Meritage Homes Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Meritage designs and builds single-family homes, primarily for entry-level and first move-up buyers, across the West, Central and East regions, and provides title, mortgage and insurance services. It had 203 active communities at quarter-end.
Financial and operating results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Home closing revenue | $1,080.0 million | $890.4 million | +21.3% |
| Total closing revenue, including land sales | $1,083.8 million | $901.0 million | +20.3% |
| Home closing gross profit / margin | $266.7 million / 24.7% | $178.4 million / 20.0% | Margin +470 basis points |
| Earnings before income taxes | $166.0 million | $86.8 million | +91.1% |
| Net earnings | $131.8 million | $71.2 million | +85.3% |
| Diluted earnings per share | $3.44 | $1.83 | +88.0% |
| Net cash from/(used in) operating activities | $(13.9) million | $43.9 million | Decrease of $57.9 million |
- Closed 2,890 homes, up 24.8%; average closing price fell 2.8% to $373,700, which management attributed to a greater mix of lower-priced entry-level homes.
- Home orders rose 11.5% to 3,458 homes, with order value up 14.3% to $1.35 billion. The cancellation rate improved to 11% from 13%.
- Backlog increased 46.9% to 5,240 homes, valued at $2.08 billion, versus 3,568 homes and $1.39 billion at March 31, 2020.
- Homebuilding segment operating income increased to $171.4 million from $92.6 million. Revenue grew in Central and East; West revenue grew modestly. Home closing gross margins improved in all three regions.
- Cash and cash equivalents were $716.4 million, down from $745.6 million at year-end 2020. Real estate inventory increased to $2.98 billion from $2.78 billion.
- Total debt was $1.02 billion, including $997.2 million of senior notes and $23.3 million of other borrowings. Net debt was $304.1 million; debt-to-capital was 29.2% and net debt-to-capital was 10.9%.
- No borrowings were outstanding under the $780 million revolving credit facility; $685.3 million remained available after letters of credit. The company reported compliance with facility and senior-note covenants.
Management commentary, outlook and risks
- Management cited low mortgage rates, limited housing supply and demand for homes suited to working and schooling from home as supportive market conditions. It said strong demand and pricing power, higher closing volume, construction efficiencies and overhead leverage drove margin improvement, offsetting rising lumber and other commodity costs.
- Management reported pandemic-related supply-chain constraints and construction delays of two to four weeks from typical cycle times, though these had minimal impact on Q1 results. A Texas weather event also affected operations.
- The company was on track toward its goal of 300 active communities by mid-2022. Management cited growth plans that include increasing land and development spending over the next several years; it purchased approximately 5,700 lots for $202.6 million and spent $167.2 million on land development during the quarter.
- Key stated risks include mortgage-rate increases and reduced buyer financing availability, material and labor cost inflation or shortages, supply-chain disruption, land availability and costs, construction defects and warranty claims, severe weather, and the possibility that demand or absorption weakens. Management noted that actual results may differ materially from forward-looking expectations.
- Routine legal and construction-defect matters were disclosed. The company had $23.8 million in warranty reserves, including case-specific reserves for alleged stucco defects and drainage issues in Florida; management believed reserves were sufficient, but estimates may change as information develops.
- Subsequent financing: In April 2021, Meritage issued $450 million of 3.875% senior notes due 2029 and used proceeds to redeem its $300 million of 7.00% notes due 2022, with remaining proceeds for general corporate purposes. It expected an approximately $18.2 million loss on early extinguishment of debt in Q2 2021.
Important facts for investors to verify
- Whether elevated orders and the $2.08 billion backlog convert to closings on schedule, particularly given reported construction delays and the lower year-over-year community count.
- Whether pricing power and production efficiencies continue to offset increases in lumber, materials and labor costs and sustain gross margins.
- How land investment and inventory growth affect operating cash flow and liquidity as the company pursues community-count expansion.
- The Q2 accounting impact and ongoing interest-cost effects of the 2029 notes issuance and 2022 notes redemption.
- Whether warranty reserves and insurance or indemnity recoveries adequately cover the Florida matters and other construction-defect claims.