going to you just think that this is the right time to move to that higher price point?

Speaker #5: And you have talked a lot about how the cycle time is reduced and it enables you to build more quickly. I just wanted to see if you could elaborate a little further on maybe some of the tweaks that you're going to make to your product if you're building a bigger product that takes a little longer. I would think the customer maybe wants a little more personalization and things of that nature.

Speaker #5: Could you just elaborate a little bit more on maybe some of the differences that you see in going after the one MU customer again?

Stephen Kim: Could you just elaborate a little bit more on maybe some of the differences that you see in going after the 1MU customer again?

Speaker #1: Yeah, I mean, probably four questions there, but let me try to answer them all. I think, first of all, this is not opportunistic. This is something that we've intentionally had as a goal of our business.

Phillippe Lord: Yeah. Probably four questions there, let me try to answer them all. I think, first of all, this is not opportunistic. This is something that we've intentionally had as a goal of our business. The market's been very different for the last five years, we've played in the market the way the land market supported. First Time land was much more available and priced correctly for the last five years, now that bifurcation is starting to close, and 1MU land is making more sense and is more underwriteable. Can that change? Certainly, it can change. We're always going to balance out the business between entry level and First Move-Up based on the inputs in the business. Long-term, our strategy is to be a third 1MU and two-thirds entry level.

Speaker #1: But the market's been very different for the last five years, and so we've played in the market the way the land market supported. First-time land was much more available and priced correctly for the last five years.

Speaker #1: And now that bifurcation is starting to close and one MU land is making more sense and is more underwritable. Can that change? Certainly, it can change.

Speaker #1: We're always going to balance out the business between entry-level and first move-up based on the inputs in the business. But it's long-term our strategy is to be a third one MU and two-thirds entry-level.

Speaker #1: Certain markets will allow us to do more of it, and other markets will allow us to do less of it. So we're glad we have our regional and national footprint to kind of play in the market the right way.

Phillippe Lord: Certain markets will allow us to do more of it, and other markets will allow us to do less of it. We're glad we have our regional and national footprint to kind of play in the market the right way. As it relates to the tweaks to our operating model, I really feel like it's a tweak. It's a modification on the margin. We're not going to start offering design studios. We're not going to start offering a bunch of personalization. We're just going to build a nicer home. Homes that are 50 foot wide versus 40 foot wide don't necessarily take longer to build. You just build them the same way, but you might offer some nicer features.

Speaker #1: As it relates to the tweaks to our operating model, I really feel like it's like a tweak. It's a modification on the margin. We're not going to start offering design studios.

Speaker #1: We're not going to start offering a bunch of personalization. We're just going to build a nicer home. Homes that are 50-foot wide versus 40-foot wide don't necessarily take longer to build.

Speaker #1: You just build them the same way, but you might offer some nicer features. Maybe those buyers will get nicer cabinets, countertops, flooring, and maybe some other things that we'll tweak to make sure we're delivering the right value to that customer.

Phillippe Lord: Maybe those buyers will get nicer cabinets, countertops, flooring, and maybe some other things that we'll tweak to make sure we're delivering the right value to that customer because they're looking, like you said, for their second home. I don't see a big change in our kind of core operation strategy, but maybe some things on the margin that we'll tweak to make sure we deliver the right value to that customer segment.

Speaker #1: Because they're looking, like you said, for their second home. So I don't see a big change in our kind of core operation strategy, but maybe some things on the margin that we'll tweak to make sure we deliver the right value to that customer segment.

Speaker #5: All right, great. Thanks so much, guys.

Stephen Kim: All right, great. Thanks so much, guys.

Speaker #3: Thank you. We'll take our next question from Alan Ratner with Zelman. Please go ahead, your line is open.

Operator 3: Thank you. We'll take our next question from Alan Ratner with Zelman. Please go ahead. Your line is open.

Operator: Thank you. We'll take our next question from Alan Ratner with Zelman. Please go ahead. Your line is open.

Speaker #6: Hey guys, good morning. Thanks for all the detail here. I won't beat the drum on the move-up pivot but I'll just ask one quick question on that front.

Alan Ratner: Hey, guys. Good morning. Thanks for all the detail here. I won't beat the drum on the move-up pivot, but I'll just ask one quick question on that front. It seems like M&A activity has accelerated a bit across the industry, and I'm curious if you would consider M&A as an avenue to maybe accelerate that process towards building up the first time move-up market share.

Speaker #6: It seems like M&A activity has accelerated a bit across the industry and I'm curious if you would consider M&A as an avenue to maybe accelerate that process towards building up the first-time move-up market share.

Speaker #1: Yeah, we're very encouraged to see that well-respected and smart long-term investors are investing in the home building industry and really reinforcing the confidence in the sector that we have and the value of scale and repeatable platforms.

Phillippe Lord: Yeah. We're very encouraged to see that well-respected and smart long-term investors are investing in the home building industry, Really reinforcing the confidence in the sector that we have and the value of scale and repeatable platforms. We look at M&A through a very strategic lens. It's not just about scale at any cost. It's about can we go out and acquire assets that will allow us to play in different markets or consumer channels. 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well. There's a number of Midwest markets that seem really interesting right now. For us, it's about a strategic add versus just incremental scale.

Speaker #1: We look at M&A through a very strategic lens. It's not just about scale at any cost. It's about whether we can go out and acquire assets that will allow us to play in different markets or consumer channels.

Speaker #1: So 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well.

Speaker #1: There are a number of Midwest markets that seem really interesting right now. So for us, it's about a strategic add versus just incremental scale.

Speaker #6: Got it, that makes sense. Second question: you made the comment about intra-quarter, where rates briefly dipped. That gave you an opportunity to maybe pull back a little bit on incentives.

Alan Ratner: Got it. Makes sense. The second question, you made the comment about intra-quarter where the rates briefly dipped, that gave you an opportunity to maybe pull back a little bit on incentives. I just wanted to clarify, did you actually reduce the incentives you were offering or were you kind of maintaining the same mortgage rate buydown programs that you were offering, it was just costing less to buy down to that rate given what was going on in the market? I just wanted to clarify. Is there kind of an ability if we do see further moderation of rates to actually pull back more significantly on incentives, or it was just a cost dynamic?

Speaker #6: I just wanted to clarify. Did you actually reduce the incentives you were offering or were you kind of maintaining the same mortgage rate buy-down programs that you were offering?

Speaker #6: It was just costing less to buy down to that rate given what was going on in the market. I just wanted to clarify. Is there kind of an ability if we do see further moderation of rates to actually pull back more significantly on incentives or it was just a cost dynamic?

Speaker #3: So it's tranched. So, the first step, if rates pull back a bit, it's a lower cost offering. We're not—if we're offering $499,000, if the rates drop, we don't start offering $399,000.

Hilla Sferruzza: It's tranched. The first step when rates pull back a bit, it's a lower cost offering. If we're offering 499, if the rates drop, we don't start offering 399. It's just costing us less to offer the same incentive because the differential to the interest rate is still significant enough that it's an interesting incentive. We have seen that when rates drop a second tick down, the utilization drops. It kind of comes in waves. First, the cost per rate lock is lower, and then the utilization shifts to a different type of discount, a more traditional discount in our sector. It was great to see that when the market started to briefly return to normal, consumer behavior followed.

Speaker #3: It's just costing us less to offer the same incentive because the differential to the interest rate is still significant enough that it's an interesting incentive.

Speaker #3: We have seen that when rates drop a second tick down, the utilization drops. So it kind of comes in waves. First, the cost per rate lock is lower and then the utilization shifts to a different type of discount and more traditional discount in our sector.

Speaker #3: So it was great to see that when the market started to briefly return to normal, consumer behavior followed.

Speaker #1: Yeah, and I would just add that from a long-term perspective, with inventory levels being down and BTO builders now pivoting back strongly to BTO and out of spec, we're just seeing a general stability in the incentive environment.

Phillippe Lord: Yeah, I would just add that from a long-term perspective, with inventory levels being down and BTO builders now pivoting back strongly to BTO and out of spec, we're just seeing a general stability in the incentive environment. Now, I can't predict what's going to happen with the economy and some consumer psychology things out there, at least we don't see the incentive wars happening to the level that they were happening last year and into this year.

Speaker #1: Now, I can't predict what's going to happen with the economy and some consumer psychology things out there, but at least we don't see the incentive wars happening to the level that they were happening last year and into this year.

Speaker #6: That's great to hear. Thanks a lot.

Alan Ratner: That's great to hear. Thanks a lot.

Speaker #3: Thank you. We'll take our next question from John Lavallo with UBS. Please go ahead, your line is open.

Operator 3: Thank you. We'll take our next question from John Lovallo with UBS. Please go ahead. Your line is open.

Operator: Thank you. We'll take our next question from John Lovallo with UBS. Please go ahead. Your line is open.

Speaker #7: Good morning, guys. Thanks for taking my questions as well. The first one is the roughly 18% gross margin outlook for the third quarter. Has clearly spooked some folks out there coming off the 18.6 in the second quarter.

John Lovallo: Good morning, guys. Thanks for taking my questions as well. The first one is, the roughly 18% gross margin outlook for Q3 has clearly spooked some folks out there coming off the 18.6% in Q2. I don't want to get too cute here, would you consider 18.3%, 18.4%, 18.5% to be around 18%? If not, what other than the lower quarter-over-quarter closings would drive the gross margin down from Q2?

Speaker #7: And I don't want to get too cute here, but would you consider 18.3, 18.4, 18.5 to be around 18%? And if not, what other than the lower quarter-over-quarter closings would drive the gross margin down from the second quarter?

Speaker #1: Yeah, I mean, it's primarily leverage. And rates did increase through June, so you saw incentive utilization and rate buy-down utilization increase in June, which can hit the 18% on the margin.

Phillippe Lord: Yeah, it's primarily leverage. Rates did increase through June. You saw incentive utilization, rate buydown utilization increase in June, which can hit the 18% on the margin. We're kind of sitting here around 18%, depending on what rates do. Is it going to be a little bit lower or a little bit higher? It just depends on what happens intra-quarter. We guided to around 18% in Q2 and ended up at 18.6% because rates were favorable. It's just really dependent on that factor.

Speaker #1: We're kind of sitting here around 18%, depending on what rates do. Is it going to be a little bit lower — a little bit lower, higher?

Speaker #1: It just depends on what happens intra-quarter. We guided to around 18% in Q2 and ended up at 18.6% because rates were favorable. So it's just really dependent on that factor.

Speaker #3: Yeah, I think the first part of Elite's response was also very important. It's the leverage. You can look at the midpoint of our closings guidance and where we ended up Q2 versus Q3, and see that there's going to be maybe 20 to 30-ish bips that are just a function of leverage.

Hilla Sferruzza: Yeah. I think the first part of Phillippe's response was also very important. It's the leverage. You can look at the midpoint of our closings guidance and where we ended up Q2 versus Q3 and see that there's going to be maybe 20, 30-ish bps that are just a function of leverage. Obviously, looking at our full-year guidance, you can extrapolate to what you think Q4 is going to be. There's going to be a pickup and an improvement where the leverage will go in the other direction. It's so tough on these intra-quarter kind of discussions, especially when so much of your sales volume is unknown for us, and we're closing still 200% of our backlog.

Speaker #3: Obviously, looking at our full-year guidance, you can extrapolate to what you think Q4 is going to be. There's going to be a pickup. And an improvement where the leverage will go in the other direction.

Speaker #3: So, it's really tough on these intra-quarter discussions, especially when so much of your sales volume is unknown for us and we're still closing 200% of our backlog.

Speaker #3: So visibility into the units and to the incentives that will be part of those closing units is not as clear, which is why we've shifted our commentary from providing an exact number to kind of saying around a number because there's still a lot of movement in the closing universe for us for Q3.

Hilla Sferruzza: Visibility into the units and to the incentives that will be part of those closing units is not as clear, which is why we've shifted our commentary from providing an exact number to kind of saying around a number because there's still a lot of movement in the closing universe for us for Q3.

Speaker #1: Yeah, and rates, again, have been increasing since mid-June. They're probably the highest they've been as we roll into July, which is typically the lower seasonal period.

Phillippe Lord: Yeah. Rates, again, have been increasing since mid-June. They're probably the highest they've been as we roll into July, which is typically the lower seasonal kind of period.

Speaker #7: Okay. Yeah, no, I think the fourth quarter comment was going to be my next question—that we should see the reversal of that gross margin.

John Lovallo: Okay. Yeah. No, I think the Q4 comment was going to be my next question, that we should see the reversal of that gross margin. Let me just ask, the Q4 deliveries are implied to be up about 10% year-over-year. That would either seem to imply that you're expecting a decent ramp in orders in the Q3 here, or that you're willing to work the backlog down pretty meaningfully as we move through the year. How should we sort of think about this? I just want to make sure that the idea here is that you're not going to ramp incentives to try to drive orders to meet that full-year delivery.

Speaker #7: But let me just ask, the fourth quarter deliveries are implied to be up about 10% year over year. And so that was either seemed to imply that you're expecting a decent ramp in orders in the third quarter here or that you're willing to work the backlog down pretty meaningfully as we move through the year.

Speaker #7: I mean, how should we sort of think about this? And I just want to make sure that the idea here is that you're not going to ramp incentives to try to drive orders to meet that full-year delivery.

Speaker #1: Yeah, again, everything we say is predicated on how this plays out economically and politically over the next six months. But the Q4 guide is mostly predicated on community count growth.

Phillippe Lord: Yeah. Again, everything we say is predicated on how this plays out economically and politically over the next six months. The Q4 guide is mostly predicated on community count growth. As we said, we have still some material community count growth happening into Q3 and Q4, that's driving the incremental closings for Q4. We're not expecting the market to improve. In fact, we're probably pretty conservative about what we think the H2 is going to look like from an incentive and absorption standpoint. It's 100% tied to the community count growth that we expect in the H2 of this year.

Speaker #1: So, as we said, we still have some material community count growth happening into Q3 and Q4, and that's driving the incremental closings for Q4.

Speaker #1: We're not expecting the market to improve. In fact, we're probably pretty conservative about what we think the back half is going to look like from an incentive and absorption standpoint.

Speaker #1: So it's 100% tied to the community count growth that we expect in the back half of this year.

Speaker #3: And remember, just for us, the way that we count an active community is a sale. And for us, we don't sell until we're ready to close within 60 days.

Hilla Sferruzza: Remember, just for us, the way that we count an active community is a sale. For us, we don't sell until we're ready to close within 60 days. For us, an active community can start producing closings same quarter that it becomes active, not just sales in the same quarter that it becomes active. We have quite a ramp of communities that's coming up. If you look at where we started the year and that 5% to 10% guide on ending community count, where all of those will be delivering closings.

Speaker #3: So for us, an active community can start producing closings same quarter that it becomes active, not just sales in the same quarter that it becomes active.

Speaker #3: So, we have quite a ramp of communities that's coming up. If you look at where we started the year, in that 5% to 10% guide on ending community count, where all of those will be delivering closings.

Speaker #1: Yeah, that's a great point. Our starts were up because we were starting homes for these communities that were getting ready to open. And we don't open up communities until we can close homes.

Phillippe Lord: Yeah. That's a great point. Our starts were up because we were starting homes for these communities that were getting ready to open, we don't open up communities until we can close homes.

Speaker #7: Yeah, that makes a lot of sense, guys. Thank you.

John Lovallo: Yeah. That makes a lot of sense, guys. Thank you.

Speaker #3: Thank you. We'll take our next question from Susan McLaurie with Goldman Sachs. Please go ahead. Your line is open.

Operator 3: Thank you. We'll take our next question from Susan Maklari with Goldman Sachs. Please go ahead. Your line is open.

Operator: Thank you. We'll take our next question from Susan Maklari with Goldman Sachs. Please go ahead. Your line is open.

Speaker #8: Thank you. Good morning, everyone. Thanks for taking the question. I want to start on the cost side. The 6% savings that you've realized is impressive.

Susan Maklari: Thank you. Good morning, everyone. Thanks for taking the question. I want to start on the cost side. The 6% savings that you've realized is impressive there. Can you talk a bit more about what is driving that and how you're thinking about the ability to realize further incremental benefits in the coming quarters?

Speaker #8: Can you talk a bit more about what is driving that, and how you're thinking about the ability to realize further incremental benefits in the coming quarters?

Speaker #1: Yeah. So the 6% savings year over year, and we're down 2% sequentially. It's both labor and materials. We saw it sort of broad-based. We're seeing some savings in both categories.

Phillippe Lord: Yeah. The 6% savings year-over-year, and we're down 2% sequentially, it's both labor and materials. We saw it broad-based. We're seeing some savings in both categories. As Hilla noted in her prepared remarks that our lower cost new starts are replacing aged inventory, which is being captured in Q3 on 2026 gross margin guidance. I'm not sure we're anticipating further cost savings on new starts that are going to go out in Q3. We are seeing a little bit of headwinds in lumber that may play out here over the next couple quarters. Due to that factor, we're not modeling any more improvements from here for now.

Speaker #1: As Hila noted in her prepared remarks that our lower cost new starts are replacing aged inventory, which is being captured in the third quarter 26 gross margin guidance.

Speaker #1: I'm not sure we're anticipating further cost savings on new starts that are going to go out in Q3. We are seeing a little bit of headwinds in lumber.

Speaker #1: That may play out here over the next couple of quarters. So due to that factor, we're not modeling any more improvements from here for now.

Speaker #8: Okay, all right. That's helpful. And then maybe as we think out—and you reiterated the longer-term target for the gross margin—as you think about the mix shift that will come through as you start to integrate more of the move-up product in there, what does that mean in terms of the path for profitability and the business?

Susan Maklari: Okay. All right. That's helpful. Maybe as we think out and you reiterated the longer term target for the gross margin, as you think about the mix shift that will come through as you start to integrate more of the move-up product in there, what does that mean in terms of the path for profitability in the business, and how should we think about the shift that will come through and how you can hit that target?

Speaker #8: And how should we think about the shift that will come through, and how you can hit that target?

Speaker #1: Well, I think the long-term target of 22 and a half to 23 and a half is not mix-related. It's purely based on the way we underwrite land.

Phillippe Lord: Well, I think the long-term target of 22.5% to 23.5% is not mix related. It's purely based on the way we underwrite land. Right now, we're not achieving our underwriting because primarily incentives are running extremely hot. We typically underwrite land at a much more normal incentive environment. The bridge between where we are and the bridge to where we want to be is 100% interest rate and incentive related. Now, 1MU land should typically be higher revenue, and you should get more leverage from the higher ASP, we don't really underwrite 1MU land at a higher margin than we underwrite entry-level land. Again, this will take some time. We have about 10% of our business is 1MU right now, and there's probably some opportunity to pivot some of our existing land book to 1MU because they're in the right locations.

Speaker #1: And so, right now, we're not achieving our underwriting because, primarily, incentives are running extremely hot. We typically underwrite land at a much more normal incentive environment.

Speaker #1: So, the bridge between where we are and the bridge to where we want to be is 100% interest-rate and incentive-related. Now, one MU land should typically be higher revenue, and you should get more leverage from the higher ASP.

Speaker #1: But we don't really underwrite one MU land at a higher margin than we underwrite entry-level land. And again, this will take some time. We have about 10% of our business in one MU right now.

Speaker #1: And there's probably some opportunity to pivot some of our existing land book to one MU because they're in the right locations. But most of it's going to come from new land that we're sourcing today.

Phillippe Lord: Most of it's going to come from new land that we're sourcing today. The impact of the mix to 1MU won't really play out in our P&L until 2029 and beyond.

Speaker #1: So the impact of the mix to one MU won't really play out in our P&L until 2029 and beyond.

Speaker #8: Okay. Thank you for the color. Good luck with the quarter.

Susan Maklari: Okay. Thank you for the color. Good luck with the quarter.

Speaker #3: Thank you. We'll take our next question from Rafe Jadrosich from Bank of America. Please go ahead. Your line is open.

Operator 3: Thank you. We'll take our next question from Rafe Jadrosz from Bank of America. Please go ahead. Your line is open.

Operator: Thank you. We'll take our next question from Rafe Jadrosz from Bank of America. Please go ahead. Your line is open.

Speaker #9: Hi, good morning. Thanks for taking my questions. Just following up on John's question earlier, on the second half delivery guidance relative to the first half—I think it's about 1,000 more deliveries. If I look at the backlog and completed specs, it's sort of flattish.

Rafe Jadrosich: Hi. Good morning. Thanks for taking my questions. Following up on John's question earlier, on the H2 delivery guidance relative to the H1, I think it's about 1,000 more deliveries. If I look at the backlog and completed specs, it's sort of flattish. Do starts need to pick up further from here to hit the H2 delivery guidance? Can you give any color on the community count cadence Q3 versus Q4?

Speaker #9: Do starts need to pick up further from here on out to hit the back half delivery guidance? And can you give any color on the community count cadence, third quarter versus fourth quarter?

Speaker #3: Yeah. I mean, we don't give community count cadence. It's just way too difficult. I mean, municipality approves something, you drop below or doesn't approve something, you drop below a certain number of units, and then you can no longer count a community as active.

Phillippe Lord: Yeah, we don't give community count cadence. It's just way too difficult. A municipality approves something, you drop below a certain number of units, and then you can no longer count a community as active. It's just way too refined for us to try to figure out the specific timing on a 30 September versus 31 December. We're still really comfortable with our 5% to 10% growth year-over-year. Obviously, as you're running it through your model and trying to hit that full year units number that we are fairly comfortable with at the 5% below full year 2025. Agree, there is a ramp up in volume, but as Phillippe already mentioned, it's a function of the community count. You already started to see a little bit of that spec start happen now, right?

Speaker #3: So, it's just way too refined for us to try to figure out the specific timing on a September 30 versus December 31. But we're still really comfortable with our 5 to 10 percent growth year over year.

Speaker #3: And obviously, as you're running it through your model and trying to hit that full-year units number that we are fairly comfortable with at the 5% below full year 2025.

Speaker #3: There is a ramp-up in volume, but as Phillippe already mentioned, it's a function of the community count. So you’ve already started to see a little bit of that.

Speaker #3: Spec start happened now, right? Our starts pace—or our starts volume—increased quite a bit between Q1 and Q2, as we're getting inventory ready for these communities. Again, that four- to six-month supply of available inventory is something that we're very focused on.

Hilla Sferruzza: Our starts volume increased quite a bit between Q1 and Q2 as we're getting inventory ready for these communities. Again, that 4 to 6 month supply of available inventory is something that we're very focused on. I think we mentioned several times during

Speaker #3: So, I think we mentioned several times during the prepared remarks, between the inventory that we are carrying to start Q3 and into Q4, and that sub-110-day cycle time, we feel really confident that we have everything that we need to hit our full-year guidance.

Hilla Sferruzza: The prepared remarks between the inventory that we are carrying to start Q3 and into Q4 and that sub 110-day cycle time, we feel really confident that we have everything that we need to hit our full-year guidance.

Speaker #9: Okay, that's helpful. And then, can you just remind us of the lag time between when lumber prices move and when that starts to show up in your deliveries?

Rafe Jadrosich: Okay. That's helpful. Then can you just remind us the lag time between when lumber prices move and when that starts to show up in your deliveries?

Speaker #3: It's staggered. We don't hedge, but we have 30-, 60-, or 90-day locks at different points in time throughout the country, so we kind of create natural hedges.

Hilla Sferruzza: It's staggered. We don't hedge, but we have 30, 60, or 90-day locks, at different points in time throughout the country, so we kind of create natural hedges. It's a little bit of noise, but within 90 days, you should start to see some of it flow through into our construction, then you should see that flow through into our numbers in about a quarter. I think a couple of our peers said about two quarters, and I think that that's probably the right number for us as well.

Speaker #3: So it's a little bit of noise, but within 90 days, you should start to see some of it flow through into our construction, and then you should see that flow through into our numbers in about a quarter.

Speaker #3: So I think a couple of our peers said about two quarters, and I think that that's probably the right number for us as well.

Speaker #9: Okay. That's helpful. Thank you.

Rafe Jadrosich: Okay. That's helpful. Thank you.

Speaker #3: And we'll take our last question from Jade Rahmani with KBW. Please go ahead, your line is open.

Operator 3: We'll take our last question from Jade Rahmani with KBW. Please go ahead. Your line is open.

Operator: We'll take our last question from Jade Rahmani with KBW. Please go ahead. Your line is open.

Speaker #1: Thank you very much. Just on the first-time move-up strategy, have you considered broadening that to beyond first-time move-up, to the broader move-up market?

Jade Rahmani: Thank you very much. Just on the first-time move-up strategy, have you considered broadening that to beyond first-time move-up to the broader move-up market?

Speaker #2: No, I think, again, we've had this strategy in place for a long time. We feel like, with our operating model and the way we want to play in the market, and where the demographics are the strongest, we want to stay in that one MU price point.

Phillippe Lord: No. I think, again, we've had this strategy in place for a long time. We feel like with our operating model and the way we want to play in the market and where the demographics are the strongest, we want to stay in that 1MU price point. We don't want to expand beyond that into a 2MU or a luxury buyer. Those folks typically want choice and customization, which we're not going to offer, based on the way we build homes. For those reasons, it's really mostly a value-focused 1MU consumer segment.

Speaker #2: We don't want to expand beyond that into a two-MU or a luxury buyer. Those folks typically want choice and customization, which we're not going to offer based on the way we build homes.

Speaker #2: So for those reasons, it's really mostly a value-focused, one MU consumer segment.

Speaker #1: Thank you very much. And on land banking, I was wondering what you thought the value it provides is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone are offering.

Jade Rahmani: Thank you very much. On land banking, I was wondering what you thought the value that it provides is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone are offering in the land banking space.

Speaker #1: In the land banking space.

Speaker #2: Yeah, I mean, it's a good point. It's why we haven't done a lot of land banking over the last five years. For that reason, we were sitting on a bunch of cash.

Phillippe Lord: Yeah, it's a good point. It's why we haven't done a lot of land banking over the last 5 years. That reason, we were sitting on a bunch of cash. Then the price of land banking was pretty expensive. The optionality of land banking had really changed. At some point, as a company of our size, we believe land banking allows us to control more land, to allow us to grow our business at a better return on equity. At some point, it makes sense when your balance sheet reaches a point where that extension creates that incremental value. That's how we think about it. It's why we haven't done it a lot.

Speaker #2: And then the price of land banking was pretty expensive, and the optionality of land banking had really changed. But at some point, as a company of our size, we believe land banking allows us to control more land to allow us to grow our business at a better return.

Speaker #2: On equity, so at some point, it makes sense when you're balance sheet reaches a point where that extension creates that incremental value. So that's how we think about it.

Speaker #2: That's why we haven't done it a lot. It's why we're trying to get it to 40% over time, because as we're trying to grow from 15,000 to 20,000 units, we want to control more land with less of our balance sheet at play.

Phillippe Lord: It's why we're trying to get it to 40% over time because as we're trying to grow from 15 to 20,000 units, we want to control more land for less of our balance sheet at play.

Speaker #1: Makes sense. Thanks. Okay. Well, thank you, everybody. Thank you, operator. I want to thank everyone who joined this call today for your continued interest in Meritage Homes.

Jade Rahmani: Makes sense. Thanks.

Phillippe Lord: Okay. Well, thank you, everybody. Thank you, operator. I want to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a wonderful rest of your day and a great weekend.

Speaker #1: We hope you have a wonderful rest of your day and a great weekend.

Operator 3: This concludes today's Meritage Homes Q2 2026 analyst call. Please disconnect your lines at this time and have a wonderful day.

Operator: This concludes today's Meritage Homes Q2 2026 analyst call. Please disconnect your lines at this time and have a wonderful day.

Q2 2026 Meritage Homes Corp Earnings Call

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