Meritage Homes announced its fourth consecutive profitable quarter Wednesday, posting earnings of 4 cents per share, surprising analysts who had predicted a loss of 7 cents per share.
But accomplishing that and it's going to be tough to do in the traditionally slow last quarter of the year, CEO Steven J. Hilton told analysts during a conference call Wednesday.
It wasn't home deliveries that pushed the company's earnings over into the black. In fact, the company closed 16% fewer homes compared with the year before: 848 versus 1,015. Deliveries in the fourth quarter are likely to be worse since orders were down by 36% to 706. Management said the company will need to close about 800 homes in its fourth quarter to break even.
Meritage sold 4.7 sales per community during the quarter, which also slipped compared to other quarters. "All those are short of where we would like to be," Hilton said.
It also wasn't increased community counts that helped push a profit for the quarter since Meritage averaged 12% fewer actively selling communities in the quarter.
Rather, it was closing prices that increased 21% because the company sold more houses in its higher-cost markets, including Florida and California, than it did in its lower-priced Texas markets. Average closing price for the quarter was $275,700, up from $228,400 last year.
Gross margins improved as well, to 18.2% versus 10% last year. Cost cuts, too, helped since the company has redesigned its homes and improved purchasing to decrease construction costs as well as time. There were also staff cuts. Hilton said Meritage decreased head count in September by 7% or 8%.
More personnel cuts aren't planned for now, management said. "It's our strategy is to try to keep our team together," Hilton said.
Another strategy is to continue to add new communities on lower-cost land that sell better and yield roughly 600 basis points more profit than legacy land.
Analysts asked whether Meritage planned to lower prices to move through the legacy land faster. "There is not a lot of motivation as long as we are breaking even to plow through those communities at a faster pace," said Larry Seay, the company's CFO. "I think as long as we can maintain at least a break-even sales pace those older communities, we will muddle our way through until the market improves."
Instead, the company plans to add more new communities to the mix. The plan is to have two-thirds of its communities to be new ones by the end of next year. And more of those will offer the company's highly energy-efficient homes, which are selling two to three times faster than regular homes. "We end up making more money because we are able to leverage overhead and reduce interest costs because we are selling at a little bit better pace," Hilton said.
And the company plans to continue buy land, though with sales rates falling, fewer land deals are penciling. And as finished lots become more expensive because of scarcity, it is turning to more partially finished lots and raw land.
Meritage also is focusing on keeping more spec homes on its books than it has in the past. "If you manage your spec sales correctly, there shouldn't be much difference between the sales" price, Hilton said. "Having more specs today in this environment is an advantage, and we are trying to take advantage of that market dynamic."
Hilton also said that he is not concerned about costs of put-backs, which are mortgages that investors demand their money back on after they go south. Meritage brokers, but does not issue, mortgages. "Our JV (joint venture) partner has the liability," he said. "We have never taken a loan back and we don't expect that we ever will."
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.