Despite the presence of macroeconomic headwinds and elevated mortgage rates, home buying demand remained steady in the third quarter for Meritage Homes, with sales orders growing 50% on a year-over-year basis.
“Home buying demand held steady in the third quarter despite the elevated interest rate environment, as we continued to offer a full range of incentives to help buyers solve for a monthly payment,” executive chairman Steven Hilton said. “With the backdrop of life events creating a housing need for millennials and baby boomers and the ongoing shortage of existing-home inventory for sale, Meritage’s average absorption pace reached 4.1 net orders per month this quarter."
The fifth-largest company on the 2023 BUILDER 100 list reported third quarter profits of $221.8 million, or $5.98 per share, compared with $262.5 million, or $7.10 per share, in the third quarter of 2022. Despite the 16% year-over-year decline, the quarterly results outperformed the consensus analyst profit projections by $0.88 per share.
CEO Phillippe Lord said during the company’s earnings call that Meritage is benefiting from “two distinct competitive advantages” in the current operating environment. First, the company builds spec homes to provide available, move-in ready inventory, therefore offering “the most desired criteria in home building today.” Second, as a large public builder, Meritage Homes is able to access interest rate locks and rate buydowns to help prospective buyers solve for monthly payments.
“We are providing our local teams with a full toolkit of available financing solutions that can be customized to each potential home buyer’s need, allowing us to merge the benefit of being a top five builder with the personal service and agility that are required to sell homes in today’s market,” Lord said. “Existing-home sellers cannot replicate the financing incentives, and even smaller private builders can struggle to do so.”
Orders increased 50% year over year to 3,474 homes in the third quarter, reflecting a 52% increase in the average absorption pace to 4.1 per month from 2.7 per month in 2022. Entry-level homes accounted for 88% of sales in the third quarter, the same as in the third quarter of 2022. Home closings in the third quarter were 3,638, a 4% increase compared with the third quarter of 2022.
Lord said a third of homes were sold and closed during the quarter from Meritage’s available move-in ready inventory. The builder recorded a cancellation rate of 11% in the third quarter, a significant improvement from 30% in the third quarter of 2022, a period when interest rates began rising rapidly.
The average sales price on orders in the third quarter increased 2% to $430,000 due to geographic mix. Home closing revenue increased 3% year over year to $1.6 billion. Hilton said Meritage Homes reduced its construction cycle 15 days sequentially in the third quarter to 140 days for a cumulative reduction of 50 days in 2023.
“Cycle time improvement and the commitment to our spec building strategy led to a record 96% backlog conversion and our highest third quarter of home closings and home closing revenue,” Hilton said.
Lord said Meritage Homes’ continued focus on “pace over price” led to sales pace improvement in the third quarter across all the home builder’s operating geographies, both on a year-over-year and sequential basis.
The Central region had the highest regional absorption pace of 4.5 homes per month, compared with 2.7 last year.
“The job growth and in-migration in Texas coupled with our steady spec production enabled our Central region to convert over 100% of its backlog this quarter,” Lord said. “With the highest regional completed spec inventory at the end of the quarter, we believe this region is well positioned to maintain a strong sales pace.”
The East region had an average absorption pace of 4.3 homes per month in the third quarter, compared with 3.8 last year. Lord said the cancellation rate in the region was in the single digits in the quarter. The West region had an average absorption pace of 3.6 homes per month, much improved from 1.5 per month in the third quarter of 2022.
Chief financial officer Hilla Sferruzza said Meritage Homes began to accelerate its investment in internal growth in the third quarter, allocating $537 million to land acquisition and development. The amount represented a 41% increase from the third quarter of 2022 and a 31% increase from the second quarter. Year to date, the home builder has spent $1.3 billion on land acquisition and development.
“We expect full-year 2023 land spend to total north of $1.5 billion as we replenish our land portfolio after a short hiatus from land acquisitions that started in the latter half of 2022,” Sferruzza said. “We plan to spend $2 billion-plus on land acquisition and development in 2024 as we plan to grow our community count 10% to 15% on an annual basis.
At the end of the quarter, Meritage Homes owned or controlled approximately 60,700 lots, 74% of which were owned.