Meritage Homes Corp. (NYSE:MTH), Scottsdale, after market close Wednesday reported net earnings of $54.1 million ($1.33 per diluted share) for the third quarter ended Sept. 30, up 27% and 30%, respectively, compared to $42.6 million ($1.02 per diluted share) for the third quarter of 2017. Earnings before income taxes were up 13% year-over-year, primarily due to increased home closing revenue. The gain missed analyst expectations for a net of $1.36 per share.

Among the results:

  • Home closing revenue increased 9% with a 10% increase in closing volume, partially offset by a 1% decrease in average sales price compared to the third quarter of 2017, as demand continued to shift to entry-level homes. The increases in closings and revenue were led by the East region, which delivered a 31% increase in home closing revenue with 32% more home closings at an average sales price 1% lower than the third quarter of 2017. The Central region delivered home closings and revenue growth of 11% and 8%, respectively, with a 3% decrease in average price. West region home closing revenue was 2% less than last year’s third quarter, as a 5% decline in closing volume was partially offset by a 3% increase in average closing prices for the region.
  • Home closing gross margin for the third quarter of 2018 was 18.1%, or 18.4% excluding a $2.6 million charge to terminate a purchase agreement for land in California that is no longer consistent with the company’s strategy. That compared to 18.1% in the third quarter of 2017, or 18.3% excluding $1.8 million of charges incurred for asset write-offs.
  • Selling, general and administrative expenses totaled 11.0% of third quarter 2018 home closing revenue, in line with 10.9% in the prior year.
  • Interest expense declined $1.1 million for the third quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development.
  • Third quarter effective tax rate was approximately 24% in 2018, compared to 33% in 2017, reflecting lower corporate income tax rates enacted for 2018.
  • Total orders for the third quarter of 2018 were 2% below 2017’s third quarter, primarily reflecting a 42% decrease in average active communities in California, which have produced among the highest absorptions over the past year. Though average active community count company-wide for the third quarter was 2% higher in 2018 than 2017, this included several communities near close-out with limited inventory, which contributed to a 4% decline in total orders pace year-over-year.

“The combination of higher home prices and interest rates have clearly impacted recent home buying activity, especially at higher price points, which we anticipated two years ago when we undertook our strategy to build more affordable homes to cater to the expanding entry-level and move-down markets,” said Steven J. Hilton, chairman and CEO. “We’ve made tremendous progress in shifting toward more affordably-priced homes, which represented one-third of our communities and 43% of our total orders in the third quarter. The fact that these communities are selling at a faster pace than higher-end move-up communities reinforces our confidence and commitment to furthering that strategy.”

He continued, “Underlying economic and housing market fundamentals remain strong. Employment is high, wages are growing, consumer confidence is high and inventories of affordable homes are low. These conditions offer opportunities for Meritage and the entry-level LiVE.NOW.® communities we have in our pipeline.

"We expect continued demand for entry-level homes will exceed that for move-up homes over the long term, though the next couple of quarters may be more challenging, and we have therefore adjusted our expectations for the remainder of 2018 based on the recent softness we’ve seen in the overall market,” said Mr. Hilton. “We are now projecting approximately 8,300-8,500 home closings and total home closing revenue of $3.375-3.475 billion for the full year 2018. We also expect home closing gross margin for the full year to be approximately 18% and are projecting pre-tax earnings of $265-285 million for the year."