In its third quarter earnings report this morning, Meritage posted gains but not quite what analysts expected.
For instance, orders increased 4.5% year-over-year. The Street expected 15% growth, while KBW’s Jade J. Rahmani anticipated 20% growth. In the company’s earnings release, however, Chairman and CEO Steve Hilton emphasized strong order growth in the builder’s East and West regions this year, which drove a 21% increase in third quarter home-closing revenue. Meritage’s average community count grew 23% year-over-year.
“Order declines in Denver and Dallas were partially attributable to extended delivery schedules resulting from weather-related delays in starting new homes, which management believes have discouraged some buyers from contracting for new homes,” Meritage said in its release. “Softer demand in Houston related to lower oil prices also contributed to the decline in Texas' orders.”
Rahmani projected 19.5% gross margins, but Meritage came in at 19%, down from the 20.4% it posted in the third quarter of 2014. Increased land and construction costs driven by labor shortages in certain markets played a role. So did $2.0 million in impairments and lower than average margins in the East, which were primarily associated with the company's most recent acquisitions.
“Rising construction costs driven by labor shortages have pressured our home closing gross margin this year, which was 19% for the third quarter,” Hilton said in the release. “However, we expect to see our margins increase over the next 12 to 18 months as we improve the margins in our East region, made up primarily of new markets we have entered in recent years, which have not yet achieved anticipated operating efficiencies.”
Meritage posted a 21.3% increase in home sales revenue to $662 million, which beat Rahmani’s estimate. It beat in other categories as well.
“Unit closings of 1,712 homes increased 12.5% year over year [versus our 1,674],” Rahmani said. “The average sales price of $387,000 was above our $369, up 7.9% year over year and up 1.8% quarter over quarter.”
Meritage finished the third quarter with 250 active selling communities—it’s most ever. And Hilton says despite “less than robust than expected” recent order volumes, orders remain healthy overall.
“As we enter our fourth quarter, we are doing our best to complete and close homes by year-end where schedules have slipped due to weather and labor issues, so that our customers can move in as soon as possible,” Hilton said. “Based on our backlog and current costs, we anticipate fourth quarter home closing revenue of approximately $750 to 800 million.”