With $347 million in cash on hand, Meritage Homes is on a shopping spree, replenishing its low land inventory with lots priced low enough to help the company meet its goal of turning a profitable in 2010.
The Scottsdale, Ariz.-based company spent $50 million on bargain basement lots in the third quarter, picking up a turn-key active adult community in Maricopa, Ariz. as well as land in Florida and California, executives told analysts during its third quarter earnings call Tuesday morning. In total the company contracted for 2,500 lots in 11 communities in five states.
Resetting its offerings with lower cost land is one strategy that has already helped the company narrow losses to $18 million for the quarter, 56 cents a share.
Retooling product to cut out costs by 30 to 40% in some markets, targeting what CEO Steve Hilton calls the market "sweet spot" first-time and first-move-up buyers, and speeding up cycle times dramatically are others methods that have led to gross margins climbing to 14.5%. And Hilton said that number move up more as the lower-cost land moves through the process.
And Meritage wants that to happen quickly. "When we buy a lot we hope to be up and running within 90 days," said Hilton. "And our cycle times from purchase to closing are 99 days or less. Our goal is to really crunch the cycle time and turn our capital faster."
The company has reduced its average time from sale to closing by about eight weeks since the beginning of 2008, allowing the company to build and deliver more homes without increasing inventory
It also gives buyers less time to back out of a purchase. The company's cancellation rates have fallen to 20% from 40% last year. Keeping a healthy ready-to-move into spec home inventory is also part of Meritage's ongoing strategy that Hilton says is working. Despite starting construction on more spec homes, its inventory of non-sold houses has declined.
Meritage is marketing itself heavily to renters by including large banners on each of its model homes labeled with the total monthly payment, including home owner association fees so buyers can easily see what they can afford.
The company's new products, while smaller, are designed to differentiate the homes from the homes available through foreclosure as well. Numbers show that the re-design of the homes and communities are working. The company's newer communities are selling better and producing better margins for the company, executives said.
"I believe this is one of those times in history that can be a game-changer for many industries, and an opportunity to define who the next leaders will be," Hilton said. "I'm excited about the prospects for our future."