Meritage Homes Q2 2025 Earnings Report

Meritage Homes EPS Results

• Actual EPS: $2.04
• Consensus EPS: $1.99
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $3.15

Meritage Homes Revenue Results

• Actual Revenue: $1.62 billion
• Expected Revenue: $1.60 billion
• Beat/Miss: Beat by +$23.41 million
• YoY Revenue Growth: -4.60%

Meritage Homes Announcement Details

• Quarter: Q2 2025
• Date: 7/23/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 24, 2025
• Conference Call Time: 11:00AM ET

Meritage Homes (NYSE:MTH), together with its subsidiaries, designs and builds single-family attached and detached homes in the United States. The company operates through two segments, Homebuilding and Financial Services. It acquires and develops land; and constructs, markets, and sells homes for entry-level and first move-up buyers in Arizona, California, Colorado, Utah, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee. The company also offers title and escrow, mortgage, insurance, and closing/settlement services to its homebuyers. Meritage Homes Corporation was founded in 1985 and is based in Scottsdale, Arizona.

Meritage Homes Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Meritage secured orders for 3,914 homes and delivered 4,170 homes in Q2 with an average absorption pace of 4.3 net sales per month and achieved diluted EPS of $2.04.
• Negative Sentiment: Adjusted Q2 home closing gross margin fell to 21.4% (down ~480 bps YoY), driven by higher use of financing incentives and $4.2 million of terminated land deal charges.
• Positive Sentiment: Company-wide active community count rose to a record 312 stores (up 9% YoY), and construction cycle time improved from ~120 days to ~110 days, supporting agility in the challenging market.
• Positive Sentiment: Balance sheet remains strong with $930 million cash, net debt to capital at 14.6%, Q2 share buybacks of $45 million (674k shares), and a 15% dividend increase to $0.43 per share.
• Neutral Sentiment: Q3 guidance forecasts 3,600–3,900 home closings, ~20% gross margin and $1.51–$1.86 EPS, with low backlog and typical summer seasonality limiting full-year visibility.

Presentation

[Operator]

Greetings, and welcome to the Meritage Homes Second Quarter twenty twenty five Analyst Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Emily Tadano, Vice President of Investor Relations and External Communications. Thank you. You may begin.

[Emily Tadano, VP - IR & ESG at Meritage Homes]

Thank you, operator. Good morning, and welcome to our analyst call to discuss our second quarter twenty twenty five results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to Slide two cautioning you that our statements during this call as well as in the earnings release and accompanying slide contain forward looking statements.

[Emily Tadano, VP - IR & ESG at Meritage Homes]

Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2024 Annual Report on Form 10 ks and Form 10 Q for subsequent quarters. We've also provided a reconciliation of certain non GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our 01/02/2025 stock split for all prior periods.

[Emily Tadano, VP - IR & ESG at Meritage Homes]

With us today to discuss our results are Steve Hilton, Executive Chairman Philippe Lord, CEO and Hilla Speruza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve?

[Steven Hilton, Executive Chairman at Meritage Homes]

Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll start by touching on our second quarter results and current market trends. Philippe will cover our strategy, how our strategy helps us navigate the changing market conditions and the highlights of our quarterly performance. Hila will provide a financial overview of the quarter and forward looking guidance.

[Steven Hilton, Executive Chairman at Meritage Homes]

We are proud of our team's efforts to navigate the tougher selling conditions and we secured orders of 3,914 homes in the second quarter of twenty twenty five. Our strategy is focused on move in ready inventory and the continuous of financing incentives allowed us to better compete in a challenging market because we provide our customers with certainty to help overcome strained consumer confidence. This performance generated a strong average absorption pace of 4.3 net sales per month this quarter. In the second quarter of two thousand twenty five, we delivered 4,170 homes. Our improved cycle times and move in ready spec strategy drove another quarter of backlog conversion above 200%.

[Steven Hilton, Executive Chairman at Meritage Homes]

We generated home closing revenue of 1,600,000,000.0 this quarter and achieved adjusted home closing gross margin of 21.4%, excluding terminated land deal charges, which contributed to EPS, diluted EPS of $2.04. We also increased our book value per share 10% year over year. It is well documented that home buying demand has softened over the last several quarters and even more so this past quarter. Mortgage rates increased and remained volatile while consumer hesitancy went up, causing potential buyers to take an extended time frame to commit to a home purchase. And at the entry level segment, affordability remains the primary barrier to homeownership.

[Steven Hilton, Executive Chairman at Meritage Homes]

We believe our strategy was designed to provide certainty and weather these challenges head on, and we remain positive on the long term outlook of our industry given favorable demographic trends. And with that, I'll now turn it over to Philippe.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thank you, Steve. As Steve noted, we believe that Meritage is well positioned. Despite today's macro headwinds, we remain competitive and gain market share because we are choosing to focus on what we can control by having an agile business model with a go to market strategy which delivers certainty for customers during challenging times. First, we want to commend everyone at Meritage for their dedication and hard work to focus on these controllables. We're happy to share that our second quarter twenty twenty five ending community count was 312 active stores, the highest community count in company history, with more planned growth to come in the second half of the year.

[Phillippe Lord, CEO & Director at Meritage Homes]

Further, our teams once again challenged themselves and were able to reduce our construction time from approximately a hundred and twenty calendar days in the 2025 to about a hundred and ten this quarter, which allows us to reduce our starts per community. These two achievements are laying the groundwork for continued growth even during a time when there are macro factors that are challenging the entire industry. Next, I wanna underscore the agility of our affordable spec building strategy. We can pull various levels various levers at the local level to ensure we optimize every asset. Our operations and cost structure are more efficient when we are building, selling, and closing at a consistent pace of four net sales per month.

[Phillippe Lord, CEO & Director at Meritage Homes]

We know that these savings and efficiencies can be used to offset the impact of increased incentives that are currently being offered to achieve the target. However, home building is a local business, and we look to balance pace and price on a community by community basis to ensure we are maximizing our financial performance. As you have seen us do in the past, the sales page starts to slow. We moderate our starts in order to maintain our targeted level specs, which is four to six months supply on the ground. We also changed the pace of our star of our stars based on our cycle times to ensure we have an optimal amount of ready inventory.

[Phillippe Lord, CEO & Director at Meritage Homes]

As part of our agile business model, we exercise a disciplined yet flexible approach around our land strategy that helps us optimize our land position on a market by market basis. We routinely review all of our land under control and determine if it still aligns with the changing market conditions. As a result of this analysis, we regularly terminate land deals that no longer fit our criteria, which in q q two was approximately 1,800 lots. Lastly, our go to market strategy provides the certainty that buyers are looking for today. Our sixty day closing commitment and move in ready offerings complete compete directly with resale inventory, but with all the benefits of a new home.

[Phillippe Lord, CEO & Director at Meritage Homes]

And our focus on including our customers' brokers in the buying process make us a partner of choice for both future homeowners and the broker community. We believe our strategy and agility have allowed us to maximize our earnings while continuing to have a strong balance sheet with a focus on liquidity. We are making all these decisions with the bigger framework of our capital allocation decisions. To align with prevailing macro dynamics, we have intentionally toggled between our spend on land and a focus on shareholder returns, which Sheila will cover later. Now start turning to slide four.

[Phillippe Lord, CEO & Director at Meritage Homes]

Demand remained healthy during the spring selling season as we work through affordability concerns on a customer by customer basis. Second quarter twenty twenty five orders were 3% higher year over year due to a 7% increase in average community count that was partially offset by a 4% decrease in average absorption pace. The cancellation rate of 10% this quarter remained lower than historical average given the limited time between sale to close with our sixty day closing ready commitment. Average absorption pace decreased to 4.3 in the 2025 from 4.5 per month in the prior year, but was in line with our target of spring selling sales pace greater than four per month. Under normal market conditions, we expect a sales pace that is higher in the first half of the year and a little lower in the second half of the year, balancing to around four net sales per store annually.

[Phillippe Lord, CEO & Director at Meritage Homes]

ASP on orders this March 5000 was down 5% from prior year due to a greater utilization of rate buy down financing incentives. We offer a wide range of incentives to our customers and rate buy downs continue to be the most attractive offering in the majority of our markets as they drive affordability and help our customers solve for a monthly payment. Our second quarter twenty twenty five ending community count was 312. This was up 9% year over year compared to 02/1987 at 06/30/2024, and also up 8% compared to 02/1990 at March thirty first twenty twenty five. During the quarter, we brought over 50 new communities online with additional community count growth in the second half of the year.

[Phillippe Lord, CEO & Director at Meritage Homes]

We reiterate our outlook of double digit year over year growth for our twenty twenty five year end community count. As for early July indications, the first few weeks exhibited normal seasonality at a slower pace. July is traditionally one of the slowest sales months and the timing of the fourth of July holiday caused the month to start slower than anticipated. But demand has approved to normal seasonality since then. We believe we can continue to solve affordability concerns and achieve our internal sales targets through our incentive offerings and broker relationships.

[Phillippe Lord, CEO & Director at Meritage Homes]

Moving to the regional trend levels on slide five. The Central Region had a our highest average absorption pace of 5.2 in the second quarter, followed by the East with 4.1 net sales per month. The West Region had an average absorption pace of 3.9. During the quarter, we continue to see diversity in performance across the country with some of our markets experiencing healthy demand, while others were more impacted by the elevated mortgage rates and growing retail supply. Although no market is immune to the current economic conditions, we saw relatively strong demand and sales performance in Arizona, Dallas, Houston, and Southern California.

[Phillippe Lord, CEO & Director at Meritage Homes]

Florida, Colorado, Austin, San Antonio continue to face more challenging conditions with increasing existing inventory and stretched affordability while the balance of our markets were performing as expected. Now turning to slide six. We started approximately 4,000 homes in the second quarter twenty twenty five, 5% less than last year's q two given our faster cycle times while aligning with the current sales volume. We will continue to review seasonal sales patterns and our approved cycle times when planning for our starts pace per community in q three and beyond. With over 200% backlog conversion, our ending backlog declined from 2,700 units as of 06/30/2024 to 1,700 homes as of 06/30/2025.

[Phillippe Lord, CEO & Director at Meritage Homes]

The lower ending backlog balance is an intentional output of our strategy as we were able to convert sales to closings quicker. The higher backlog conversions and shorter cycle times are also generating improved with asset turns, helping us to achieve home inventory turns of around three times per year. As we gain additional experience and consistency under our new strategy, we will be reevaluating our target for backlog conversion rate this year. Since about half of our deliveries have been generated from inner quarter sales for several quarters now, we consider the aggregate of total specs and backlog to determine the right inventory levels of each of our communities. We have had approximately 8,700 specs and backlog units as of 06/30/2025 as compared to over 9,200 units at 06/30/2024.

[Phillippe Lord, CEO & Director at Meritage Homes]

We had approximately 6,900 spec homes in inventory as of 06/30/2025, up 400 units from over 6,500 specs as of 06/30/2024 and up 2% sequentially from q one. While the total number of specs slightly increased, our specs per store held steady at approximately 22 specs per community this quarter, which corresponds to about five months supply in the middle of our four to six month target. As a reminder, to have the appropriate amount of inventory to meet our sixty day closing ready commitment, we intentionally released our homes for sale when they're near nearly move in ready. So similar to q one, we maintain our percentage of complete specs at 38% as of 06/30/2025. We continue to balance our inventory levels to ensure success in our go to market strategy and offer customers peace of mind.

[Phillippe Lord, CEO & Director at Meritage Homes]

Our strategic focus and community count growth create an opportunity for near term growth during time of economic transition. With that, I will now turn it over to Hila to walk through our financial results.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Thank you, Philippe. Let's turn to slide seven and cover our q two results in more detail. Second quarter twenty twenty five home closing revenue of $1,600,000,000 was 5% lower compared to prior year despite a 1% increase in closing volume primarily as a result of increased utilization of financing incentives, drove our ASP on closings lower to $387,000 per home. Home closing gross margin of 21.1% in the second quarter of twenty twenty five was down four eighty bps from 25.9% in the second quarter of twenty twenty four, reflecting the increased use of financing incentives and higher lock costs, partially offset by improved direct costs and cycle times. Our q two twenty twenty five margins also included terminated land deal walk away charges of $4,200,000 compared to $1,400,000 in the prior year.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Excluding these charges, adjusted margins were 21.426% in the 2025 and 2024 respectively. As we look at the components of margin, we note that despite some green shoots in the current pricing of land, the land basis that is reflected in our closings was acquired and developed several years ago and remains elevated due to the higher than normal land development cost experienced since 2022. While we've not yet seen these costs start to notably decline, we have seen them stabilize, we are in the midst of ongoing efforts to actively rebid land development spend. During the quarter, we were successful in reducing our direct costs by more than 1% per square foot year over year. We also achieved direct cost savings sequentially from q one to q two.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

In addition to lumber prices trending down, our higher volume combined with stronger national vendor partnerships and our purchasing teams negotiations led to the incremental savings. Labor also seems to be more available in our markets potentially stemming from slower multifamily construction and reduced starts in the industry. Our q three margin guidance reflects the current incentive environment, our actual land costs, the savings in the directs from lower prices, and improved cycle times. On a sequential basis, q three margins incorporate some lost leverage from q two since we have already closed most of the high volume of the spring selling season orders in q two and July, which now generates about one third of our closing volume for q three under our new strategy, is one of our slowest months of sales as Philippe already mentioned. Our pace typically picks up in August and September, but most of those closings won't occur until q four.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Our longer term gross margin target remains at 22 and a half to 23 and a half percent under normal market conditions, which is about 300 bps higher than where we were pre COVID due to our structural differences since that time. We are a larger scale company with a different operating model today, which we believe permanently improves our gross margin trajectory from our historical averages. We believe this target is achievable with even just a small pullback from the current above normal levels of incentives being utilized by a large percentage of our customers. SG and A as a percentage of home closing revenue in the 2025 was 10.2 compared to 9.3% in the second quarter of twenty twenty four, primarily as a result of higher commissions, startup costs for our newer divisions, carry costs related to increased spec inventory, as well as some lost leverage. Given the tougher selling conditions, commission rates were higher year over year, and our marketing spend also increased respectively.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Our co broke percentage is in the low nineties and remains similar to q one this year. Under our new strategy, the higher volume of specs resulted in increase in utility, cleaning, and landscaping costs, all of which are included as a component of our selling expenses. We are assessing all SG and A components to ensure we have the appropriate overhead to align with the current operating environment. There are also some AI opportunities we are pursuing that can help us further streamline operations in the future. We are maintaining our long term s g and a target of 9.5% once we achieve higher closing volumes.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

The second quarter's effective income tax rate was 23.9% this year compared to 22.1% for the second quarter of twenty twenty four. The higher tax rate in 2025 reflects fewer homes qualifying for energy tax credits under the inflation reduction act given the new higher construction thresholds required to earn the tax credit this year. Overall, lower gross margins as well as higher s g and a and tax rates led to a 35% year over year decrease in second quarter twenty twenty five diluted EPS to $2.04 from $3.15 in 2024. We also generated a return of equity a return on equity of 12.5 for the twelve months ended 06/30/2025. To highlight just a few results from the first half of twenty twenty five, on a year over year basis, orders were flat, closings were down 1%, and our home closing revenue decreased 6% to 3,000,000,000.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Adjusted home closing gross margin of 21.7% excluded to excluding terminated deal charges was 420 bps lower than 2024. SG and A as a percentage of home closing revenue was 10.7%, and net earnings decreased 35% to 270,000,000 with $3.73 in diluted EPS. Before we move on to the balance sheet, I wanna discuss our customers' second quarter credit metrics. As expected, our buyer profile remained relatively consistent with our historic historical averages with FICO scores in the seven thirties and DTIs around 41 to 42. LTVs were in the high eighties.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

This strong credit profile validates our belief that there is still a deep buyer pool that can purchase our homes and that as of today, student loans are not a material headwind. The current market slowing isn't just a qualification or affordability issue, but also a function of weakened consumer sentiment. On to slide eight. Our balance sheet remained healthy at June 2025 with cash of 930,000,000, nothing drawn on our credit facility, and net debt to cap of 14.6%. Additionally, earlier this month, we refinanced our revolving credit facility to extend the maturity from 2029 to 02/1930.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

We are committed to our long term growth trajectory while managing to a strong balance sheet and maintaining our investment grade credit rating. As such, our net debt to cap ceiling remains in the mid 20% range. We aligned our capital spend with current market conditions. We reduced land acquisition and development spend, net of land development reimbursements, to 509,000,000 for the second quarter of twenty twenty five. This was a 12% decrease from 576,000,000 in the prior year.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Accordingly, we are lowering our full year land spend target from 2,500,000,000.0 to 2,000,000,000 given today's economic uncertainties. We also shifted our capital dollars to return more cash to shareholders this quarter exceeding our programmatic threshold. We again tripled our $15,000,000 quarterly commitment in the second quarter of twenty twenty five, demonstrating that we can and will repurchase shares opportunistically based on market conditions. We spent $45,000,000 to buy back over 674,000 shares in q two, recognizing the current undervaluation of our stock. To date, in 2025, we have spent $90,000,000 on share buybacks, reducing our 12/31/2024 outstanding share count by almost 2%.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

As of 06/30/2025, $219,000,000 remain available to repurchase under our share authorization program. We increased our quarterly cash dividend 15% year over year to 43¢ per share in 2025 from 37.5¢ per share in 2024. Our cash dividends totaled 31,000,000 in the 2025 and 61,000,000 year to date. We returned a total of $76,000,000 of cash to shareholders in the 2025 and $151,000,000 for the first half of this year as we intentionally slowed our land spend and recalibrated our capital allocation to maximize returns in prevailing market environment. Slide nine.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

In the second quarter of twenty twenty five, we put approximately 1,800 net new lots under control. This balance is net of the 1,800 lots that we terminated as part of our routine quarterly review of land deals that no longer met our underwriting standards. In the second quarter of twenty twenty four, we put nearly 8,700 net new lots under control. As of 06/30/2025, we owned or controlled a total of about 81,900 lots, equating to five point three years supply of the last twelve months closings. We also had nearly 26,200 lots that were still undergoing diligence as of the end of the second quarter.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Given our strong land portfolio as of June 30, we owned or controlled all of the land we need for the next several quarters. About 66% of our total lot inventory at 06/30/2025 and 2024 was owned and 34% optioned. Our maximum ceiling for option land remains in the 40% range. Finally, I'll direct you to Slide 10 for our guidance. Due to volatility in the market at this time and our high backlog conversions, we have little visibility beyond the next quarter.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Therefore, we are only providing q three guidance. For q three twenty twenty five, we are projecting total home closings between 39 thirty six and thirty nine hundred units, home closing revenue of 1.4 to 1,560,000,000.00, home closing gross margin of around 20%, an effective tax rate of about 24.5%, and diluted EPS in the range of a dollar 51 to a dollar 86. With that, I'll turn it back over to Philippe.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thank you, Hila. In closing, I wanna highlight on slide 11 that we work we have worked hard to create a business model that maximizes return and is flexible enough to allow us to navigate successfully through periods of economic transition. Our spec strategy provides a flexibility and an efficient cost structure to maintain the right level with a lot of inventories. We are offering consumers affordability and certainty in their home ownership journey and believe our go to market strategies make us resilient as we compete with resale and grow our market share. In q two, we achieved community count expansion and shorter cycle time to prepare us for future growth opportunities and also demonstrated our commitment to discipline land spending growth in the business while increasing our return of cash to shareholders.

[Phillippe Lord, CEO & Director at Meritage Homes]

Through operations and capital allocation strategy, we are focused on maximizing returns. With that, I will now turn the call over to the operator for instructions on the q and a. Operator?

[Operator]

Thank you. And at this time, we will conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Our Our first question comes from Trevor Allinson with Wolfe Research. Please state your question.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Hi. Good morning. Thank you for taking my questions. Appreciate your high backlog conversion rate and the volatile environment really limits your visibility into full year volume. So I guess the question on what you're seeing regarding absorption rates on new communities.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

I think previously you'd expected that as you bring on a significant number of new communities, you would expect to see pretty good absorption rates relative to fleet average on those. Can you just comment on how that has trended versus what you expected?

[Phillippe Lord, CEO & Director at Meritage Homes]

Yep. Thank you for the question. It's trended pretty well. As you can see from the q two results, we opened up 50 stores and achieved 4.3 net sales per month in that quarter. So they opened up and met our expectations, as it relates to what we were thinking we were gonna get from the from those communities.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Okay. Definitely encouraging to hear. And then, the second question is somewhat related on community count specifically. You've had a really nice growth there expecting more in the second half. Can you talk about the cadence that you're expecting in the second half?

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

You talked about up double digits by the fourth quarter by any community count. Any additional color on what exactly you're thinking with double digits? And then with what you have in the pipeline, any early reads on, where 2026 community count could grow? Thanks.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. Thank you again. I think from this was a really big quarter for us, q two. We knew we were gonna get a big pop here. I think from here, the rest of it is pretty even flowed between q three and q four to achieve the double digit community count growth.

[Phillippe Lord, CEO & Director at Meritage Homes]

We still feel that we're gonna end, the year there. As it relates to 2026, still doing a lot of planning around that, but we expect another solid year of double digit growth between, between the beginning of that year and the end of 2026.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. Trevor, I think we touched on this a little bit, in in various conversations, but the double digit growth is not gonna be 10 o, but it's also not gonna be 20. So it's it's somewhere in between, but it's gonna be north of 10.

[Trevor Allinson, Director - Equity Research at Wolfe Research LLC]

Okay. Thanks for all the color. I appreciate it. Good luck moving forward.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thank you.

[Operator]

Your next question comes from Alan Ratner with Zelman and Associates. Please state your question.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Hey, guys. Good morning. Thanks as always for the detail. So first question on volume outlook, understanding not updating the full year guidance. I'm just trying to think through how you're positioned from a volume standpoint for the remainder of the year.

[Alan Ratner, Managing Director at Zelman Partners LLC]

If I look at your homes under construction, the specs and backlog of about 8,700 and I look at the closings year to date, it would still seem like if the market cooperates, you're positioned to deliver 16,000 plus homes, so, like, not too far off from where you were before. I just wanna make sure I'm thinking about that correctly. And, you know, I guess, in general, are you scaling back spec starts at all here in the third quarter? And and will that have any impact on your ability to deliver homes this year or is that more of a 26 story?

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. Thanks, Alan. I I think you are thinking about it the right way. Q three, based on our high backlog conversion rate, is now going to be one of our lowest volume quarters because we basically closed out all the spring demand. And then we obviously have July to start the quarter out.

[Phillippe Lord, CEO & Director at Meritage Homes]

So that's really what's driving the lack of visibility and some of the macro conditions that we're experiencing. But we certainly have the community count and the inventory to achieve the numbers that you're mentioning. It's just a matter of whether the market market will cooperate. To your second question, we are slowing down starts because of our cycle times. And so we can reduce the amount of starts we have, based on just the call the the timing that's taking to build homes.

[Phillippe Lord, CEO & Director at Meritage Homes]

And then we're ramping up starts because of our community count growth. But between those two things, I still think you'll see a slower q three to kinda match the seasonality of demand. But we're still starting quite a few specs in all these new communities that we're opening up between now and the end of the year.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Got it. That's that's helpful, I believe. And then just thinking through kind of cash capital allocation, you know, you've buying back stock at a at a slightly greater rate than the than kind of the quarterly commitment you've set forth. I'm just curious with you pulling back the land spend by $500,000,000 is there an opportunity or are you thinking about accelerating that buyback number even further? Because it would seem like that should free up a pretty meaningful amount of cash in the back half of the year, you know, if I'm if I'm thinking about that correctly.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. We're we're definitely, looking at rebalancing those two. Good catch on the fact that we're pulling back on on the expected spend by half a billion dollars. So we're definitely gonna be pressing on the gas, on their repurchases while kinda just keeping, you know, an eye on the store. We do have quite a few communities opening and, all those need new specs as well, which is also a a cash a cash utilization for us.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So we're balancing all those pieces, definitely an intentional rebalancing, from, the volume of land spend that maybe we projected coming into the year, based on current economic conditions and, redeploying that cash back into return of capital to shareholders.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. And I would just say that with our stock trading where it is, it's just for us, you can expect us to continue to buy more than our programmatic commitment, because of the value that we see in our stock.

[Alan Ratner, Managing Director at Zelman Partners LLC]

Well, based on my conversations with investors, I I would imagine that that would be very well received, especially considering where the stock is at today.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thank you.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Perfect. Thanks, Alan.

[Operator]

Your next question comes from Stephen Kim with Evercore ISI. Please state your question.

[Stephen Kim, Senior MD at Evercore ISI]

Yeah. Thanks a lot, guys. Appreciate the color. You know, touching up, following up on the the comment I think that that Trevor made regarding this, your new communities, opening up being a boost to sales. Am I right that communities, when they open up, they typically have a somewhat lower margin profile than when, you know, they're sort of later in their life?

[Stephen Kim, Senior MD at Evercore ISI]

Is that is that a dynamic that, first of all, is true for you guys? And is that something that, you know, is is, something we should be thinking about, as to the impact of these communities, on your margin?

[Phillippe Lord, CEO & Director at Meritage Homes]

So, yeah, I I think traditionally, when you open up a new community, you set it up to, make sure you set it up to gain momentum. Because momentum is really important. It gets the consumers confidence. And so we certainly evaluate and make sure we price our our new community openings to really achieve that momentum. I don't think it's fair to say that we open up new communities at lower margins just as a standard course of business.

[Phillippe Lord, CEO & Director at Meritage Homes]

It's really sort of market by market. In today's environment, I think the theory of being more conservative when you open up to make sure you get those first sales is probably a reality just because of the amount of incentives out there in the market and whatnot. But I'd have to go back and look. A lot of the new communities we opened up this last quarter are really good locations and really good spots. So I feel pretty good that the margin profile was pretty good.

[Phillippe Lord, CEO & Director at Meritage Homes]

But, yes, your to your point, we always traditionally try to open up a community and and gain momentum. And usually, the the number one lever to do that is pricing.

[Stephen Kim, Senior MD at Evercore ISI]

Yeah. I appreciate that. Another question, relates to some of the change one of the changes you made in addition to guaranteeing, you know, move in in sixty days, you've also changed the way in which your sales folk can cross sell, you know, sell homes in communities that are not the one they're sitting in. And I was curious, first of all, that seemed like it might be a really good thing for your for your strategy in terms of developing relationships not just with the realtors but with also consumers who may be looking at more than one community. But I was wondering if you could give us some statistics on that, like roughly what percent of your sales are done in a cross sale manner?

[Stephen Kim, Senior MD at Evercore ISI]

And secondarily, are you seeing any of your peers, copying this, or not? And if not, why do you think that is?

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. So I would say, first of all, the reason we're doing this, the cross selling is exactly what you highlighted. When we spoke to our customers and spoke to the realtors, they really create a relationship with a specific salesperson. And just because they don't wanna buy a home in that community or the realtor doesn't wanna sell a home in that community, they still wanna work with that salesperson. So cross selling allows that relationship to translate across our communities, which is which is why we do it, to build those deeper connections with our customers and with our realtors.

[Phillippe Lord, CEO & Director at Meritage Homes]

I have to get you stats on that, but I think it's pretty high because we're cross selling across the entire company. So I think there's a lot of salespeople in our in our business selling in communities that they don't quote, unquote art station to. But frankly, Steven, we don't station them anymore. They are driving around, meeting with realtors, meeting with customers, showing homes, and we really don't head around to a community anymore. So I I think it's at some point, it's just gonna become, a 100%.

[Phillippe Lord, CEO & Director at Meritage Homes]

The last thing you asked was whether competitors are following us. I would say yes in some form or fashion. We see a lot of competitors starting to cross sell. Lennar was one of the first ones to start doing it a long time ago in a couple of markets. But they probably still do it for different reasons.

[Phillippe Lord, CEO & Director at Meritage Homes]

They're still tethering their salespeople to a particular community, but allowing them to cross sell. While in our case, we're not tethering them to that community, and all we do is cross sell. I hope that's helpful.

[Stephen Kim, Senior MD at Evercore ISI]

Yeah. Appreciate it, guys.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thanks.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Thank you.

[Operator]

Your next question comes from John Lovallo with UBS. Please state your question.

[John Lovallo, Homebuilders Analyst at UBS Group]

Good morning, guys. Thanks for taking my questions as well. I wanted to talk about the gross margin. So the third quarter gross margin seems like it's expected to decline about 140 basis points sequentially. I know you guys pointed to lower closings given the new strategy, higher land cost and higher incentives.

[John Lovallo, Homebuilders Analyst at UBS Group]

So as a starting point, I was hoping maybe you could bucket those three categories as it pertains to that 140 basis points decline. And then importantly, it seems like the fourth quarter gross margin is expected to step up from sequentially from the third quarter. Wondering if you could just help us kind of put some context around, you know, the magnitude of that potential step up.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. So we actually didn't give any guidance on q four, so, I don't think we're gonna have any, discussion about that. However, the the commentary probably still stands. We did note that there's going to be lost leverage in q three, in our prepared remarks and that and you can see that from the the volume projections that we provided in the guidance, and that's really a function of July being a little bit of tougher month and that and that pickup that you're seeing subsequent to that is really not going to materialize in closings until q four. So I think that you're seeing that lost leverage is the primary driver of the pullback in margins.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

If you, recall from from discussions in prior years, it can be 75 to a 100 bps in lost leverage in gross margin alone from, from volume. So as we're looking at our, at our, expectations for q three, and we know that the volume is going to be less, the the majority of the, pullback that you're seeing is lost leverage. As I I said, we didn't give any guidance into into q four and we didn't reiterate our full year guidance, but, you know, lot lot putting logic together if we're expecting a different volume for for the last quarter of the year, any lost leverage could potentially be recovered if the units, increase at that point in time. So I think that that's that's the majority. I don't know that the other categories make up meaningful buckets. It's primarily the lost leverage.

[Phillippe Lord, CEO & Director at Meritage Homes]

And just to amplify the things that you highlighted, I mean, most deals to older order builders, their lowest leverage quarter is gonna be q one because they closed out all their backlog in q four. For us, based on our new strategy, it's gonna be q three. And traditionally, July is the slowest month of sales across the whole year. Sometimes December can be slow too, but July is traditionally the slowest. And then we start to see volume pick back up between September, October, and November.

[Phillippe Lord, CEO & Director at Meritage Homes]

So that's kinda what we're currently expecting, but right now, it's it's it's tough to see with everything that's going on.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. When you think about the fact that we closed out such a material portion of our backlog and we're coming in with a lower backlog, there's not that cushion to go into it. So some of those closings were accelerated into q two. The strong volume that we're gonna have in the back half in in sales in q three isn't going to close until q four. So it kinda creates, this this dip in q three, which, as Philippe said, is a different quarter for other builders.

[John Lovallo, Homebuilders Analyst at UBS Group]

Yeah. And I think that's really helpful clarity, particularly when people see the 20% in the in the third quarter and start trying to run rate that. And I think reiterating the twenty two five to twenty three five also is really helpful. But the second question would be, in terms of land cost inflation, curious what you're seeing today. And I know you talked about the potential for rebidding and some potential lower development costs.

[John Lovallo, Homebuilders Analyst at UBS Group]

Curious when that may start rolling through. I mean, is that a fourth quarter? Or is that more in 2026? And what would you expect kind of that land cost inflation to look like you know, as we move into into 2026?

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. So, just to give you a feel for what's happening in the land market, and I'm not sure I'm gonna say anything different than what you've heard from others because we're all sort of competing for the same land. But generally, the land market is slowing, which creates some opportunities to restructure deals, mostly terms and timing, breaking up deals into multiple takes, potentially closing a deal closer to being shovel ready, and things like that. We haven't really seen land prices decline anywhere except a few distressed pieces here and there in certain locations. I'm not sure we should expect that at all until, next year.

[Phillippe Lord, CEO & Director at Meritage Homes]

I think most land sellers are patient, and we'll wait to see if this thing extends into 2026 before they start getting a little bit more religion on what their lands were. As far as rebidding land development jobs, we have seen some green shoots recently as we've gone out and rebid, new jobs that we're about to start develop for, future phases of existing communities. We've seen more competitive bids, more people bidding, and therefore, we've seen some potential cost savings there. Those obviously wouldn't impact until the back half of twenty twenty six. It usually takes about six to nine months to develop land.

[Phillippe Lord, CEO & Director at Meritage Homes]

We're sitting here in August oh, no. I'm sorry. July, almost August. So at the earliest, you wouldn't really see that impact our p and l until, you know, second quarter, probably more like third quarter, fourth quarter of twenty twenty six.

[John Lovallo, Homebuilders Analyst at UBS Group]

Thank you, guys.

[Operator]

Your next question comes from Susan Maklari with Goldman Sachs. Please state your question.

[Charles Perron-Piché, VP - Equity Research at Goldman Sachs]

Hi, everyone. This is Charles Perron from Susan's team. Just first on the with the rising, for sale inventory that we're seeing in the markets, are you making further changes to your approach to broker commission, support traffic and volume, especially in your in your new committees?

[Phillippe Lord, CEO & Director at Meritage Homes]

No. I mean, I think our our over our enterprise level strategy is to directly try to mirror and compete with the existing home market. So as that inventory comes back, we wanna be a compelling choice to buy a new home over a used home. And as part of that strategy, we believe having a consistent and reliable commission structure for our realtors that they can count on is a key key part of that. We operate at a market rate.

[Phillippe Lord, CEO & Director at Meritage Homes]

Whatever the market rate is for that commission in that market and in that submarket is where we, position our external commissions. And, and and that's it. I think there are right now in the competitive market, there are a lot of people doing a lot of different incentives, including, doing some different realtor bonuses and and things like that. So that's kind of an industry thing, not a marriage thing. And in certain communities, we may we may do that as well where realtors are really driving, the customer base in that market.

[Phillippe Lord, CEO & Director at Meritage Homes]

But generally, we don't do anything unique when we open up a new community versus an existing community. Our our realtor strategy is market based at at kind of the MSA level.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. And just to clarify, I think a couple of of our peers have already mentioned this. There's no denying the fact that that resell inventory is increasing across The US, but it's not necessarily a head on competitor in all of our markets. The inventory that's coming, online isn't necessarily entry level. A lot of it's aging.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

And, as as we mentioned, you typically are not able to get a financing incentive when you're buying from from an individual homeowner. So, it's not it it hasn't created the drag that we had expected in the market that have seen the return of the resell inventory. Certainly there and it's certainly a competitor, but it's not a head to head competitor.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. I think that's in a really important point. The incentives we're seeing out there aren't in the existing home space. The incentives that are we're competing with right now are more in the new home the new home space.

[Charles Perron-Piché, VP - Equity Research at Goldman Sachs]

That's very helpful color. Thanks, guys, for that. And it's nice to see that stick and brick costs were declining year over year this quarter. When you consider the recent decline in lumber and OSB, against potential for tariffs flowing through your p and l, do you see opportunities for further reductions going forward in your stick and bricks? How does this play out in your third quarter margin outlook?

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. So most of our third quarter homes have already been started. Actually, all of our third quarter homes have already been started. So the the guidance that we provided includes, the sticks and bricks that we're experiencing right now. There's always an opportunity to reset.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So our teams never stop rebidding, never never stop competing, for a lower for a lower price. I think several of our of our peers have also said that tariffs have not really flown through our numbers in any material way. We've been able to successfully push back on any tariff asks, and there haven't been, nearly as many as we had anticipated. Kind of trying to read a few leaves is difficult, but at this point in time, we're not modeling any expectation for increases in our direct. We actually think that there's potential savings.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

We haven't modeled incremental savings, although we're going to continue to push internally to find those.

[Operator]

Thank you.

[Phillippe Lord, CEO & Director at Meritage Homes]

Thank you. Next question, operator?

[Operator]

Your next question comes from Michael Rehaut with JPMorgan. Please state your question.

[Michael Rehaut, Executive Director at JP Morgan]

Hi. Thanks. Good morning, everyone. Thanks for taking my questions. Wanted to start off with some of the comments around how to think about closing for the full year.

[Michael Rehaut, Executive Director at JP Morgan]

I think, you know, Alan brought that up. And, you know, obviously, you have a a decent amount perhaps of of a thought around volume, I would assume already. Gross margin is obviously taking a little bit of a of a downward move in the third quarter and and, you know, extensively assuming a relatively stable backdrop. I know that might be a big assumption, but, you know, I'd assume that there's some way to think about 4Q even at this point. I'm wondering about, you know, the pulling of the full year guidance, you know, at this point in the year.

[Michael Rehaut, Executive Director at JP Morgan]

And if there's other variables outside of just, you know, what you're seeing today in terms of maybe being a little less certain, you know, that that maybe we're not fully appreciating in terms of, you know, pulling the guidance rather than perhaps just adding a a little bit of a wider range or maybe lowering the high end of the range, you know, versus what you had, three months ago.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. I mean, it's a great question. I think it's all just really built on the lack of visibility we have right now with with our current backlog, and you start to model out our current community count and our guidance for q three, you can back into what our absorptions per store is. So I think that's pretty indicative of what we think the market's gonna give give to us. And then we're optimistic that demand will trend the way it normally does seasonally.

[Phillippe Lord, CEO & Director at Meritage Homes]

The example I gave earlier was that usually August and September and October pick up meaningfully from July. But based on the macro backdrop, I think, you know, we just don't we're not really too ready to commit to that until we see it. July will close this quarter. August will close this quarter. If September is strong and October fall fall course and our community count that's gonna happen in the back half of the year, we can get to a a pretty good number full year.

[Phillippe Lord, CEO & Director at Meritage Homes]

But until we experience that, I just think that given our low backlog rate, it's tough to continue giving out full year guidance. That's that's kind of discussion we had with our board and everyone else around the company, and we thought that was in our best interest.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. So I'll just add this is very, very obvious, but I'm just gonna say it anyway because it needs to be said. If you look at the backlog that we have coming into the quarter at 1,700 units, we got it to 36 to 3,900 closings. We don't even have all of our closings yet for q three. We have zero closings identified identified yet for q four.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So just because of the current market dynamics, we thought it didn't make sense, to put a number out there and potentially be wrong one way or the other, up or down. We didn't think it was it was a a responsible action to put a number out there that's at this point, I guess, that market dynamics are moving around so quickly. It's it's tough to gauge them. We have a a good level of confidence about q three even though we're coming into the quarter with less than half of those closings. So I think that at at this point, when we see market conditions stabilize and we see the community count opening trends stabilize, then we'll be able to provide better, guidance on a go forward basis.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

But unlike many of our peers, we don't have any units currently sold beyond the current quarter. So it it's really just a, you know, very educated guess on our end, which didn't seem like the right call.

[Michael Rehaut, Executive Director at JP Morgan]

Right. No. No. I appreciate it. I just thought I'd, you know, kind of probe it a little bit more.

[Michael Rehaut, Executive Director at JP Morgan]

So I appreciate you you you having the patience to answer that. You know, secondly, you know, I I wanted to kind of explore a little bit on the on the gross margin side. You know, you you said, Hilla, that, you know, the three q, declined versus two q two q primarily due to reduced leverage. But when I look at, you know, what you're expecting to generate from a revenue standpoint versus, you know, the back half of twenty four, you know, you averaged about a 24% margin in the back half of '24. You know, your your revenue guidance for third quarter if you kind of it's a little bit less than the back half average.

[Michael Rehaut, Executive Director at JP Morgan]

But clearly, there's a change in cost structure or profitability. And I'm just kind of wondering in terms of, you know, year over year over the last several quarters, you know, actually, maybe perhaps just more year to date, what have you seen in terms of headwinds from higher, specifically just incentives, you know, either financing incentives or just a more challenging pricing backdrop that's impacted the gross margin year to date. And if you've seen that trend, presumably, headwind continue throughout February and and you expect that to continue into March, in terms of incremental headwinds?

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. So I think this is a good point. The the dynamics are fairly different than they were in 2024. Right? It's primarily the incentive environment.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So if you look at our ASP or year over year, it's quite a material difference. Right? I think we were from 411 to '3 80 '7. So it's that ASP differential that's causing the margin pullback in the ASP differential. A little bit of it is mix and product, geographic mix and product, but a big piece of it is increased use of incentives.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So as we we kinda talked about it in the prepared remarks, there's a lot of buyer hesitancy. So even though folks may be able to qualify for a home, they want that comfort and security of that lower affordability point, to get them over the fence to make that purchasing decision. So what we're seeing is an increased use of, financing incentive. The financing incentive cost hasn't moved too much, but the number of folks that are asking for that financing incentive to be included with their home purchase has increased. So that that's really the pullback that you're seeing in margin where you're looking at '24 to '25.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

And then kind of sequentially from q one to q two to q three, it's really that increased utilization that, is is the main driver. Our costs are actually, as we mentioned, are coming down. So we're not we're not really seeing anything else change in the profit equation. It's really just, the fact that the top line number is lower because of that of that, incentive usage. As a reminder, know different builders, record that differently.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

For us, that comes right off the top. It it it reduces ASP. We don't have it in, financial services. So it's a function of, of reduced revenue, which for us obviously affects, margin versus maybe some other folks that have it rolling through a different line item.

[Michael Rehaut, Executive Director at JP Morgan]

And that that's a that's a great point, Hilla. And obviously, that also kinda ties into when you're talking about reduced operating leverage. I assume it's fair to say or or maybe not. Maybe you can clarify. I mean, it's about reduced operating leverage because of less revenue.

[Michael Rehaut, Executive Director at JP Morgan]

That that's really because of the increased use of incentives that's ultimately driving the the lower gross margin. And and the reduced operating leverage is a byproduct of those higher incentives. Is that fair? Or

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Exactly. So the reduced leverage both as a component in gross margin and all the way down to s g and a. Right? Again, folks that are recording that as a financial services reduction, it's not it's not showing in their s g and a. So our s g and a control has actually been very tight.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

But because of the lower per home ASP, the net percentage calculation is increasing, even though the dollars are are kind of doing what we thought that they could and should be doing. So you're a 100% right, Mike.

[Michael Rehaut, Executive Director at JP Morgan]

Okay. And then one one last quick clarification, Hilla. You said earlier in the call that you're talking about year over year community count growth. I wasn't sure if you're referring to year end '25, year over year growth or year end '26. It was an answer to a question talking about '26, and you said not 10%, but, you know, not 20%.

[Michael Rehaut, Executive Director at JP Morgan]

I wasn't sure if you were referring to the year end '25 or year end '26 in terms of year over year growth.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

You know what? Both. It's gonna be both. So for sure, '25, and we're expecting double digit growth in, '26 as well.

[Michael Rehaut, Executive Director at JP Morgan]

Alright. Perfect. Thanks so much.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Thanks, Mike.

[Operator]

And your next question comes from Rafe Jadrzych with Bank of America. Please state your question.

[Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America]

Hi. Good morning, and thanks for taking my my question. Just following up on some of the the prior questions on the the fixed cost side, can you give some color on the fixed costs that are in cost of goods? It would be really helpful if we get a dollar amount so we sort of break out what the deleverage, could be in the third quarter and what the leverage was in the second quarter.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

Yeah. That's too detailed. We don't we don't go into components of gross margin, but you guys can probably back into it if we're giving you the lost leverage pieces. We can tell you that it's mostly people people costs. Right?

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

So there's there's a, superintendent and land act and land of team members that, no matter how many homes we we sell, they're still working. So it's really the leveraging of the human capital that's the primary primary driver.

[Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America]

Got it. Just the so the 140 basis point step down from, two q to to three q, that's all deleverage. It's not higher incentives quarter over quarter?

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

No. So it's not all deleverage. I think we've we've, gone on record many times in the past that deleveraging, from your highest quarter to your lowest quarter is typically 75 to a 100 bps. So it's not the 140. It's just the large portion of of that pullback.

[Hilla Sferruzza, EVP & CFO at Meritage Homes]

The rest is, you know, a million other factors going going forwards and back backwards. Product mix, geographic mix, you know, it it it it's a lot of other little things here and there.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. I mean, we're we're not currently thinking that incentives are gonna rise between q two and q three. They're already pretty high. But, certainly, July is a tough month, and we see some pretty aggressive stuff out there in July to kinda get through the summer slowdown.

[Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America]

Got okay. So so we should the the the fixed cost, so it's 75 basis points roughly from '2 q to three q of of that Roughly. Of of the okay.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yes, sir. Yeah.

[Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America]

That that that's super helpful. And then in terms of the the community count growth outlook, the the double digit this year and then also targeting that for next year, can you talk about how many of of those communities are in newer markets or expanding additional markets versus places where or better, like, be in existing markets that you have today?

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. So we went into, you know, Jacksonville and Utah recently, a couple years ago. And then, of course, we bought Elliot Homes recently, which got us into the Gulf Coast. So other than those three, all the new community count growth we're talking about for this year or next year is in our existing footprint. But I would say we are over investing, obviously, in Jacksonville, Utah, and The Gulf Coast because we wanna gain scale there.

[Phillippe Lord, CEO & Director at Meritage Homes]

Although the Elliott Homes transaction came with almost 5,000 lots, so we have quite a few lots through that acquisition. But there is no, new community growth between now and next year in markets that we're currently not in.

[Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America]

Thank you. It's really helpful.

[Phillippe Lord, CEO & Director at Meritage Homes]

Okay. Is that

[Operator]

Thank you. And that ends our question and answer session. I'll hand the floor back to Philippe Lord for closing remarks.

[Phillippe Lord, CEO & Director at Meritage Homes]

Yeah. Thanks. Appreciate everyone joining our call today. Thank you so much for your interest in our organization, and we look forward to seeing everyone next quarter. Appreciate it very much.

[Operator]

Thank you. And that concludes today's call. All parties may now disconnect. Have a good day.

Participants

Executives

• Emily Tadano, VP - IR & ESG
• Steven Hilton, Executive Chairman
• Phillippe Lord, CEO & Director
• Hilla Sferruzza, EVP & CFO

Analysts

• Trevor Allinson, Director - Equity Research at Wolfe Research LLC
• Alan Ratner, Managing Director at Zelman Partners LLC
• Stephen Kim, Senior MD at Evercore ISI
• John Lovallo, Homebuilders Analyst at UBS Group
• Charles Perron-Piché, VP - Equity Research at Goldman Sachs
• Michael Rehaut, Executive Director at JP Morgan
• Rafe Jadrosich, MD & Senior Equity Analyst - U.S. Homebuilders & Building Products at Bank of America