Meritage Homes Corporation (NYSE:MTH) on Thursday reported net income of $53.8 million ($1.31 per diluted share) for the second quarter of 2018 ended June 30, 2018., up 29% and 34%, respectively, compared to $41.6 million ($0.98 per diluted share) for the second quarter of 2017. The gain beat the consensus Wall Street estimate of 1.11 per share.
Earnings before income taxes were up 13% year-over-year, primarily due to increases in home closing revenue and home closing gross margin.
Home closing revenue increased 9% with a 12% increase in closing volume, partially offset by a 3% decrease in average sales price compared to the second quarter of 2017, as demand shifted more toward entry-level homes. The increases in closings and revenue were led by the East region (Florida, Georgia, North and South Carolina, and Tennessee), which delivered a 30% increase in home closing revenue with 35% more home closings at an average sales price 4% lower than the second quarter of 2017. The Central region (Texas) delivered home closings and revenue growth of 21% and 15%, respectively, with a 5% decrease in average price. West region home closing revenue (California, Colorado and Arizona) was 5% less than last year’s second quarter, as a 9% decline in closing volume reflected 8% fewer communities open on average during the second quarter in 2018 than 2017, but was partially offset by a 4% increase in average price due to additional closings from higher-priced communities in California.
Home closing gross margin increased 60 bps to 18.3% for the second quarter of 2018, compared to 17.7% in the second quarter of 2017, primarily due to improved margins in the East region.
Selling, general and administrative expenses were 10.9% of second quarter 2018 home closing revenue, compared to 2017’s second quarter SG&A of 10.6% of home closing revenue. Approximately 15 bps of the year-over-year increase was due to the recognition of compensation expense in the second quarter of 2018 for certain performance-based equity awards. No comparable expense was incurred in 2017.
Interest expense declined $1.6 million for the second quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development, despite a $2.1 million increase in total interest incurred from the issuances of new senior notes in June 2017 and March 2018. The net proceeds of those higher-rate issuances were primarily used to retire maturing notes and repay outstanding borrowings under the Company’s revolving credit facility.
Second quarter effective tax rate was approximately 24% in 2018, compared to 34% in 2017, reflecting lower corporate income tax rates enacted for 2018.
Total orders for the second quarter of 2018 increased 5% year-over-year, driven by a 6% increase in orders pace (orders per average active community), partially offset by a 1% year-over-year decline in average active community count. Order growth in the East and Central regions offset a decline in the West region, with a significant 14% year-over-year increase in average orders pace for the East region.
Backlog increased 6% to 3,619 homes with a vaule of $1.53 billion, also up 6%.
Cash and cash equivalents at June 30, 2018, totaled $169.4 million, compared to $170.7 million at December 31, 2017. Real estate assets increased to $2.87 billion at June 30, 2018, compared to $2.73 billion at December 31, 2017. Approximately $191.2 million of the increase related to homes under construction or completed, partially offset by a $52.5 million decrease in finished home sites and land under development.
Meritage ended the second quarter of 2018 with approximately 33,700 total lots owned or under control, compared to approximately 33,500 total lots at June 30, 2017. Approximately 85% of the nearly 2,600 lots added during the second quarter were in communities planned for entry-level product.
Debt-to-capital ratios were 43.8% at June 30, 2018 and 44.9% at December 31, 2017, with net debt-to-capital ratios of 40.4% and 41.4%, respectively, remaining well within management’s target range for this key ratio.
The company expanded capacity available under its unsecured revolving credit facility to $780 million during the second quarter of 2018 and extended the maturity date to July 2022, ending the quarter with no borrowings outstanding under the credit facility.
“We continued to experience generally healthy demand in our markets, especially for our entry-level LiVE.NOW.® homes, and our second quarter performance reflects the results of our strategy to address that demand, as well as the successful execution of our strategic initiatives to improve profitability,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our overall orders pace was 6% higher in the second quarter than it was in 2017 and is up 8% in the first half of the year. It’s evident that our LiVE.NOW. homes are driving the increases in orders pace, as they made up 44% of our orders this quarter compared to just 35% in last year’s second quarter.”
