Meritage Homes Corporation, Scottsdale (NYSE:MTH) on Friday morning reported net income of $42.6 million ($1.02 per diluted share) for the third quarter of 2017, compared to prior year net earnings of $36.9 million ($0.88 per diluted share), Analysts were expecting a gain of $0.93 per share.
Home closing revenue increased 9% over the prior year on higher closing volume. Despite increases in market prices of homes over 2016, average closing prices remained constant with the third quarter of 2016, as a higher percentage of home closings were lower-priced entry-level homes. Both the West and Central regions delivered 19% year-over-year increases in home closing revenue, reflecting strong growth in Arizona and Texas. A 12% decline in East region home closing revenue reflected 14% fewer closings due to fewer orders during the first half of 2017 than 2016, as well as delays due to Hurricane Irma.
Home closing gross margins increased to 18.1% for the third quarter of 2017, compared to 17.8% in the third quarter of 2016 and 17.7% in the second quarter of 2017. The margin improvement reflects higher margins in Texas and the West Region as well as improved leverage of construction overhead expenses overall.
Selling, general and administrative expenses totaled 10.9% of home closing revenue, an 80 bps improvement from 11.7% in the third quarter of 2016, reflecting successful cost controls and greater overhead leverage.
Total orders for the third quarter increased 8% year-over-year due to strong demand in Texas and improved sales execution in the East region. Orders increased 22% over the third quarter of 2016 in Texas, primarily due to a 26% increase in average active communities over the prior year. Total orders increased 13% in the East, primarily due to a 12% increase in absorptions (orders per average active community) during the quarter. Three of the five states in the region produced 20% or greater order growth over the third quarter of 2016, reflecting positive acceptance of new products in new communities, as well as better sales execution. A 7% decrease in average active communities in the West region resulted in a 6% decline in third-quarter orders for the region.
Total active community count was 250 at September 30, 2017, compared to 237 communities open at September 30, 2016, which translated to a 6% year-over-year increase in average active communities for the third quarter.
Cash and cash equivalents at September 30, 2017, totaled $115.2 million, compared to $131.7 million at December 31, 2016, primarily reflecting the use of cash to fund the purchase and development of lots, as well as additional homes under construction, to meet growth targets. Proceeds from the issuance of $300 million in new senior notes in June 2017 were used to repay borrowings under the company’s revolving credit facility and to retire all $126.5 million of the Company's 1.875% convertible senior notes.
A total of $285.6 million was invested in land and development during the third quarter of 2017 to meet current demand and position the company for future growth. Total spending on land and development year-to-date was $771.1 million in 2017, compared to $667.2 million through the third quarter of 2016.
Meritage ended the third quarter of 2017 with approximately 33,300 total lots owned or under control, compared to approximately 28,800 total lots at September 30, 2016, as the Company secured more than 2,400 new lots during the quarter. Approximately half of those additions were in Texas to meet continued strong demand, and approximately 70% of the newly controlled lots added during the quarter were for entry-level communities.
Debt-to-capital and net debt-to-capital ratios at September 30, 2017, were 45.9% and 43.6%, compared to 44.2% and 41.2%, respectively, at December 31, 2016.
"Demand continues to be healthy across all of our markets, especially for our entry-level and LiVE.NOW. homes," said Steven J. Hilton, chairman and CEO. "More than ever, buyers appreciate that they can get Meritage's quality, energy efficiency and advanced technology in affordably-priced homes. As we continue to execute our strategy to serve the growing population of first-time buyers, we foresee additional growth opportunities for Meritage."
Regarding 4Q guideance, Hilton said, “Considering the results we’ve achieved in the first nine months of the year and adjusting for delays due to weather events, we are modestly reducing our closings and revenue guidance while maintaining our 2017 earnings expectations due to our strong third quarter performance. We expect to deliver approximately 7,600-7,800 homes and closing revenue of $3.15-3.25 billion for the year. On that level of closings and revenue, we are maintaining our expectations for approximately $235-245 million in pre-tax earnings with full year 2017 gross margin in line with 2016.”
