Meritage Homes Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024, compared with the three months ended March 31, 2023, unless otherwise noted. Meritage builds single-family homes across the West, Central and East regions and provides title, insurance and mortgage-related services. It was selling in 275 communities across 10 states at quarter-end.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 or prior period |
|---|---|---|
| Home closing revenue | $1.466 billion | $1.262 billion; up 16.2% |
| Total homebuilding closing revenue, including land | $1.468 billion | $1.279 billion |
| Homes closed / average closing price | 3,507 / $418,000 | 2,897 / $435,600 |
| Home closing gross profit / margin | $378.0 million / 25.8% | $282.5 million / 22.4% |
| Earnings before income taxes | $234.0 million | $165.3 million |
| Net earnings / diluted EPS | $186.0 million / $5.06 | $131.3 million / $3.54 |
| Operating cash flow | $81.9 million | $124.5 million |
| Cash and cash equivalents | $905.3 million | $921.2 million at Dec. 31, 2023 |
| Debt, net of debt issuance costs, and other borrowings | $1.002 billion | $1.008 billion at Dec. 31, 2023 |
| Stockholders’ equity | $4.721 billion | $4.612 billion at Dec. 31, 2023 |
Home closing gross margin increased 340 basis points year over year. Management attributed improvement to lower direct costs, shorter construction cycles, reduced use of interest-rate incentives and better overhead absorption, partly offset by higher lot costs. Commissions and other sales costs rose to $101.6 million, while G&A increased to $50.7 million; each was 6.9% and 3.5% of home closing revenue, respectively. The effective tax rate was 20.5%, versus 20.6%.
Operating cash flow declined despite higher earnings, principally reflecting a $193.4 million increase in real estate inventory. Investing activities used $7.8 million. Financing activities used $90.1 million, including $27.2 million of dividends and $55.9 million of share repurchases. The quarterly dividend was $0.75 per share, compared with $0.27 a year earlier.
At March 31, 2024, debt-to-capital was 17.5% and net debt-to-capital was 2.0%. The company had no revolver borrowings and reported $765.3 million available under its $835 million credit facility after letters of credit. It reported compliance with facility covenants. Senior notes totaled approximately $1.0 billion, with no debt maturities before 2025.
Material changes and operating trends
- Home orders reached a company quarterly record of 3,991, up 14.5%; order value rose 8.2% to $1.63 billion. Orders pace increased to 4.9 per community per month from 4.2.
- The cancellation rate fell to 8% from 15%. Backlog conversion rose to 138% from 87%, contributing to quarter-end backlog falling 22.7% in units and 29.5% in value year over year, to 3,033 homes valued at $1.24 billion.
- Average selling prices declined: 4.0% on closings and 5.4% on orders. Management cited a greater mix of entry-level homes and geographic mix; entry-level homes were 88% of closings and 91% of orders.
- Homebuilding segment operating income increased to $238.6 million from $165.0 million. West revenue rose 23.6%, Central 0.6%, and East 24.6%.
- Real estate inventory increased to $4.915 billion from $4.721 billion at year-end. The company purchased approximately 2,900 lots for $162.2 million, spent $268.2 million on land development, and started 4,142 homes during the quarter.
- Financial services swung to a $0.7 million loss from $2.9 million profit, including $5.8 million of charges for unused prepaid interest-rate forward commitments that expired, versus $1.9 million of similar charges in Q1 2023.
Outlook, risks and contingencies
Management described new-home demand as strong, citing demographic demand and limited existing-home supply. Its strategy emphasizes entry-level and first move-up buyers, spec homes and quick move-in availability, affordability incentives, energy-efficient features, and community-count growth. Management said supply-chain disruptions and production cycle times had improved year over year but remained elevated. The filing provides no specific quantitative full-year earnings, revenue or margin guidance.
Management expects to fund near-term needs primarily with cash on hand and operating cash flow, and believes current cash and credit-facility availability provide sufficient liquidity. Land and home construction are significant cash requirements; the company notes that seasonal patterns and community development stages can cause cash flows to differ materially from reported earnings. Additional financing may be sought, but availability and terms are not assured.
Key risks include higher mortgage rates or reduced mortgage availability, affordability and demand changes, construction-cost inflation, labor and material constraints, slower sales or higher cancellations, land availability and option-deposit exposure, impairment risk, severe weather, and warranty or construction-defect claims. The company had $122.8 million in deposits on land under option or contract and 55,375 lots under contract or option with an indicated purchase price of $2.56 billion; most agreements do not require purchase, and exposure is generally limited to non-refundable deposits and related costs.
Surety bonds totaled $994.8 million and letters of credit $69.7 million. The company said it believed significant draws were unlikely. It reported $36.4 million of warranty reserves, including case-specific reserves for alleged stucco defects in certain older homes and HVAC condensation issues in limited markets; management believes reserves are adequate, but estimates may change. Routine litigation includes construction-defect matters; management said no unreserved pending matters were expected to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- Whether record orders and the low cancellation rate persist, and whether backlog rebuilds after the unusually high 138% conversion rate.
- How price, product and geographic mix affect average selling prices and gross margins, including the impact of affordability incentives and lot costs.
- Whether inventory investment and land-development spending convert into closings and operating cash flow; Q1 operating cash flow was below the prior-year period.
- The recurrence or resolution of the $5.8 million forward-commitment charge and the performance of the financial-services segment.
- Debt maturities beginning in 2025, credit-facility availability and covenant compliance, and potential changes in warranty, litigation or land-option exposures.