Meritage Homes Corp., Scottsdale (NYSE:MTH) late Wednesday reported net earnings of $50.8 million ($1.31 per diluted share) for the second quarter of 2019, compared to $53.8 million ($1.31 per diluted share) for the second quarter of 2018. Analysts were expecting a gain of $1.03 per share.
Additional interest expense in 2019 accounted for most of the $3.5 million decrease in pre-tax earnings, in addition to a $1.1 million year-over-year increase in land closing gross loss from one impairment in 2019 due to exiting a move-up community that was no longer aligned with the company's strategy, the company said.
Home closing revenue decreased 1% on a 5% increase in home closing volume offset by a 6% decrease in average sales price over the second quarter of 2018. The lower ASP primarily reflected the company’s on-going strategic shift toward more affordable entry-level and first move-up homes at lower price points.
The reduction in ASP from the mix shift toward lower-priced homes was most evident in the West region, where home closing revenue was down 15% year-over-year on a 9% reduction in ASP, coupled with 6% fewer home closings. Lower closing volume in the West was entirely attributable to Meritage's California operations, where demand has softened over the last year. East region home closing revenue was up 4% on an 11% increase in closings offset by a 7% decline in ASP. The Central region's second quarter 2019 closing volume and revenue increased 11% and 12%, respectively.
Home closing gross profit was flat compared to the prior year's second quarter, despite lower home closing revenue, as home closing gross margin improved slightly to 18.4% from 18.3%.
Total orders for the second quarter of 2019 increased 22% year-over-year, driven by a 19% increase in absorption pace over the prior year’s second quarter. West, Central and East region orders grew 31%, 8% and 26%, respectively, with broad strength across nearly all of the company’s markets. Partially offsetting the increase in orders was a 6% decrease in average sales price (ASP) due to a higher percentage of lower-priced entry-level homes. As a result, the total value of second quarter orders increased 14% over 2018.
Selling, general and administrative expenses (SG&A) were 11.0% of second quarter 2019 home closing revenue, compared to 10.9% in the second quarter of 2018, despite elevated brokerage commission costs.
Interest expense increased $3.2 million year-over-year, primarily due to less interest capitalizable to assets under development as construction cycles have shortened and turnover of entry-level inventory has increased.
Cash and cash equivalents at June 30, 2019 totaled $407.4 million, compared to $311.5 million at December 31, 2018, due to positive cash flow from operations. Real estate assets remained consistent at $2.7 billion.
Meritage ended the second quarter of 2019 with approximately 34,700 total lots owned or under control, compared to approximately 33,700 total lots at June 30, 2018. Approximately 75% of the lots added during the second quarter of 2019 were in communities planned for entry-level product.
Debt-to-capital ratios were 42.1% at June 30, 2019 and 43.2% at December 31, 2018, with net debt-to-capital ratios of 33.4% and 36.7%, respectively.
“Home buying activity was strong and steady throughout the second quarter of 2019, led by affordable entry-level and move-up homes," said Steven J. Hilton, chairman and CEO of Meritage Homes. “Our second quarter orders increased 22% year-over-year to a total of 2,735, representing a 13-year record high for quarterly order volume, which was mainly driven by a 19% increase in absorptions pace on top of a small increase in average community count. We believe the demand we’ve seen throughout the extended spring selling season reflects sustained positive macroeconomic factors for the housing industry.
“It’s been a little over two years since we began rolling out our strategy to focus on the entry-level and first move-up markets, and streamlining our operations to deliver a stress-free, transparent and easy home buying experience to first-time, first move-up and move-down customer groups. Approximately 90% of our second quarter 2019 orders came from homes purchased by those customers. Most notably, our entry-level LiVE.NOW.® homes made up 52% of our second quarter orders, up from 44% a year ago and 35% two years ago. We’ve seen strong demand for more affordable homes by Millennials and Baby Boomers, or others who are looking for a new, nicely amenitized, energy-efficient home at a great value.
“We have closed over 4,000 homes through the first half of the year, 4% more than we closed in the first six months of 2018, despite starting the year with a backlog that was 15% less than we had the previous year,” Hilton added. “We are reducing our cycle times with our LiVE.NOW. communities and Studio M, allowing us to convert sales of spec homes into closings more quickly. Two-thirds of our second quarter 2019 closings were from previously started spec homes, up from a little more than half of closings a year ago. Most of those came from our entry-level LiVE.NOW. communities. The higher absorption pace in those communities and our simplified product offerings should drive additional overhead leverage and profitability in the future.”
Hilton concluded, “We are encouraged by the outlook for interest rates and optimistic that demand for our homes and communities will remain strong. Based on our results in the first half of this year, we are currently projecting 2019 home closings and total home closing revenue of approximately 8,700-9,100 and $3.4-3.6 billion, respectively, for the full year. We are anticipating home closing gross margin to be in the mid-18% range for the year, which we estimate will translate to approximately $5.20-5.50 diluted earnings per share.”
