Meritage Homes Corp. (NYSE:MTH) late Monday reported a net loss of $23 million, or -$0.79 per share, for the second quarter of 2008, including write-downs of $39 million. Minus the impairments, however, the company would have had pre-tax income of $5 million.
The earnings missed Wall Street estimates, which were a consensus -$0.51.Nevertheless, the stock was up more than 5% in after-hours trading as investors digested what looked like bright spots in the earnings report.
The loss was less than half that of the comparable quarter last year, and the company succeeded in generating $102 million in positive cash flow from operations despite "modest" acquisitions of new lots. It has reduced inventory of unsold homes by 35% to 725 (297 completed), year to date, versus the same period last year, has cut lot supply by 60% from its 2005 peak to a 3.2-year supply and reduced its net debut-to-capital ratio to 41% from 49% at yearend 2007. Finally, the company ended the quarter with $115 million in cash, no bank debt and no bond maturities before 2014, and, regarding the latter, it has reduced its capacity on its credit facility to $500 million and amended it to "relax the most restrictive covenants."
Still, second-quarter home closings were down 25% to 1,388, and revenue was down 34% to $374 million, both compared to last year, from the prior year as average sale prices slipped 12%. Likewise, new orders fell 15% to 1,473 and the value of those orders dropped 23% to $387 million. Both orders and closings were helped by the company's presence in Texas, which helped offset larger drops in California and Florida. The cancellation rate for the quarter came in at 29%, slightly ahead of first quarter but well behind the 37% posted in last year's second quarter.
The company also cut the number of units in backlog by 30% to 2,679 with a value of $731 million, which was down 39%.
"We've experienced three years of dramatically lower sales, softening prices, tightening credit for homebuyers and rising inventories, compounded recently by increased foreclosures and an uncertain economic outlook," said Steven J. Hilton, chairman and CEO of Meritage. "However, our impairment charges have trended lower over the last three quarters, and we continue to benefit from our relatively strong position in Texas. We remain a build-to-order homebuilder, appealing primarily to move-up buyers, but are re-positioning many of our communities to attract buyers at lower price points, in response to demand for more affordable homes. We're offering smaller homes with fewer standard features, while still allowing customers the flexibility to upgrade from a good selection of options, and make the house distinctively their own."
Home building gross margins increased to 6.2% in quarter 2008 from 1.7% during the same period last year. Second quarter general and administrative expenses fell 27%, from $28 million in 2007 to $21 million in 2008, excluding the impact of $10 million received in a legal settlement.
Meritage reduced total lot supply by 11% during the quarter to 21,902 lots controlled , with approximately 57% of all lots in Texas and 56% controlled under purchase or option contracts. It also shrunk its investment in joint ventures to $21 million at second quarter-end.
Community count is down to 213 from 220 at year end, but some 40% of all Mertiage communities are down to 25 or fewer unsold lots, the company said. "Our intent is to redeploy the cash generated from closing out some of our low-margin communities to new higher-margin communities with lower-priced lots, thereby improving our homebuilding margins," said Hilton. "Though we do not intend to increase our leverage by significantly increasing our lot inventory, we are looking for select opportunities to acquire small finished lot positions in certain markets at deeply distressed prices, where we believe we can earn near-normal returns at today's home prices. We are targeting finished lots in well-located areas on which we can immediately begin building and selling homes."