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 profitable in 2010.
The Scottsdale, Ariz.-based company spent $50 million on bargain-basement lots in the third quarter, picking up a turnkey active adult community in Maricopa, Ariz., as well as land in Florida and California, executives told analysts during its third-quarter earnings call Tuesday. 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 (Click here for more financial details).
Retooling product to cut costs by 30% to 40% in some markets; targeting what CEO Steve Hilton calls the market “sweet spot” of first-time and first-move-up buyers; and speeding up cycle times dramatically are other methods that have led to gross margins climbing to 14.5%. Hilton said that number will move up more as the lower-cost land moves through the process.
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 an ongoing Meritage strategy that Hilton says is working. Despite starting construction on more spec homes, Meritage's inventory of unsold 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 homeowner association fees, so buyers easily can 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 suggest that the re-design of the homes and communities doing just that, as Meritage's newer communities are selling better and producing better margins for the company compared to older communities, 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."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.
Learn more about markets featured in this article: Phoenix, AZ.