After just two years in the Southwest Florida market of Ft. Myers/Naples, Meritage Homes announced it is abandoning plans to develop any new communities in the area.
Though the company denies it is officially exiting the market, Meritage investor relations director Brent Anderson confirms that they have "terminated all of our future options to purchase additional lots in southwest Florida." This included more than 2,500 lots in the area – as well as approximately $25 million in lot deposits. This just after Meritage entered the Southwest Florida housing market in February of 2005 when it purchased Fort Myers-based Colonial Homes for an estimated $66 million.
Operations in the Ft. Myers/Naples, Florida market are seriously depressed and Steven Hilton, Meritage chairman and CEO, predicts no turnaround in the area for the foreseeable future. As a result, the company anticipates recording a non-cash, pre-tax charge of $28 million relating to goodwill and other intangible assets related to the acquisition. This comes in addition to the $25 million lost on lot deposits in the area.
"Southwest Florida has been experiencing some of the most difficult housing market conditions in the country," said Hilton in a statement to investors. "While our 2006 home closings there represented only approximately 2% of our company-wide closings, our year-to-date 2007 home closings in Fort Myers/Naples are down more than 70% from the level a year ago."
Continued expansion in the area became impaired due to the ability to acquire new lots or renegotiate existing land contracts that reflect current market pricing. The company will maintain a skeleton office in the market in order to complete homes already under contract. "We are not, at this point in time, exiting the Ft. Myers market," said Anderson. "We have customers to serve, homes to build and inventory to sell. Albeit small, we will maintain an office and staff there to achieve those things. Beyond that, we will continue to monitor the market conditions, and act accordingly in the future."
After reporting preliminary sales, closings, and backlog for the second quarter ending June 30, 2007, Meritage Homes joins the ranks of many public builders suffering weaker-than-expected performance.
Though the company was encouraged by improving sales and cancellation rates during each month of this year's first quarter, positive trending came to an end in April. Preliminary net sales for the first two months of the second quarter were approximately 21% lower than the same period last year, and cancellations increased to a rate of 36% of gross orders, from 27% reported in the first quarter 2007.
As a result, the backslide is expected to bring pre-tax charges to Meritage in the $75 to $80 million range related to inventory impairments and the write-off of land options.
Citing increased price reductions and margin deterioration brought on by weakening demand, Hilton also predicts the company will not meet the guidance it provided on April 25 for total home closings, revenue and earnings for 2007. In addition, he warned that current conditions and recent performance "also increases the risk for larger associated write-offs of options and impairment charges, which could significantly impact our near-term profitability."
The company is currently reviewing operating plans for the remainder of the year.
Learn more about markets featured in this article: Cape Coral, FL.