As macroeconomic conditions are shifting buyer demand toward move-in-ready new homes, Meritage Homes believes it is well positioned to capitalize moving into 2024 and beyond.
The builder benefited from such market conditions in its fourth quarter, utilizing its move-in ready inventory to grow orders 60% year over year in the quarter and 12% for the full fiscal year.
“As the economy stabilizes, we believe entry-level buyers will continue to gain confidence that now is the right time to buy a home,” CEO Phillippe Lord said. “With our growing spec inventory levels, Meritage is well positioned to take advantage of this positive demand environment.”
Lord said the company accelerated its starts activity in the quarter to build up its spec inventory to ensure sufficient supply for the spring selling season. He said by utilizing a spec strategy, Meritage Homes is able to ramp up production in strong demand environments and slow down in uncertain environments to prevent overproduction.
In the fourth quarter, sales orders increased 60% year over year to 2,892 homes, largely due to a 64% increase in average absorption pace to 3.6 homes per month. Entry-level comprised 88% of total sales orders in the quarter and has represented more than 80% of sales orders since the second half of 2021, according to Lord.
The company’s fourth quarter average sales price on orders was $415,000, a 6% increase on a year-over-year basis. The builder's fourth quarter cancellation rate improved meaningfully from the fourth quarter of 2022, falling to 13% from 39%.
“During the quarter, we leaned into our spec building strategy, and through the slower months of October and November we held true to our plan of pre-starting enough inventory to meet expected demand,” Lord said. “This allowed us to capture volume in the quarter and replenished our supply for the upcoming spring selling season.”
For the full fiscal year, total sales orders increased 12% compared with 2022 to 13,193 homes, reflecting an 11% increase in average absorption pace to 4.0 per month. Home closing revenue for the full year declined 2% to $6.1 billion.
Lord said each of the builder’s three operating regions achieved year-over-year growth in volume and sales pace for the full year. The builder’s Central region had the highest regional absorption pace at 4.1 per month for 2023, while the East region had the lowest cancellation rate. Meritage intends to realign its geographic footprint more evenly across its markets in 2024, with a focus on increasing community count in the East region, which is composed of Florida, Georgia, Tennessee, and the Carolinas.
Meritage Homes delivered 3,951 homes in the quarter, the second highest quarterly output in company history, and recorded a record quarterly backlog conversion of 110%. As a result, the builder generated home closing revenue of $1.6 billion. Revenue was 17% lower on a year-over-year basis in the quarter, due to in part to lower average sales prices on closings compared to the prior year.
While cycle times were relatively flat from the third quarter to the fourth quarter, Meritage Homes achieved a six-week improvement for the full year, returning cycle times closer to the builder’s historical average of four to five months.
The builder reported profits of $198.9 million, or $5.38 per share, in the fourth quarter, beating analyst expectations of $5.18 per share. Profits declined 24% compared with the fourth quarter of 2022, reflecting lower home closing revenue and higher selling, general, and administrative expenses. For the full year, Meritage Homes recorded profits of $787.7 million, or $19.93 per share compared with $992.2 million, or $26.74 per share, in 2022.
