Meritage Homes Corp., Scottsdale (NYSE:MTH) late Wednesday reported net earnings of $43.9 million ($1.07 per diluted share) for the first quarter of 2018, up 86% and 91%, respectively, compared to the first quarter of 2017. Analysts were expecting a gain of $0.74.
Earnings before income taxes were up 33% year-over-year, primarily due to increases in home closing revenue and home closing gross margin.
Home closing revenue increased 10% on a 9% increase in closing volume and a 1% increase in average sales price over the first quarter of 2017. The increases in closings and revenue were led by the East region (Florida, Georgia, the Carolinas and Tennessee), which delivered a 25% increase in home closing revenue from 29% more home closings at an average sales price 3% lower than the first quarter of 2017.
The Central region (Texas) delivered home closings and revenue growth of 9% and 10%, respectively. A 2% increase in West region home closing revenue (California, Colorado and Arizona) was due to a 7% increase in average sales prices compared to the first quarter of 2017, which offset a 5% decline in closings due to 14% fewer communities open on average during the first quarter in 2018 than 2017.
Home closing gross margin increased 90 bps to 17.1% for the first quarter of 2018, compared to 16.2% in the first quarter of 2017, primarily due to improved margins in the East region, as well as moderate increases in home prices and greater cost efficiencies throughout the company' regions.
Total orders for the first quarter of 2018 increased 10% year-over-year, driven by a 10% increase in absorption pace. Total active community count increased during the first quarter of 2018, though the ending and average community counts were consistent year-over-year.
The improved performance in the East region were attributed to management’s efforts over the past year on new regional product offerings and better sales execution. Strong order growth of 23% and 17% respectively in the East and Central regions offset a 2% decline in orders within the West region. The decline in the West region reflected fewer average actively selling communities in the first quarter of 2018 over 2017. Most of the new communities opened during the first quarter in the West were opened late in the quarter and only minimally contributed to first quarter 2018 orders. Community count is expected to increase in the West region this year.
Partially offsetting the 10% increase in orders was a 2% decrease in average sales price (ASP) as the ratio of lower-priced entry-level homes increased, resulting in an 8% increase in the total value of orders. California’s ASP was a notable exception, increasing 24% year-over-year primarily due to high demand in several higher-priced communities in the first quarter of 2018.
Land closing gross profit declined $3.7 million year-over-year due to a $1.2 million net loss from the sale of various land parcels during the first quarter of 2018, compared to land closing gross profit of $2.5 million in the first quarter of 2017.
Selling, general and administrative expenses were 11.5% of first quarter 2018 home closing revenue, 30 bps less than 2017’s first quarter SG&A of 11.8% of home closing revenue, reflecting cost controls and greater leverage on higher closing volumes and revenue.
Other income increased $4.3 million year-over-year, primarily due to a $4.8 million settlement from long-standing litigation related to a previous joint venture in Nevada.
Interest expense declined $0.7 million for the first quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development, despite a $3.0 million increase in total interest incurred. The company issued $300 million in new 5.125% senior notes in June 2017 that were primarily 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. The company also issued an additional $200 million of 6.00% senior unsecured notes in March of 2018 and used the net proceeds to repay outstanding borrowings under its revolving credit facility, which included $175 million of borrowings for the February 2018 redemption of the company’s 4.50% senior notes due in March 2018.
First quarter effective tax rate was approximately 10% in 2018, compared to 36% in 2017, reflecting lower corporate income tax rates enacted for 2018, as well as $6.3 million of energy tax credits recorded in the first quarter of 2018 for all homes closed in 2017 that qualified for the credits. These energy tax credits were extended by Congress in 2018 for 2017 only, and are expected to reduce the full year 2018 effective tax rate by about 200 basis points.
Cash and cash equivalents at March 31, 2018, totaled $172.6 million, compared to $170.7 million at December 31, 2017, as net cash generated was invested in real estate to support additional orders and closings. Real estate assets increased to $2.80 billion at March 31, 2018, compared to $2.73 billion at December 31, 2017. Approximately $82.3 million of the increase related to homes under construction or completed, offset by a slight decrease in finished home sites or land under development.
Meritage ended the first quarter of 2018 with approximately 34,000 total lots owned or under control, compared to approximately 31,300 total lots at March 31, 2017. Approximately 80% of the lots added during the first quarter were in communities planned for entry-level product.
Debt-to-capital ratios were 44.7% at March 31, 2018 and 44.9% at December 31, 2017, with net debt-to-capital ratios of 41.2% and 41.4%, respectively, remaining well within management’s target range for this key ratio.
Steven J. Hilton, chairman and CEO of Meritage, commented, “Our strategy to focus on the growing demand for entry-level homes with our LiVE.NOW.™ product addresses the need for lower-priced homes as interest rates rise, in order to keep homes affordable for first-time buyers, including millions of Millennials expected to enter the market over the next decade. As part of this strategic shift, we have simplified our business to gain operating efficiencies and improve our buyers’ experiences throughout the entire home-buying process, which has been very well-received."
