Meritage Homes Corporation 2026 Q3 Earnings Call

Please go ahead. Thank you, operator.

Good morning and welcome to our analyst call to discuss our third 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 2 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, Phillippe 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 start by sharing our thoughts on the current market dynamics and covering the key third-quarter results. Philippe will then discuss our strategy, provide additional color on our operating metrics, followed by Hilla's review of our financial performance and our capital and liquidity position. Since we last spoke to you on our Q2 earnings call, external factors have exacerbated the uncertainty across the housing market. While job growth has remained a positive highlight, rising mortgage rates have further constrained affordability, increasing rate buydown costs and overall incentive usage, and made homebuyers more hesitant to commit to a home purchase. Compounding these challenges are persistent inflationary pressures and growing concerns about job security.

Against this backdrop, we generated 3,083 sales orders in the third quarter of 2026, down 15% from the prior year despite a higher store count, but still achieved an absorption pace of 3.0 net sales per month. While we believe that these headwinds may continue in the short term, the long-term fundamentals in the U.S. supporting homeownership demand have not changed. Favorable demographics continue to underpin demand for entry-level and first move-up product, and homes at affordable price points remain desirable. During the third quarter, we closed 3,187 homes, generating $1.2 billion in home closing revenue. Adjusted home closing gross margin was 17.9%, and adjusted diluted EPS was $1.11, excluding $6 million of real estate inventory impairments. Inclusive of $285 million of year-to-date share repurchases, as of September 30, 2026, book value per share increased 4% year over year. With that, I'll now turn it over to Philippe.

Thank you, Steve. Before we dive into our operational highlights, I'd like to step back and discuss what is top of mind for us at Meritage Homes right now. In today's tougher environment, we are taking deliberate actions across all facets of the business to maximize cash generation, preserve liquidity, and maintain capital flexibility. We are tightly managing our total targeted home inventory to align with the slower sales environment while also focusing on monetizing completed homes. We achieved our internal mandate to reduce discretionary spend as we enter 2026 and expect to find incremental opportunities for savings in 2027. We remain highly selective in our land acquisition as we already have sufficient land to support our near-term goals. In addition to our dividend, we continue to repurchase shares in Q3, albeit at a more normalized pace following the elevated levels of prior periods, further preserving capital.

These actions reflect our focus on controlling what we can control and maintaining the financial flexibility to navigate a range of market conditions. I'll spend a bit more time discussing these objectives shortly, but the combination of these initiatives is our primary focus until we see some stability in the markets. On last quarter's call, we shared that we've been reallocating capital over the last few quarters towards 1MU as we advance our previously communicated goal of 1MU representing about one-third of our overall portfolio. While this was part of our initial target back in 2017, during the last five or six years, we skewed heavier to the entry-level space, aligning with the demand trends in the market. I'd like to take a minute and provide some additional context regarding Meritage and our 1MU product.

To varying degrees, first move-up has been part of our inventory lineup for the last four decades. We are simply looking to achieve a more balanced product mix in the future as our customer base matures and demand for more highly appointed homes increases. This additional consumer segment fits well with our existing business strategy. We know the markets, we know the product, we know the customer base, and we understand the land required to be successful at selling these homes. All of our markets support first move-up product, and we have not wavered from our disciplined underwriting and return thresholds, knowing that slightly lower absorption pace is offset by improved margin profiles.

These investments should begin to translate into a higher mix of first move-up sales, orders, and closings in the back half of 2028 and into 2029, and position us to serve a broader range of buyers, support long-term growth, and create improved portfolio diversification. We will continue to share our progress in the coming quarters, but for now, let's turn to slide 4. Third quarter 2026 orders of 3,083 were 15% lower year over year, primarily due to a 21% decline in average absorption pace, which was partially offset by a 7% increase in average community count. The Q3 cancellation rate was 13%, same as Q2, reflecting a continuing challenging selling environment with affordability pressures and ongoing uncertainty causing some buyers to reconsider their purchase decisions and timelines.

While our average absorption pace was 3.3 net sales per month during the third quarter compared to 3.8 a year ago and 3.5 in Q2, we are pleased we were able to achieve these results without extending incentives beyond our internal projections as we hit our gross margin targets. We credit our teams with solid execution as we managed to the softer selling environment, especially with our current outsized entry-level mix that skews towards a more affordable sensitive buyer. We believe that execution is supported by a differentiated go-to market strategy, which differentiates us from both our new construction and resale product competitors. Our move-in-ready homes and 60-day closing guarantee give buyers greater clarity and certainty around their closing timeline, combining the benefits of a new home with the speed and availability often associated with the resale market.

Our strong realtor relationships further differentiate the experience, generating repeat business and a steady source of buyer traffic through our broker network. This quarter, over a third of our sales were brought to us through realtors that had previously sold a Meritage Homes. We balanced pace and price to maximize returns on an asset-by-asset basis. When the demand backdrop is relatively inelastic to pricing, we won't pursue volume at all costs simply to achieve our long-term goal of 4 net sales per month. We will look to optimize margin and preserve the value of our land portfolio. ASP on orders this quarter of $383,000 was down 2% from prior year due to the higher cost and utilization of incentives, as well as some geographic mix. Our active community count of 348 at September 30, 2026, was up 4% year over year and 2% sequentially.

We opened 34 new communities during the quarter, predominantly in the East region. On a year-to-date basis, we had just over 100 new communities come online. We reiterate our expectation of a 5%-10% full year 2026 community count growth year over year. The additional communities position us to gain market share when demand conditions improve while providing further scale to better leverage our overhead and gain greater efficiencies over time. Throughout Q3, the sales environment became incrementally more challenging as mortgage rates increased from approximately 6.6% at the start of the quarter to 7.5% by September 30. Higher rates, persistent inflation, and concerns about job security added to affordability pressures and weighed on consumer confidence. This trend carried into October.