Meritage Homes Corporation (NYSE: MTH) after market close Wednesday reported net earnings of $103.6 million, or $2.65 per diluted share, for the fourth quarter of 2019. The gain, which included $20 million in energy tax credits on qualified homes closed in 2018 and 2019, represented a 37% increase from the $75.5 million, or $1.91 per diluted share, for the fourth quarter of 2018, also benefiting from retroactive energy tax credits recorded in 2019. Analysts were expecting a 2019 Q4 gain of $1.92.
FOURTH QUARTER RESULTS
- Total orders for the fourth quarter of 2019 increased 27% year-over-year, driven by a 37% year-over-year increase in absorptions, largely due to strong demand for Meritage’s entry-level priced LiVE.NOW. homes. Higher absorptions offset an 8% year-over-year decline in average community count for the fourth quarter, resulting from early close-outs of communities in 2019. Absorptions were up 38% in the West region, 46% in the Central and 29% in the East region, demonstrating broad strength across Meritage’s markets. As a result of the company’s strategic product shift to lower-priced homes, fourth quarter average sales price (ASP) on orders and ending backlog were down 1% and 5%, respectively, compared to 2018.
- The 11% increase in home closing revenue for the quarter reflected a 13% increase in home closing volume, partially offset by a 2% reduction in ASP due to the company’s strategic shift toward more affordable homes. Both West and East regions’ home closing revenues were up 19% year-over-year, while Central region home closing revenue was 8% lower in 2019 than 2018, primarily due to fewer active communities open in the fourth quarter of 2019.
- Home closing gross margin improved 80 bps to 19.8% from 19.0% a year ago, contributing to a 16% increase in total home closing gross profit over the prior year’s fourth quarter. Fourth quarter 2019 gross margin was reduced by $3.1 million of inventory write-downs. Excluding real estate write-downs in both years ($0.9 million in 2018), home closing gross margins were 20.1% for the fourth quarter of 2019 and 19.1% for the fourth quarter of 2018.
- Earnings from financial services unconsolidated were $3.7 million lower in the fourth quarter of 2019 compared to 2018 due to a change in the structure of customer incentives offered by the Company’s mortgage joint venture. The benefits from those incentives are now captured as part of home closing revenue rather than financial services earnings.
- Selling, general and administrative expenses (SG&A) totaled 10.1% of fourth quarter 2019 home closing revenue, a 50 bps reduction compared to 10.6% in the fourth quarter of 2018.
- Fourth quarter 2019 also included a $5.6 million loss on early extinguishment of debt related to the early redemption of $300 million notes due 2020.
- Fourth quarter 2019 pre-tax earnings margin increased 60 bps to 9.7% compared to 9.1% in 2018, reflecting increases in home closing gross margins and improved overhead leverage.
FULL YEAR RESULTS
- Total orders for the full year 2019 increased 19% year-over-year, as absorptions increased to 37.3 for the year (approximately 3.1 per month) in 2019, over 31.4 (approximately 2.6 per month) for 2018. The 19% increase in absorptions was primarily driven by the shift toward more entry-level communities, which sell at a higher pace. At year-end 2019, entry-level communities made up 47% of total communities, compared to 33% at the end of 2018.
- Home closings for the full year were up 9% over 2018, while ASP on closings was 4% lower than the previous year due to the shift toward more affordable homes, resulting in a net 4% increase in total home closing revenue for the year.
- Home closing gross margin increased to 18.9% for the full year 2019 compared to 18.2% in 2018, which drove an 8% increase in total home closing gross profit for the full year of 2019. Excluding real estate write-downs in both years ($3.2 million in 2019 and $2.2 million in 2018), home closing gross margin was 19.0% in 2019 and 18.3% in 2018.
- SG&A expenses as a percentage of home closing revenue for the full year were flat at 10.9% in both 2019 and 2018, as leverage and operating efficiencies in 2019 were partially offset by costs associated with the start-up and operation of our Studio M design studios, in addition to severance expenses and accelerated equity compensation expense taken in the first quarter of 2019 as a result of changes in tax rules.
- Interest expense increased $7.6 million year-over-year, primarily due to less interest capitalizable to assets under development in 2019, reflecting shortened construction cycle times and faster inventory turnover.
- Other income (net) decreased by $1.6 million in 2019 primarily due to 2018 including a $4.8 million favorable legal settlement related to a previous joint venture in Nevada.
- Net earnings of $249.7 million ($6.42 per diluted share) increased 10% (15% for diluted EPS) for the full year of 2019, compared to $227.3 million ($5.58 per diluted share) in 2018. Increases in home closing revenue and gross margin year-to-date in 2019 were partially offset by higher interest expense and the $5.6 million charge for early extinguishment of debt in the fourth quarter of 2019, resulting in a net 7% increase in earnings before income taxes. The effective tax rate for the full year 2019 was 18%, compared to 20% in 2018, reflecting the benefit of the retroactive energy tax credits renewed in 2019. Full year diluted EPS also increased due to a 5% reduction in weighted average shares outstanding, as compared to 2018, resulting from share repurchases in late 2018 and early 2019.
BALANCE SHEET
- Cash and cash equivalents at December 31, 2019 totaled $319.5 million, compared to $311.5 million at December 31, 2018.
- Positive cash flow from operations was used for the early redemption in December 2019 of $300 million of 7.15% senior notes due in 2020.
- Total real estate assets was relatively flat at approximately $2.7 billion at December 31, 2019, as homes under construction increased to provide additional entry-level spec inventory for sale and quick move-in, consistent with the Company’s strategy, and were offset by declines in land inventory, which is expected to be replenished with additional newly-contracted lots.
- Meritage ended the fourth quarter of 2019 with approximately 41,400 total lots owned or under control, compared to approximately 34,600 total lots at December 31, 2018, with over 6,800 lots added for approximately 46 new communities in the fourth quarter of 2019 alone. Approximately 85% of the lots added during 2019 were in LiVE.NOW. communities for entry-level homes.
- Debt-to-capital ratios decreased to 34.0% at December 31, 2019 from 43.2% at December 31, 2018, and net debt-to-capital ratio declined to 26.2% at year-end 2019 from 36.7% at year-end 2018.
“We delivered another quarter of strong results in the fourth quarter, capping off a solid performance for the full year 2019. The housing market remained strong through a traditionally quiet quarter, and with our strategic shift to entry-level fully implemented, Meritage was well positioned to capitalize on healthy demand, growing our sales volume, improving profitability and strengthening our balance sheet, while also positioning the company for long-term growth,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “Our fourth quarter results continued the momentum we had achieved over the prior three quarters, producing the strongest quarterly year-over-year growth in orders all year; the highest home closing gross margin, which was very close to our underwriting target; the most efficient overhead leverage; and nearly a 40% increase in diluted earnings per share.
“Our total orders for new homes increased 27% in the fourth quarter year-over-year, driven by a 37% increase in absorptions and benefiting from our strategic focus on delivering more affordable homes. Home closing revenue was up 11% and our home closing gross margin improved 80 bps due to the efficiencies we’re realizing from streamlining and simplifying our operations,” he continued. “Total SG&A expenses as a percentage of home closing revenue were 50 bps lower year-over-year and our net earnings increased 37% with the benefit of energy tax credits recognized retroactively for two years after their renewal and extension in December of 2019. We used positive cash flow from operations to retire $300 million of debt, reducing our net debt to capital ratio to 26.2%, while also securing more than 6,800 additional lots in the fourth quarter for future growth and ending the year with $319 million in cash.
“Our LiVE.NOW.® homes for value-conscious buyers and our innovative approach to interior personalization with our Studio M® Design Collections for first move-up buyers are delivering what home buyers want, while also providing efficiencies for Meritage that translate to improved profitability,” Hilton explained. “Absorptions in our LiVE.NOW. communities are significantly out-pacing traditional move-up communities, with equal or better margins.”
He concluded, “Based on our expectation that economic drivers remain positive for housing demand, and our ability to deliver homes that provide great value at lower price points for the broadest sectors of homebuyers, we feel we are well positioned to drive future growth and success. We secured more than 18,000 new lots in 2019, compared to approximately 10,000 in 2018, greatly expanding our pipeline for community count growth and positioning us to deliver strong volume growth as those communities are opened and begin selling over the next 4-6 quarters. We believe we can grow earnings faster than our top-line growth in 2020, leveraging the operating improvements we’ve made over the past few years while continuing to expand and refine them. For the full year 2020, we are projecting 9,700-10,200 total home closings and ASP’s between $360-370,000, with home closing gross margin in the mid-19’s percent and a tax rate of approximately 22%.”
