Meritage Homes 2026 Q2 Earnings Call

Please go ahead. Thank you, operator.

Good morning and welcome to our analyst call to discuss our second quarter 2026 results. We issued the press release yesterday after the market closed. You can find it, along with the slides we'll refer to during this call, on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to slide two cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain.

Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman, Philippe Lord, CEO, and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton.

Steve? Thank you, Emily. Welcome to everyone joining today's call.

Today, I'll begin with a brief overview of market conditions and our second quarter results. Philippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions, driving quarterly sales orders of 3,575, which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration, as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in the first quarter. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first move-up price points.

We believe that our strategy of having sufficient available home inventory, combined with our growing community count, positions us to quickly convert demand into sales this quarter from brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times, and working. These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6%, and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of June 30th, 2026, book value per share increased 5% year-over-year. With that, I'll now turn it over to Phillippe.

Thank you, Steven. Our strategy of pre-started inventory, streamlined operations, and go-to-market tenets enables us to be agile in our reactions to current market conditions. We leverage this strategy to generate additional direct cost savings to enhance our returns as incentives remain elevated this quarter. Our move-in-ready homes and strong realtor relationships help us compete in an environment where the homebuyer values a quick close through clarity and certainty in the home-buying process. While market conditions remain softer than normal, we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1,100 homes year-over-year as we replaced older inventory with an increased volume of new product with lower direct costs.

At the same time, we have kept our cycle time sub 110 calendar days for the fifth consecutive quarter and even found a few more days of improvement, allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improve liquidity while allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of June 30th, 2026, was up 9% year-over-year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Despite the small dip, we are reiterating our expectation of a 5%-10% full year 2026 community count growth year-over-year.

We also achieved another quarter of lower construction cost per foot as our purchasing teams collaborated with our strategic trades to find incremental savings and efficiencies that benefited all parties. We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year-over-year to $357 million in the second quarter from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings in the second half of 2026 and into 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases.

By maintaining our operational and financial discipline, we believe we are well positioned to navigate uncertainties today while preparing for growth and increased shareholder returns as the market conditions improve. Part of that longer-term plan includes an intentional shift of a portion of our business to first-time move-up homes as we continue to serve one of our key buyer demographics, the Millennial customer, as they begin to look toward their next home purchase while still continuing to offer our entry-level product for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends. Our goal is to be around one-third, two-thirds mix of first move-up and entry-level homes consistent with the demographics of the U.S. population.

We are intentionally rebalancing our portfolio to achieve that over time, starting with a heavier allocation to the acquisition of land for first-move-up customers. Second quarter 2026 orders were 9% lower year-over-year, primarily due to a 19% decline in average absorption pace, which was partially offset by a 14% increase in average community count. Cancellation rate of 13% was a little higher than the 11% in Q1, but still remained below typical industry averages as we benefit from a quick sale to close process. Our average absorption pace was 3.5 homes per community per month during the second quarter, compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation.

While long-term objective remains an average of four net sales per month for the year, we will not sacrifice profitability or complete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385,000 was down 3% from prior year due to geographic mix shifting from higher ASP West region into the lower ASP East region. Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per home incentive costs. We grew our active communities 9% year-over-year from 312 in the prior year to 340 by June 30th. Q2 was 1% lower than the 345 active communities in Q1 as timing played a factor this quarter.

Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter and 67 year-to-date. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2. Very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in Q2, although the needed volume incentives varied notably. Parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolinas were among our strongest performers, demonstrating more market strength in geographies with limited inventory.