Meritage Homes Corp., Phoenix (NYSE:MTH) on Wednesday reported net income of $1.2 million ($0.04 per diluted share) for its third quarter ended Sept. 30 compared to a net loss of $17.8 million (-$0.56 per share) in the same quarter in 2009. The results included pre-tax charges for $0.8 million in 2010, compared to $13.2 million in the 2009 quarter. The quarter handily beat analyst predictions of a loss of five cents per share.
Home-closing revenue increased 1% due to a 21% increase in average prices despite 16% fewer home closings. Average closing price for the quarter was $275,700 in 2010, compared to $228,400 in 2009, reflecting shifts in the mix of sales rather than price appreciation. California and Florida made up a greater percentage of 2010 closings than in the prior year, with a smaller percentage in Texas, where house prices are generally lower. Additionally, over the last several quarters, Meritage has acquired lots in in-fill locations, which support a greater mix of move-up communities that command higher prices relative to entry-level communities
Net home sales in the third quarter were 36% lower than the prior year, partially due to a 12% decline in average active communities, from an average of 170 in the third quarter of 2009 to 149 in the third quarter of 2010. Average sales-per-community fell to 4.7 from 6.1 in the prior quarter and 6.5 in the prior year. Meritage did not report a cancellation rate. The company, however, opened 16 new communities during the quarter. Just before the quarter began, Meritage opened its first extreme energy-efficient green community in Gilbert, Arizona and followed with several similar communities in Arizona during the third quarter. The communities offer up to 80% energy savings over the average existing home in the U.S. by incorporating the latest energy-efficient technologies, designed into every home at no additional charge to the buyer.
Backlog fell 46% to 902 and backlog value fell 40% to $242.4 million.
Gross profit increased to $42.6 million in 2010 from $22.9 million in 2009 due primarly to cost reductions and relatively stronger margins achieved in new communities. Home closing gross margins were 18.2% in 2010 versus 10.0% in 2009, after impairments of $680,000 in 2010 and $10.4 million in 2009. Excluding impairments, adjusted margins were 18.5% compared to 14.5% in the prior year.
Home closing gross margins were 18.2% in 2010 versus 10.0% in 2009, after impairments of $680,000 in 2010 and $10.4 million in 2009. Excluding impairments, adjusted margins were 18.5% compared to 14.5% in the prior year. SG&A rose 7.6% to $35.3 million.
After purchasing approximately 1,600 lots for a total of $65 million during the quarter, Meritage ended the quarter with $419.8 million in total cash and cash equivalents, restricted cash and short-term investments. Its net debt-to-total-capital ratio improved to 27.1% at September 30 from 35.2% at September 30, 2009. Meritage controlled approximately 14,500 total lots at September 30, 2010, equivalent to a 3.6-year supply based on trailing twelve months closings. Approximately half were acquired since the beginning of 2009, and about a third of Meritage's total 150 active communities are on recently-acquired lots. It already owns or has under contract 29 additional new communities that it plans to open over the next several quarters, the company said.
"Over the last few years, many builders have moved their product offerings down the price-spectrum, believing there is less opportunity in the move-up market at this time," said Steven J. Hilton, Meritage chairman and CEO. "While we also pursued this strategy, recently we have had good success acquiring close-in move-up lots in 'A' locations, which other builders may have passed up. Due to our low acquisition price and construction costs, we are currently able to sell homes in those communities at dramatically lower prices than were available just a few years ago, offering tremendous value and opportunity to home buyers."
"We made continued progress replacing our older communities with newer ones opened on the lots we've acquired since the beginning of last year," said Hilton. "Homes closed in our newer communities generated approximately 600 basis points higher margins in the third quarter than we averaged in our older communities. Approximately 44% of our sales and 31% of our closings in the quarter came from communities we've acquired since the beginning of last year.:
"Given the lower sales levels we've experienced in the last couple of quarters and our lack of visibility, we are anticipating lower closing revenue in the fourth quarter," he continued. "It will be challenging to maintain our profitability for the quarter with lower revenues, but we expect to be around break-even, and to meet our goal of being profitable for the full year. It is difficult to predict when buyer confidence will return and the market will strengthen, but we are optimistic that we'll see some improvement in 2011."
Learn more about markets featured in this article: Phoenix, AZ.