Stabilizing demand helped Meritage Homes deliver record levels of closings and closing revenue during the first quarter.
“Meritage’s first quarter 2023 performance reflected stabilizing demand as interest rates dipped slightly and buyers began accepting 6% to 7% mortgage interest rates as the new normal,” executive chairman Steven Hilton said. “The Meritage team executed on our spec strategy and delivered solid results this quarter.”
Similar to other public home building peers, Meritage reported better-than-expected earnings results in the fiscal first quarter, driven by improved demand conditions and the availability of move-in inventory amid wider economic uncertainty. While the home builder’s profit ($131.3 million) and profit per share ($3.54) were both lower on a year-over-year basis, Meritage outperformed analyst projections of $2.64 profits per share for the quarter.
“In the first quarter of 2023, our offering of move-in ready homes and a combination of price cuts and incentives gave us a competitive advantage that allowed us to meet our targeted sales objectives,” Hilton said.
During the first quarter, Meritage’s average absorption pace of 4.2 per month was above the builder’s goal of three to four per month. The builder closed 2,897 homes in the quarter, representing $1.3 billion in closing revenue, both up 1% compared with the first quarter of 2022.
Amid stabilizing demand conditions, Meritage’s first quarter cancellation rate improved sequentially to 15% from 39% in the fourth quarter of 2022, returning to a level consistent with the builder’s historical average. Additionally, the builder’s first quarter backlog conversion of 87% exceeded its normalized target rate of “at least 80%,” according to CEO Phillippe Lord.
“We were successful at selling and closing specs during the quarter given our available inventory of completed and near-completed homes,” Lord said.
Sales orders in the first quarter decreased 10% year over year to 3,487 homes. The entry-level represented 87% of first quarter sales orders for Meritage with an average sales price on orders of $432,000, down 5% from the first quarter of 2022. In the builder’s build-for-rent sector, sales primarily occurred in Arizona and remained at an overall mid-single-digit range as a percentage of total orders, according to executive vice president and chief financial officer Hilla Sferruzza.
“We believe our focus on pace over price and commitment to our spec inventory position us well to capitalize on buyer demand and continue to gain market share,” said Lord. “We expect the undersupply of new and resale home inventory as well as favorable demographics [to] provide a strong long-term runway for the home buying market.”
Specs, Prices, and Starts
During the home builder’s quarterly earnings, Lord said the increase in the average sales price from $389,000 in the fourth quarter was partially due to a pullback in incentives during the first quarter of about $8,000 to $10,000 per home. Lord said the average selling price was also impacted by higher prices on cancellations from prior periods.
“We also started to test our markets with small price increases in geographies where inventory is particularly tight and prices are more inelastic,” Lord said on the earnings call.
In regard to starts, Lord said Meritage is positioned to increase or slow down starts to remain in line with target ranges. Meritage continues to monitor starts on a community-by-community basis and will align with sales pace in future quarters. The company started nearly 2,500 homes in the first quarter, up sequentially from the nearly 2,100 homes started in the fourth quarter of 2022.
“We ended the period with nearly 3,900 spec homes in inventory, which was down 21% sequentially from the artificially high fourth quarter due to the high number of cancellations,” Lord said. “We expect to continue to manage spec starts to align with increased demand we are experiencing in all of our markets.”
Community Count and Land Position
“We opened 27 new communities this quarter, but our healthy sales order pace led to early closeouts, and the continuing transformer issues across the country halted some new community openings, all of which added up to a lower ending community count than we expected,” Lord said.
At quarter’s end, Meritage had 60,900 owned or controlled lots, down from 75,100 total lots at the end of the first quarter of 2022. The builder spent $310 million on land acquisition and development in the quarter, adding over 1,700 new lots that represent an estimated 17 future communities.
“About 75% of our total lot inventory was owned, and 25% was optioned. In the prior year, we had a 65% owned inventory and a 35% optioned lot position,” Sferruzza said. “The rebalancing of our land portfolio in the last few quarters has elevated our split of owned versus optioned lots. Although we don’t ascribe to a target for this metric, we believe that being nimble and ready to transact quickly on land opportunities while focusing on returns has resulted in a higher percentage of lots owned currently than our historical run rate.”
