Meritage Homes Corp. (NYSE:MTH) after market close Monday reported a $144 million loss ($-4.69 per share) for the third quarter.
The loss included impairments and joint venture charges of $55 million and a$106 million charge to deferred tax assets. Minus those charges, the pre-tax loss was $7 million.
Home closing revenue declined 35% to $373 million from the prior year as closings fell 25% to 1,423 and a average sales prices dropped 14%. Orders fell 29% to 1,013 and order value fell 35% to $254 million. The cancellation rate was 40%, up from 27% and 29% in the first two quarters of 2008 but in line with 41% in the third quarter of 2007.
Homes in backlog were down 33% from last year to 2,269 with a value of $613 million, down 40%. Inventory of unsold homes rose to 809 at quarter's end from 725 in the second quarter, owing to cancellations, the company said.
Gross margins excluding impairment charges fell to 12.7% before impairments in 2008, compared to 14.8% before impairments in 2007.
The company "saw a substantial decrease in traffic and sales during September, which has continued in October," said Steven J. Hilton, Meritage chairman and CEO. "Our September net sales were about 30% lower than the July-August pace, and our cancellation rate jumped to 45% that month in the wake of September's crisis in the financial markets."
Hilton continued, "While Hurricane Ike hurt our Houston operations in early September, the financial crisis and slowing economy have damaged buyers'confidence and resulted in further declines in home sales and asset values.That prompted us to record further real estate impairments in our third quarter. Based on greater uncertainty as to the timing of an eventual recovery in homebuilding, we concluded this quarter that a valuation allowance against our deferred tax asset was warranted."
The company said impairments of existing projects accounted for $35 million of the total third quarter real estate-related charges, with additional impairments of $13 million on land held for sale, $6 million of option terminations and $1 million related to joint venture impairments. More than half of the third quarter 2008 real estate impairments were in Arizona, primarily from the four attached home communities that Meritage has in Phoenix. California made up another 20% of the impairments, as housing markets there were further battered by falling prices and an over-supply of new and existing inventory.
Meritage reduced general and administrative expenses by $24 million (31%) year-to-date, to 4.7% of year-to-date revenue in 2008, compared to 4.4% in 2007. Excluding a $10 million benefit in the second quarter 2008 related to a successful legal settlement, year-to-date general and administrative expenses were $63 million, or 5.6% of year-to-date revenue.
The company ended the quarter with $119 million in cash, no bank debt and$338 million available under the terms of its credit facility. Delayed closings and higher inventory levels reduced net cash flow in the third quarter. The company said it was "modestly cash flow positive" for the quarter, and has generated more than $106 million positive cash flow from operations in the first three quarters of 2008. Its net debt-to-capital ratio was 46% at September 30, 2008, compared to 41% at the end of the previous quarter and 50% at September 30, 2007, and the company said it was in compliance with all covenants under its amended credit facility.
Meritage controlled 20,738 lots at September 30, 2008, down 62% from peak three years ago and down from 21,902 at June 30, 2008. It had a 1.4-year supply of owned lots (based on trailing twelve months' closings).
Said Hilton, "We believe that true demand for homes is being depressed by the volatility in the financial markets and the constant barrage of negative news. It appears that this has caused many buyers to defer home purchases until prices and economic conditions stabilize. A few markets such as Sacramento have shown sales increases recently, as buyers have taken advantage of the large selection and lower prices on homes, and brought down inventories despite additional foreclosures. However, those isolated bright spots may not be indicative of the market in general, so we are emphasizing a more defensive strategy going forward."
He added, "We'll be very cautious in acquiring any new lot positions,"adding that the company expects to generate positive cash flow for the "next several" quarters and expects roughly $80 million in tax refunds during the first half of 2009.
Shares of Meritage closed up nearly 2% at $12.84 but sank more than 5% in after-hours trading.