After making "significant progress" in its initiatives to protect the balance sheet, Meritage Homes CEO Steven Hilton told analysts in the company's earnings call today that management is now turning its attention toward improving profitability.
Despite its historical niche focused on the move-up buyer, executives plan to reposition communities with a focus on lower price points. And using a three-pronged attack on its business, Meritage plans to reduce hard costs by 20% to 25% and expects to benefit by additional margin growth by next year.
Of that, 5% to 10% is expected to be realized in the simplification of its product designs, another 5% will be achieved by stripping out standard features not valued by customers, and the remaining 5% to 10% will be recognized through rebidding the actual cost of construction.
According to Hilton, the company is already seeing results as the reduction in cost of construction for the first half of 2008 already exceeds total reductions for all of 2007.
The company currently has two-thirds of its business in the stable Texas markets, but as the rest of the business recovers, it plans to readjust the allocation to include more volume in other established markets like California, Arizona, and Nevada, which are now hard hit.
In markets where land has already been written down significantly, the company can achieve new target pricing and generate demand by changing the product offering.
But with many communities outside the Lone Star state nearly complete, the company sees "opportunity to reload" as distressed pricing starts to pencil.
"We aren't talking about large lot positions," said Hilton, who qualified the small quantities as 50 to 100 lots. "Some we get on terms, some on options, and some we pay cash. There is a risk that prices might continue to fall, but there is a lot of activity out there from investors and other builders. I think the time is now, or right in front of us, to take advantage on new positions."
That being said, the strategy only applies on deeply discounted finished lots where home pricing allows for normalized margins. "We won't buy $100,000 lots like we did before," said Hilton. Instead, the ideal pricing needs to be $50,000 or less in Phoenix and $60,000 to $70,00 in California markets or Las Vegas. At that basis, the company can offer homes under $300,000 in the California market and $200,000 or less in Phoenix.
Under that model, Meritage plans to see gross margins near 19% to 20%, and net margins between 8% and 10%.
"We are finding some lots where there is little or no residual for land," said Hilton. "When we can find those in good locations, we'll take advantage of them to the degree that our capital allows." Hilton also stated that the company doesn't plan to lever up its debt in order to fund the new land positions.
When asked how management was assessing risk on new land purchases in the current environment, Hilton said any such risk "might be that we don't make the profits we hope to make, but I don't think there is a risk of impairment on these new lots we are buying."