Meritage Homes may have ended its fourth quarter with a loss, but company CEO Steve Hilton told analysts during an earnings call Thursday that the company has built itself a solid platform for both top-line and bottom-line growth in the year ahead. Through the fourth quarter, the company continued to take advantage of land opportunities, bringing new, more profitable communities online, while lowering its land, construction, and overhead costs.
"Meritage is in the best shape it's ever been--stronger, leaner, faster, and even more nimble than ever before," said Hilton.
Most impressive was that the company strategy yielded a 15% increase in new orders, at a time when most of the company's peers logged order declines for their most recent quarters. On a per community basis, the company sold 4.7 homes per community per month during the quarter, compared with 3.9 sales per community per month during 4Q2009.
Hilton attributed the order growth to several factors. First, the rollout of its new communities, meaning those opened on land acquired since 2009. CFO Larry Seay said, generally speaking, the new communities were in better locations, where there was higher demand, fewer foreclosures, and more stable prices. During the quarter, new communities accounted for 38% of both sales and closings. Seay noted that new communities would have likely have made up a larger percentage of company sales had there not been a concerted push during the quarter to shed inventory in old communities.
However, for as much focus and urgency as there is in bringing more new communities online, Hilton said net community growth likely will be stalled in the near-term. In fact, the company could post slight declines in community count next quarter as it works to close out legacy communities while opening new ones. Moreover, he said tightness in the land market in some geographies was forcing the company, at times, to purchase land still in need of some degree of development, which creates a longer runway for bringing new communities online.
"Our community count isn't growing," he said. "We've got to rotate out of old communities to get into new ones, so we are more aggressive on our pricing in our older communities."
However, the pace of new community openings is expected to accelerate in the back half of the year, with an expected 60% of closings coming out of new communities by the end of 2011. Hilton said management expected to purchase lots in 80 to 100 new communities in the year ahead. And with margins on the new communities averaging between 500 and 600 basis points higher than legacy communities, management was expecting overall margin expansion on top of increased absorptions.
In addition, Hilton said the company's move to build more energy-efficient homes was helping to drive sales. He spent some of the call talking specifically about its second generation Meritage Green homes, which are roughly 50% more energy efficient than a code-built home. He said, by the close of 2011, between 75 and 100 communities should be offering the more energy-efficient homes, which typically have a 10% to 15% premium on comparable existing homes.
"We're going to put a lot of energy and effort into our energy-efficient homes in 2011, and we expect it to pay dividends," he said.
Between its new community strategy and its more energy-efficient line of homes, Hilton said he was optimistic about what 2011 would hold for the company. "Sales have steadily increased for us for the past three months, so we are pretty excited about that," he said. And the trends seemed to have continued into 1Q2011 so far, as Hilton said he was "quite pleased with January results," which slightly exceed internal expectations and was the second best selling month since the tax credit expired last spring.
"It gives us some confidence that we are going to see some positive momentum in 2011," Hilton said.