Meritage Homes: Driving Growth and Affordability in the Housing Market
2024-02-02
Meritage Homes recently held an analyst call to discuss their fourth-quarter 2023 results. The purpose of the call was to provide an overview of the company's performance and address any questions or concerns from analysts. The call included executives such as Steve Hilton, Phillippe Lord, and Hilla Sferruzza.
During the call, the company cautioned that the statements made, as well as the earnings release and accompanying slides, contained forward-looking statements that were inherently uncertain. They also highlighted the risk factors that could affect the company's actual results, which were listed in their earnings release and filings with the Securities and Exchange Commission.
The market trends discussed in the call included healthy home buying demand, the shift in buyer demand for move-in ready inventory into the new home space, and the impact of interest rates on market conditions. The company also shared their recent milestones, such as launching employee resource groups, being recognized as one of the best companies to work for, and receiving awards for their philanthropic efforts.
In terms of financial performance, Meritage Homes reported a home closing revenue of $1.6 billion for the quarter, with a home closing gross margin of 25.2%. The diluted EPS for the quarter was $5.38, and the return on equity for the full-year 2023 was 17%. The company also saw an increase in the price-to-book ratio by 56% year over year.
Meritage Homes aims to achieve a targeted average monthly pace of net sales in 2023 of 4.0. They adjust pricing and offer incentives on a community-by-community and home-by-home basis to achieve their targeted sales pace. The company offers various incentives to buyers, including closing costs, option upgrades, lot premiums, price concessions, and financing incentives. They also utilize rate locks and buy downs as incentives, especially in early 2022.
Meritage Homes focuses on high-growth but lower ASP markets in their East region, with an emphasis on affordability for their product. Their long-term objective for average selling price (ASP) is to return closer to the $400,000 level. They ensure sustained affordability by acquiring land at a lower price point. The company's backlog conversion rate for the quarter was 110%, and it historically takes them four to five months on average to build a home.
Meritage Homes reported an increase in home closing revenue in 2023 compared to the previous year, driven by higher commissions and marketing costs. However, net earnings declined by 26% to $738.7 million in 2023. The net debt-to-cap ratio was 1.9% as of December 31st, 2023. The company generated $355.6 million in operating cash flow and $59.7 million in total cash flows in 2023.
Meritage Homes' capital allocation strategy focuses on long-term shareholder value expansion through both growth in the business and returning capital to shareholders. They allocate cash to land acquisitions and development during strong economic periods and hold a higher cash balance during market volatility or uncertainty. The company also strategically deploys capital across investments.
Meritage Homes increased its land approvals by putting about 7,600 net new lots under control. As of December 31st, 2023, the company owned or controlled a total of about 64,300 lots, aiming for a four- to five-year supply. They opened 28 new communities in the fourth quarter of 2023 and have a land financing strategy focused on balancing strong returns and sufficient liquidity.
Meritage Homes also addressed questions about the industry environment, their market share, and their pricing strategy. They discussed their strategy to compete with the existing home market by increasing move-in ready inventory and focusing on their spec strategy. The company aims to sustain its sales pace by targeting entry-level first-time buyers and offering more affordable homes. They highlighted the importance of pace over price and their ability to adjust pricing and incentives to achieve their targeted sales pace.
Meritage Homes expects a gross margin decline of about 150 bps for the full year, with the second quarter through the fourth quarter being below that of the first quarter. They anticipate greater community count growth in 2025 compared to 2024 and expect land costs to become more normalized over time, creating purchasing power.
Overall, the analyst call provided valuable insights into Meritage Homes' performance, financials, business strategy, and market trends. The company showcased its ability to adapt to market conditions, focus on affordability, and drive growth while maintaining a strong financial position.