Meritage Homes Q3 2026 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2026

Key Takeaways

  • Negative Sentiment: Housing demand weakened materially: Q3 orders fell 15% year over year to 3,083, while closings declined 14% and home-closing revenue dropped 17% to $1.2 billion. Rising mortgage rates, affordability pressure, inflation and job-security concerns continued to weigh on buyer confidence.
  • Negative Sentiment: Profitability was pressured by incentives and lower volume. Adjusted gross margin declined to 17.9% from 20.1% a year earlier, while adjusted diluted EPS was $1.11 versus $1.39; management expects elevated incentives and margin pressure to persist near term, with some zero-margin homes affecting results through early 2027.
  • Positive Sentiment: Management is prioritizing liquidity and cost control. Meritage ended the quarter with $677 million of cash, no revolver borrowings and 18.9% net debt-to-capital, while reducing land spending 38% year over year and lowering absolute SG&A expenses.
  • Positive Sentiment: Inventory is being actively managed for a volatile market. Total specs and backlog fell 12% year over year to approximately 7,100 homes, and Q4 starts will be reduced to target four to six months of spec supply while preserving the ability to respond quickly if demand recovers.
  • Neutral Sentiment: The company withdrew near-term guidance because demand and incentives are changing week to week. Meritage expects conditions to remain choppy but sees long-term upside from affordable entry-level demand, a planned increase in first-move-up homes, and strong performance in selected markets such as Dallas, Houston and parts of Florida.
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Earnings Conference Call
Meritage Homes Q3 2026
00:00 / 00:00

There are 14 speakers on the call.

Operator

Greetings, and welcome to the third quarter 2026 Meritage Homes analyst call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Speaker 1

Thank you, operator. Good morning and welcome to our analyst call to discuss our third quarter 2026 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 2 cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward-looking statements. 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.

Speaker 1

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 2025 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, 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?

Speaker 2

Thank you, Emily. Welcome to everyone joining today's call. Today, I'll start by sharing our thoughts on the current market dynamics and covering the key third-quarter results. Philippe will then discuss our strategy, provide additional color on our operating metrics, followed by Hilla's review of our financial performance and our capital and liquidity position. Since we last spoke to you on our Q2 earnings call, external factors have exacerbated the uncertainty across the housing market. While job growth has remained a positive highlight, rising mortgage rates have further constrained affordability, increasing rate buydown costs and overall incentive usage, and made homebuyers more hesitant to commit to a home purchase. Compounding these challenges are persistent inflationary pressures and growing concerns about job security.

Speaker 2

Against this backdrop, we generated 3,083 sales orders in the third quarter of 2026, down 15% from the prior year despite a higher store count, but still achieved an absorption pace of 3.0 net sales per month. While we believe that these headwinds may continue in the short term, the long-term fundamentals in the U.S. supporting homeownership demand have not changed. Favorable demographics continue to underpin demand for entry-level and first move-up product, and homes at affordable price points remain desirable. During the third quarter, we closed 3,187 homes, generating $1.2 billion in home closing revenue. Adjusted home closing gross margin was 17.9%, and adjusted diluted EPS was $1.11, excluding $6 million of real estate inventory impairments. Inclusive of $285 million of year-to-date share repurchases, as of September 30, 2026, book value per share increased 4% year over year. With that, I'll now turn it over to Philippe.

Speaker 3

Thank you, Steve. Before we dive into our operational highlights, I'd like to step back and discuss what is top of mind for us at Meritage Homes right now. In today's tougher environment, we are taking deliberate actions across all facets of the business to maximize cash generation, preserve liquidity, and maintain capital flexibility. We are tightly managing our total targeted home inventory to align with the slower sales environment while also focusing on monetizing completed homes. We achieved our internal mandate to reduce discretionary spend as we enter 2026 and expect to find incremental opportunities for savings in 2027. We remain highly selective in our land acquisition as we already have sufficient land to support our near-term goals. In addition to our dividend, we continue to repurchase shares in Q3, albeit at a more normalized pace following the elevated levels of prior periods, further preserving capital.

Speaker 3

These actions reflect our focus on controlling what we can control and maintaining the financial flexibility to navigate a range of market conditions. I'll spend a bit more time discussing these objectives shortly, but the combination of these initiatives is our primary focus until we see some stability in the markets. On last quarter's call, we shared that we've been reallocating capital over the last few quarters towards 1MU as we advance our previously communicated goal of 1MU representing about one-third of our overall portfolio. While this was part of our initial target back in 2017, during the last five or six years, we skewed heavier to the entry-level space, aligning with the demand trends in the market. I'd like to take a minute and provide some additional context regarding Meritage and our 1MU product.

Speaker 3

To varying degrees, first move-up has been part of our inventory lineup for the last four decades. We are simply looking to achieve a more balanced product mix in the future as our customer base matures and demand for more highly appointed homes increases. This additional consumer segment fits well with our existing business strategy. We know the markets, we know the product, we know the customer base, and we understand the land required to be successful at selling these homes. All of our markets support first move-up product, and we have not wavered from our disciplined underwriting and return thresholds, knowing that slightly lower absorption pace is offset by improved margin profiles.

Speaker 3

These investments should begin to translate into a higher mix of first move-up sales, orders, and closings in the back half of 2028 and into 2029, and position us to serve a broader range of buyers, support long-term growth, and create improved portfolio diversification. We will continue to share our progress in the coming quarters, but for now, let's turn to slide 4. Third quarter 2026 orders of 3,083 were 15% lower year over year, primarily due to a 21% decline in average absorption pace, which was partially offset by a 7% increase in average community count. The Q3 cancellation rate was 13%, same as Q2, reflecting a continuing challenging selling environment with affordability pressures and ongoing uncertainty causing some buyers to reconsider their purchase decisions and timelines.

Speaker 3

While our average absorption pace was 3.3 net sales per month during the third quarter compared to 3.8 a year ago and 3.5 in Q2, we are pleased we were able to achieve these results without extending incentives beyond our internal projections as we hit our gross margin targets. We credit our teams with solid execution as we managed to the softer selling environment, especially with our current outsized entry-level mix that skews towards a more affordable sensitive buyer. We believe that execution is supported by a differentiated go-to market strategy, which differentiates us from both our new construction and resale product competitors. Our move-in-ready homes and 60-day closing guarantee give buyers greater clarity and certainty around their closing timeline, combining the benefits of a new home with the speed and availability often associated with the resale market.

Speaker 3

Our strong realtor relationships further differentiate the experience, generating repeat business and a steady source of buyer traffic through our broker network. This quarter, over a third of our sales were brought to us through realtors that had previously sold a Meritage Homes. We balanced pace and price to maximize returns on an asset-by-asset basis. When the demand backdrop is relatively inelastic to pricing, we won't pursue volume at all costs simply to achieve our long-term goal of 4 net sales per month. We will look to optimize margin and preserve the value of our land portfolio. ASP on orders this quarter of $383,000 was down 2% from prior year due to the higher cost and utilization of incentives, as well as some geographic mix. Our active community count of 348 at September 30, 2026, was up 4% year over year and 2% sequentially.

Speaker 3

We opened 34 new communities during the quarter, predominantly in the East region. On a year-to-date basis, we had just over 100 new communities come online. We reiterate our expectation of a 5%-10% full year 2026 community count growth year over year. The additional communities position us to gain market share when demand conditions improve while providing further scale to better leverage our overhead and gain greater efficiencies over time. Throughout Q3, the sales environment became incrementally more challenging as mortgage rates increased from approximately 6.6% at the start of the quarter to 7.5% by September 30. Higher rates, persistent inflation, and concerns about job security added to affordability pressures and weighed on consumer confidence. This trend carried into October.

Speaker 3

We believe our results will remain choppy in the near term as elevated incentive expectations become the norm and customers need more time to commit to a new home purchase. Moving to our regional trends on slide 5. The Central region achieved a 3.7 net sales per month average absorption pace this quarter, although demand remained highly localized with a mix of stronger and weaker markets. Dallas and Houston continue to rank among our strongest markets across our national footprint, supported by an undersupply of affordable new homes and favorable in-migration trends, while market conditions remain tougher in San Antonio and Austin. In the East region, South Florida and Jacksonville were strong performers, supported by a well-priced affordable product in each area, with constrained entry-level resale inventory. Other markets in the region were relatively weaker, where we pulled back on pace due to the inelasticity of demand.

Speaker 3

Our teams in the startup divisions of Huntsville and the Gulf Coast are making slow but steady progress as we continue to increase the Meritage brand awareness in these newer markets. In the West region, we prioritize margin over volume in markets facing more significant affordability pressures or heightened builder competition like California, Denver, and Arizona, which all remained a highly competitive market space requiring higher incentives to move inventory. As we look to the end of 2026 and into 2027, it is our intention to continue balancing price and pace on a community-by-community basis to optimize every asset across our footprint. Now turning to slide 6. Q3 starts totaled approximately 3,400 homes as we continue to try to align our starts pace to our sales pace.

Speaker 3

With over 55% of Q3 closings also sold during this quarter, our backlog conversion rate was nearly 190%, reflecting our quick close strategy and within our targeted range of 175%-200%. Our ending backlog was approximately 1,600 homes as of September 30, 2026, and approximately 1,700 as of September 30, 2025. Combining our total specs and backlog, we had around 7,100 units at September 30, 2026, 12% less than approximately 8,100 homes at September 30, 2025, reflecting our intentional efforts to reduce inventory in light of current market conditions. We ended the quarter with approximately 5,500 spec homes, down 14% from approximately 6,400 in the prior year, and up 7% sequentially from Q2.

Speaker 3

The nearly 15 specs per store this quarter translated to about five months supply, a bit higher than last quarter as we pulled back on sales to preserve margin, but still in line with our target of four to six months of supply. Comparatively, in the third quarter of 2025, we had 19 specs per store, also at five months supply. We reduced our completed specs to approximately 1,900 units in Q3, which was about 1,100 units lower than the prior year. 34% of our total specs were completed at our target of one-third. This compared to 47% in the prior year and 30% in the second quarter. We are entering Q4 with a slightly higher spec inventory per store balance than we had anticipated, reflecting the unexpected pace of deterioration in market conditions in the third quarter.

Speaker 3

We are adjusting our starts in Q4 to ensure we exit 2026 with the right amount of total spec inventory for the 2027 spring selling season. With that, I will now turn it over to Hila to walk through our financial results.

Speaker 4

Thank you, Philippe. Let's turn to slide seven and cover our Q3 results in more detail. Third quarter 2026 home closing revenue of $1.2 billion was 17% lower than prior year due to a 14% decrease in closing volume and a 4% decline in ASP on closings to $365,000. The decline in ASP was primarily due to higher incentive costs and utilization, as well as some geographic mix. With almost a 190% backlog conversion rate, our closings reflect real-time demand and incentive trends. As mortgage rates followed the steep upward trajectory of the 10-year bond market this quarter, utilization of incentives and the associated cost of secure rate buydowns increased notably between Q2 and Q3 and compared to prior year. Absent a sustained market-driven catalyst that provides meaningful mortgage rate relief, we expect incentives to remain at this elevated level for the near term.

Speaker 4

Home closing gross margin of 17.4% in the third quarter of 2026 was 170 bps lower than prior year's 19.1% due to higher lot and incentive costs and lost leverage on lower revenue, which were partially offset by improved direct costs and lower performance-based compensation expense. Third quarter 2026 home closing gross margin included $6.6 million of real estate inventory impairments and a $600,000 net credit related to terminated land deal walkaway charges, reflecting about $1 million of walkaways offset by $1.5 million we were able to recoup from previously incurred charges. Comparatively, we had $8.7 million of real estate inventory impairments and $5.8 million in terminated land deal walkaway charges in the prior year. Excluding all of these charges, adjusted home closing gross margin was 17.9% and 20.1% for the third quarters of 2026 and 2025, respectively.

Speaker 4

The majority of this quarter's impairments came from the sale of inventory in five communities to our institutional BFR partners. We determined that the best way to optimize these assets was to take a discounted price for a guaranteed exit from a few select markets where we did not anticipate a short-term improvement in market conditions placing a higher value on the quick return of capital. While all related impairments were recorded this quarter, a portion of the impacted homes closed in Q3, with the remainder expected to close in Q4 and early 2027 at approximately zero margin. Our gross margin continues to include home closings with the higher land development costs we incurred between 2022 and 2025, which we anticipate will continue to negatively weigh on our margins through at least 2027.

Speaker 4

As incentive usage returns to normalized levels in the future, and in combination with our anticipated increased volume of 1MU offerings, we expect our lot costs will then be able to return to historical averages as a percentage of ASP. In Q3, direct cost per square foot declined nearly 5% year over year, extending our cost savings to approximately 14 consecutive quarters. While our procurement team has successfully pushed back on price increases to date, tariffs, along with higher oil-based materials and transportation costs, are increasingly pressuring the supply chain. If this trend continues, we anticipate modest cost increases could impact margins over the next several quarters. We are also monitoring the impact of potential ICE activities on labor costs, although to date, such actions have been extremely limited.

Speaker 4

Sequentially, adjusted gross margin declined 70 bps to 17.9% in Q3 from 18.6% in Q2, primarily driven by decreased leverage on lower home closing revenue and higher incentives, which were partially offset by direct cost savings. While we do not anticipate significant gross margin recovery in the next several quarters, our long-term target remains at 22.5%-23.5% under normalized market conditions when incentives and interest rates are more in line with historical averages. Selling, general, and administrative expenses as a percentage of third quarter 2026 home closing revenue were 11%, losing only 20 bps compared to 10.8% in the third quarter of 2025. Lost leverage from lower home closing revenue and higher technology costs were partially offset by disciplined cost management and lower performance-based compensation expense in 2026.

Speaker 4

Importantly, we reduced absolute SG&A dollars year over year, reflecting our continued focus on operating efficiency and tightly managing costs in this environment. Diving a bit deeper into our sales and marketing costs, despite the challenging sales environment, we did not increase on sales and marketing spend on a per-sale basis. External commission rates remain consistent year over year and sequentially, and co-broke participation continued to trend in the low 90s percent. The third quarter's effective income tax rate was 20.1% this year, compared to 22.6% for the third quarter of 2025. The 2026 tax rate reflects our second annual purchase of below-market 45Z transferable clean fuel production tax credits that reduced the income tax expense this quarter. Q3 net earnings of $68 million were 32% below $99 million in the prior year, mainly due to lower home closing revenue and gross profit.

Speaker 4

Diluted EPS declined a lower 25% year over year from $1.39 for the third quarter of 2025 to $1.04 for the third quarter of 2026, benefiting from the elevated $285 million spent year to date on share repurchases. Adjusted diluted EPS for the current quarter was $1.11, excluding impairments. Shifting to the key results for the first nine months of 2026, on a year-over-year basis, orders were down 10%, closings were down 12%, and our home closing revenue decreased 16% to $3.7 billion on 17,000 lower closing ASP. Adjusted home closing gross margin of 18.1% was 310 bps lower than 2025. SG&A as a percentage of home closing revenue was 11%, and net earnings decreased 42% to $214 million. Adjusted diluted EPS was $3.38 for the first nine months of 2026, excluding impairments and walk-away charges.

Speaker 4

Before turning to the balance sheet, we would like to note that consistent with prior quarters, our average customer credit profile was stable again in the third quarter, with FICO scores, DTIs, and LTVs consistent with historical averages. Even in today's K-shaped economy, we are attracting the right qualified buyer in the entry-level and first move-up markets. But ongoing uncertainty and affordability pressures continue to weigh on consumer confidence and the timing of home purchase decisions. On to slide 8. As of September 30, 2026, we had $677 million in cash, no outstanding borrowings under our credit facility, and a net debt to cap ratio of 18.9%, reflecting the strength of our balance sheet. We remain focused on preserving liquidity by operating below our mid-20% target net debt to cap and maintaining a disciplined capital allocation strategy that appropriately balances liquidity, growth, and returning capital to shareholders based on market conditions.

Speaker 4

We continuously reassess and reprioritize capital to maximize long-term returns. In the current environment, we have reduced both land spend and share repurchases as we believe a focus on liquidity is paramount during uncertain times. As such, our land acquisition and development spend declined 38% year over year to $329 million in the third quarter. We anticipate full-year land acquisition and development spend below $1.5 billion, with total land supply remaining in line with our four to five year target range. We returned $86 million of capital to shareholders via buybacks and dividends this quarter, which was consistent with the same period last year. We bought back nearly 760,000 shares or 1.2% of shares outstanding at the beginning of the quarter for $55 million at an average discount to book value of 7%.

Speaker 4

We repurchased $435 million of shares over the last 12 months, reducing our September 30, 2025, outstanding share count by 9%. As of September 30, 2026, $229 million was available under the repurchase program. We remain confident about our intrinsic value and view share repurchases as an attractive use of capital when our stock is undervalued. However, given the uncertainty in the market today, our near-term priorities are funding the dividend and maintaining ample liquidity. Accordingly, we will closely evaluate share repurchases along with all other uses of cash. But based on our experience navigating prior cycles, we believe preserving maximum capital flexibility is prudent in the current environment. We increased our quarterly cash dividend 12% year over year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividends this quarter totaled $31 million and $94 million year to date.

Speaker 4

For the first nine months of 2026, we returned nearly $380 million of capital to shareholders or 177% of our total earnings to date this year. Slide 9. In the third quarter of 2026, we secured nearly 2,000 net new lots under control, consistent with the third quarter of 2025. These lots primarily represent communities for 2028 and beyond as we own or control the lots we need to meet our community targets through at least 2027. As of September 30, 2026, we owned or controlled a total of about 71,800 lots, equating to 5.3 year supply for the last 12 months' closings, just slightly above our target of four to five year supply. We also had approximately 18,000 lots that were still undergoing diligence at the end of the quarter.

Speaker 4

69% of our total lot inventory at September 30, 2026 was owned, and 31% was optioned, which was consistent with both Q2 and prior year. Although our target for off-balance sheet is still around 40%, we do not believe that this structure is the right solution for every land deal. We evaluate such opportunities on a deal-by-deal basis on their financial merits to see if they can absorb the incremental cost. When we do elect to utilize an OBS structure, we ensure that we earn enhanced returns to offset the cost while maintaining our ability to reasonably terminate the transaction in deteriorating market conditions. We expect to achieve our target OBS ratio over time in a methodical and thoughtful manner.

Speaker 4

As we consider today's uncertain market conditions and with our high backlog conversion rate further limiting our visibility, we do not believe it is prudent to provide Q4 or preliminary 2026 guidance at this time. We plan to use the balance of this year to conduct a detailed assessment of our balance sheet and operational needs to ensure the business is appropriately aligned with the current environment, and we look forward to sharing our thoughts and actions with you on our Q4 earnings call. With that, I'll turn it back over to Philippe.

Speaker 3

Thank you, Hila. Please turn to slide 10. Despite a challenging housing market, we maintain an average absorption pace of 3.0 net sales per month by balancing pace and price and leveraging our broker relationships. We remain firmly committed to our strategy of pre-starting homes and streamlined operations, which we believe positions Meritage for long-term success. Additionally, our strong balance sheet was built to withstand challenging environments like this, and we continue to focus on controlling the controllables by tightly managing inventory and costs, preserving liquidity, and maintaining the flexibility to navigate near-term uncertainty and capitalize on opportunities as conditions improve. We are disciplined in our capital allocation decisions, appropriately allocating capital across liquidity, growth, and returning capital to shareholders. We also believe increasing the mix of first move-up product in our sales portfolio over time will enhance our long-term shareholder value creation.

Speaker 3

With that, I'll now turn the call over to the operator for instructions on the Q&A. Operator?

Operator

Thank you. To ask a question, you will need to press star one on your telephone keypad. If you want to remove yourself from the queue, please press star two. In the interest of time, we ask that you limit yourself to one question and one follow-up. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We will now take our first question from Trevor Allinson, Wolfe Research.

Speaker 5

Hi. Good morning. Thank you for taking my questions. First one's on how you're balancing pace and price in the current environment. You talked about preserving margins, but in the past, you've often talked about being significantly more efficient as you get closer to that four absorption pace. So if demand conditions remain similar to where they're at today, how should we think about the absorption pace for you guys that properly balances some of the efficiencies that you get from running a little faster, without leaning in too hard into what may be a less elastic market currently?

Speaker 3

Thanks, Trevor. As we stated, we're most efficient when we operate between 3 and 4 net sales per month. Obviously, 4 is better than 3, but we can operate pretty efficiently at 3. So I think that's the range we want to play in, depending on how elastic and inelastic the market is right now, or the market will be. The current market, at least in this very moment in time as we move through the more unseasonal pattern of Q4 and some of the stuff we have going on in the macro environment, and then rates being where they are, the market feels about as inelastic as it's felt in a long time. So we're going to be very prudent as we navigate that, and I think Q3 is a pretty good reflection of what we're trying to target, based on what the market can give us.

Speaker 4

I think we're a little bit of a broken record. You hear us saying this on all the calls, but it's a community by community, division by division decision. The intent, as you said, is to make sure that we're optimizing leveraging without giving away the inherent value of the asset.

Speaker 5

Yep. Makes sense. Appreciate all that color. Second is on Q4. I appreciate you are not providing guidance here. Clearly, with your guys' backlog conversion rate, the market impacts you real time. Maybe I will just ask then on what your incentives look like currently versus where they were at in Q3. Any sort of quantification on how those have changed. Appreciate you may change again here moving forward, but just where you are running at today versus where you ran at in Q3 on average. Thanks.

Speaker 3

Yeah. We are not giving out any guidance right now. That is kind of the point, it is moving so fast, frankly. As rates accelerated into the back half of Q3, and now we are starting out Q4 at that higher rate, there is just a lack of visibility that we are currently experiencing. Until we have more visibility, we are just not comfortable giving out guidance at that level. That being said, we are starting out the quarter at the higher rate that we ended the previous quarter with, so that should give you some pretty good indication of where incentives are running at. But the market, as I have said, is fairly inelastic right now, so we are not going to push further on that when it is not really moving demand.

Speaker 4

I know that maybe this is an allusion to some of our peers who have guided to an incremental couple hundred bps further of incentives in Q4 than Q3. Just a reminder, we are real time with 190% backlog conversion, so some of what they are intimating is activity that occurred in Q3 that will close in Q4. Our Q3 activity, a lot of it is already closed in Q3. So I think you are seeing the market conditions in our numbers already.

Speaker 5

Okay. Makes sense. Appreciate all the color, and good luck navigating the volatile market moving forward.

Operator

Thank you. Our next question is from Alan Ratner with Zelman. Please go ahead.

Speaker 6

Hey, guys. Good morning. Thanks for all the details so far. Hila, maybe I'll just follow up quickly on that last comment you made on the incentives. I just want to make sure I'm thinking about this right, because recognizing your margins are kind of reflecting real time trends, it did seem like the market took a fairly meaningful leg lower in September towards the end of your quarter. I just want to make sure. Obviously, you're selling and delivering pretty quickly, but I would imagine in September, probably pricing or incentives took a leg lower with demand. Are you telling us that the margin you printed this quarter fully captures that, or is there potentially a bit of a lag effect just from the September pullback we saw?

Speaker 4

Yeah, Alan, this is why we're not giving out guidance, because it's week to week right now, and we're moving into an election cycle. We got some stuff going on. Until things firm up and we have more visibility, we'll be willing to answer those type of questions. Right now, the reason we're not giving out guidance is the fact that we are real time tells you that things are moving fairly quickly.

Speaker 6

Fair enough. All right. Appreciate that. Secondly, I might have misheard, but I think, Hila, when you were making the comments about the impairment and the sales to BFR, I thought you made a comment in there that you were exiting markets, as opposed to maybe exiting communities. I just wanted to double-click on that and get some clarification. Then more broadly, if you could talk about your general thoughts on BFR as a whole now that the ROAD to Housing Act has been passed, and it sounds like maybe we're seeing some renewed interest in that. Is that an opportunity for you guys to lean more heavily in that segment? Thank you.

Speaker 4

Yeah. You do have eagle ears. Good listening. It is not markets, it is communities. There are just five communities that in that particular community and that geography, it did not make sense for us to take the bird in the hand, the guaranteed return of capital on a very accelerated pace as we typically do with the build for rent community. It was a much better answer for us than to try to continue to work through that existing inventory in that community. So you are right. It is just those communities. It is not any total market that we are uncomfortable with. We are happy about all the markets that we are in. As far as BFR in general, they are impacted by interest rates, same as us, but there does seem to be some slight renewed interest around the edges, primarily for whole communities. It is not really changed from where we have been historically.

Speaker 4

We are running at low single digits maybe for the last five-ish years of BFR being a part of our business. So it is not a material part of our business, although it is helpful in unique situations, as we specifically mentioned in our prepared remarks, where they have the ability to take an entire community and relieve us from having to work through it slowly and get the capital back.

Speaker 6

Thanks very much.

Operator

Thank you. Our next question is from Stephen Kim with Evercore.

Speaker 7

Great. Thanks a lot, guys. Appreciate the color so far. Can you give us a sense for in terms of market conditions, are you seeing more of a convergence of demand conditions across your markets? Or are you still seeing the same kind of significant variability that you would normally see across the country?

Speaker 4

No. We have 350-ish communities. We have some really great communities that are still very stable. We talked about Dallas and Houston, parts of Florida, even some communities in core infill locations in the West are doing well, things that we bought a while back that are very affordable. So it is community by community. I would not say that we are seeing some sort of all boats are moving in the same direction right now. Housing is very local still. There is still a lot of demand out there. If you can unlock it and solve it with the right product and the right price and location, there is still a lot of opportunities. That is why we were able to sell 3.0 net sales per month last quarter.

Speaker 7

Yeah. I think I heard you say that you were pretty comfortable, or at least planning to run sort of at this kind of 3.0 absorption level for the foreseeable future, or at least in the near term. I just want to clarify that, is that like a level that you feel moving meaningfully lower than that is not something that you feel you would be comfortable tolerating? Then if you can give us a sense for specs per community, how do you calibrate the level that you want that to be at given the current difficult market conditions?

Speaker 4

Yeah. I do not think over an extended period of time we would operate below 3.0. It might be choppy here depending on sort of things that we do not control. We will see what happens here over the next 60 days. We will see how the spring materializes. But

Speaker 3

Over a 12-month period, we're going to try to at least operate between 3 and 4 net sales per month. We may get below that or a little bit higher than that depending on seasonality, et cetera. That feels like a pace that we need to go out and achieve to maximize the efficiencies of our business and monetize our land appropriately. Specs were a little heavy right now, but a lot of that has to do with the fact that the market deteriorated quicker than we thought into September as rates moved up over 7%. We'll adjust those accordingly here in Q4. We like to be around 4 to 6 months of sales, depending on where we're at in the seasonal demand trends. We like a little heavier going into the spring. We like a little bit lighter going into the fall.

Speaker 3

Our cycle times are really tight, so we should be able to manage to that as long as the pace of demand, both up and down, is relatively predictable, which right now, there's a lack of visibility around that. We typically want to operate in that range. I think for 2027, we're going to plan to be on the low end of that range because we want to preserve as much liquidity as we can right now.

Speaker 7

Perfect. Thanks so much, guys.

Operator

Thank you. Our next question comes from John Lovallo with UBS. Please go ahead.

Speaker 8

Good morning, guys. Thanks for taking my questions. It's clearly, I think, human nature to have a little bit of recency bias, and I think that makes a lot of sense, particularly given all the uncertainty. The questions that I have are kind of related to a lot of things we're hearing from investors, so I'm curious to your thoughts on them. The first is, look, the 30-year fixed rate mortgage at 7.35% and consumer confidence at all-time lows are undoubtedly headwinds, right? But rates could drop with any kind of resolution in Iran, any kind of tempering of inflation. If you think about the University of Michigan Consumer Sentiment Index, it's being heavily weighted by Democrats. The September reading of 48.1, I think the Democratic reading was 39.5. I think the Republican reading was 82.5. So maybe there's some balancing there in the midterms.

Speaker 8

The heart of the question is, notwithstanding the challenges in the market today, and I'm talking about rates and consumer confidence, do you believe that if these factors improved, you could see a quick bounce back in buyer demand?

Speaker 3

Absolutely. There was a lot that you said in that question. But yeah, if there's less noise politically, if there's lower rates, if gas prices come down, I think demand would recover very quickly, and we plan to be ready for that. On the other hand, for the time being, all those things are directionally going the other way, and we plan to manage our business in a very conservative way during that period of time until we get that visibility and we get some more predictability. But yeah, there's clearly a lot of underlying demand out there that is electing to not buy a home right now. And the reason they're electing to not buy a home right now is because of all the things that you just mentioned. There's three legs to the housing stool, and consumer confidence is one of the most precarious ones.

Speaker 3

And right now, consumers are disengaged with the market because from their perspective, buying and making the biggest financial decision of their life doesn't make sense to do in Q4 of 2026.

Speaker 4

Also, John, with our 60-day close and our all spec starts, when the market does return, it's not an if, it's just a when, we're going to be able to capitalize on that very quickly. So our entire operating structure is set to analyze market changes very quickly, and hopefully we'll be able to monetize any demand increases.

Speaker 3

I think we've demonstrated in the last five years with multiple sort of stops and starts to the business, that we're able to move very quickly in both directions. We have a very flexible balance sheet. We control a lot of land for very little dollars. We're not cross-collateralized. We can walk away from things if we need to. We can self-liquidate fairly quickly. We can adjust starts appropriately. We can adjust our SG&A appropriately. We're more agile and flexible than we've ever been in the past, and that affords us the opportunity to move quickly when the market recovers.

Speaker 8

Yeah. Makes a lot of sense. Then, second question along a similar vein. I know you mentioned in the press release and in the comments that the next few quarters will be unpredictable, and that probably goes without saying. But I guess what I wanted to just kind of touch on is that we've had two consecutive years where the spring has suffered an exogenous shock, whether it was Liberation Day last year or the Iran war this year. It feels to us that, in the absence of a third consecutive year with an exogenous shock, almost by definition, we should have a somewhat better spring. I know there's other factors at play there, but would you push back on that?

Speaker 3

Yeah. I would say that there's a lot of ifs and buts in that because housing is very psychological. So if we're moving into a period, potentially, where people just think it's not a great time to buy, I'm not sure just because it's February, that changes. It could. It usually does. People feel more optimistic coming into the spring, and that's when they go out and buy houses because they want to buy a house before the next school year, and they want to move and make the adjustment. So it could, but I think we have to wait and see right now. That's kind of the plan.

Speaker 8

Understood. Appreciate the thoughts, guys.

Operator

Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Please go ahead.

Speaker 9

Thank you. Good morning, everyone. My first question is on market conditions in the near term. As you think about just the overall inelasticity that we are seeing, what does that imply for competition into year-end? We tend to see builders that make moves in order to get specs and inventory in line before the end of the year. Do you think that there will be any change in overall competition, just given the fact that the consumer confidence is so weak right now?

Speaker 3

Yeah, it is a great question. I think builders have done a very nice job this year controlling their inventory, including us. We are not going into the fourth quarter with a bunch of excess finished inventory that we need to get rid of. I think if we slow down our starts in Q4, we kind of feel like we go into spring selling season with the right amount. I think based on what I am seeing from our competitors, they are in a similar spot. There might be a little bit of an overhang into Q4, but for the most part, I think our competitors have been very responsible about their inventory. There has been a big shift out of spec into BTO by a lot of our competitors. For those reasons, I do not expect there to be a big overhang.

Speaker 3

There might be some places around the country where there's some inventory adjustments and some aggressive pricing to clear out some stuff, but for the most part, I think it's pretty well-balanced.

Speaker 9

Okay. That's encouraging. Then turning to the balance sheet, I know you mentioned that you'll do a very detailed assessment as we get into 2027. But just at a high level, when you think about the world that we're in right now, can you talk about the level of cash and the level of leverage that you are comfortable holding in this environment?

Speaker 3

Yeah, I'll let Hila comment, but I think we sort of said it in the script. When you think about our balance sheet, liquidity, capital allocation, our two non-negotiables are investment grade and the net debt to cap in the low 20s and to continue to pay our dividend. Then we'll manage the rest of our capital from there to make sure we achieve those goals. Part of being investment-grade is maintaining a certain level of liquidity. So we'll focus on that. The adjustments we'll make will be on the land side, on SG&A, and on our starts to get there. We have the ability to do that. So anything you want to add to that, Hila?

Speaker 4

No, I think you hit all the highlights. If you noticed a little nuance, we brought down our total spend projection for the year to a maximum of 1.5, kind of indicating that there's another further leg down on expected land spend for Q4. The trigger for us that we can accelerate or decelerate fairly quickly is land is also obviously our largest percentage of total capital allocation is dedicated to land acquisition and development. So we have a lot of mechanisms, especially in a slowing environment where we don't need to increase the community count, both reflecting the sales environment and the fact that we're having faster closeouts. We're not going to hit all of the same targets that we had initially expected a couple of years ago. So we have the ability to maintain growth at a much lower acquisition and development spend.

Speaker 4

You are going to see our cash balance pretty much do what it is doing right now, hopefully for the foreseeable future.

Speaker 9

Okay. Thank you for the color. Good luck with the quarter.

Operator

Thank you. Our next question comes from Rafe Jadrosich with Bank of America.

Speaker 10

Hi, good morning. It is Rafe. Thanks for taking my question.

Speaker 3

Good morning.

Speaker 10

Hila, I was wondering, can you walk us through just the mechanics of the impairments and zero-margin homes? Just trying to get an understanding of going forward, kind of the core margin relative to the headwind from the zero-margin homes. How long will that continue, and is there any way to quantify that impact?

Speaker 4

Yeah. We didn't provide any incremental detail beyond 5 communities, but you can take a 5 communities, average communities, you know what our average community size is, and kind of spread it over a year, right? It's Q3, Q4, and first half of next year. So I don't think the impact is material, although there will be some pullback in our margin that we won't specifically call out as an impairment because it's not impaired. It's just an extremely low-margin volume of homes because we've intentionally written them down to a zero margin. So there'll be a little bit of noise. It's not something that's overly material, but there'll be a little bit of impact from those communities for the next 3 quarters.

Speaker 10

Got it. It started in Q3 or is it starting in Q4?

Speaker 4

Correct. We took the impairment in the third quarter, but the closings from those homes are going to happen in Q3, Q4, Q1, and Q2.

Speaker 3

Yes. We got some modest impairments for the last year. They have been mostly walking away from land deals that no longer. They are not really impairments, they are walkaways. There is going to be some noise as we rationalize land and we make sure that we have the right land for current market environment.

Speaker 10

Just following up on that, on the previous questions. You mentioned that you will take the balance of the year to conduct an assessment of the balance sheet. Is that a comment on cap allocation priorities or additional impairments? Can you just expand on that and what that means?

Speaker 3

It is a comment regarding land. As we look at where we are, what the next couple of years might look like, what our growth trajectory will be, the goal would be to rationalize every piece of land we have within that environment. Most of it is the right land, but some of it is not. We are going to scrutinize every land deal right now to make sure it is part of the long-term profitability equation for the company.

Speaker 4

If you think about us indicating that land acquisition and development is going to be the lever that we can increase or lower on capital allocations. We were initially set up for a different volume and a different pace. There is just some extra land that we have not taken down yet that we might not need. Looking forward. So we are just going to have to look at everything and say, "Does this still pencil? Is this still the ideal location?" And make those decisions in Q4. It is not something that we typically had to do, but we did have to go through the similar exercise in last year's Q4.

Speaker 10

Right. Thank you. It is helpful.

Operator

Thank you. Our next question comes from Jonathan Bettenhausen with Truist Securities. Please go ahead.

Speaker 11

Hey, guys. Thanks for taking my questions. So the company-wide absorption pace dropped down to 3.0 this quarter, kind of the bottom end of your preferred range. The West and East were below the Central above. That dynamic is kind of nothing new. But from an end of period community count perspective, you added the most communities in the Central. Is that by design to a certain extent? Are you deliberately slowing the community openings in the East and the West relative to the Central in order to kind of mix the company into higher sales pace, that three to four range? And how should we think about community opening mix going forward?

Speaker 3

Yeah, a lot of it's just timing. I think we've made some pretty big investments in the Texas region, which is called the Central region. So those are starting to open up. We have over-indexed capital to the East and Central. That is by design long term. We think that those two regions will make up a bigger part of our business over time. We've opened up a lot of new markets out in the East, that we're continuing to try to grow and scale. So long-term, yes, that's by design, but I think more this quarter, that was just a timing thing. As we indicated on our call, we expect our community count year-end to be somewhere around 5%-10% year-over-year growth. We're not giving out 2027 guidance at this point, and we'll provide that in Q1 of next year on our Q4 earnings call.

Speaker 11

Got it. Okay. Just following up on that too, when we think about the scale benefits from sales pace, does your long-term kind of target sales pace change from region to region? I guess asked a different way, is like a 4.0 absorption pace in the East give you the same kind of scale benefits as something like a 4.3 in Central?

Speaker 3

No. It's a community by community kind of ground up getting to our number. In the higher end, more unaffordable stuff we don't usually achieve 4. We achieve something closer to 3, but more affordable, bigger scale communities, we can get something closer to 5 sometimes. So it all blends out to about 4, and 4 is kind of our optimal run range, but it's not 4 across the footprint. ASP is a big driver. Higher ASPs tend to skew more towards 3. Lower ASPs tend to skew more towards 5 or 6 when things are normal. So when we're looking at 3, some of our more affordable stuff will skew more to 4, and some of our less affordable stuff will skew more to 2.

Speaker 11

Got it. Okay. Thanks, guys. Good luck.

Speaker 3

Thank you.

Operator

Thank you. Our next question comes from Michael Rehaut with Melius. Please go ahead.

Speaker 12

Thanks. Good morning, everyone. Almost good afternoon. Thanks for taking my questions. I wanted to first just zero in on the incentives out there. You mentioned at the beginning of the call increased rate buydown costs, and I am just curious, when you think about the buydowns that are offered out there today, has the absolute rate come down with softer demand over the last 2 or 3 months? Or is it just that the spread has widened and the rate being offered is the same and the spread widening because of the higher market rates that are out there are causing the increase of cost? And I am curious not only for Meritage, but for the market more broadly.

Speaker 4

Mike, good morning. It is a combination of both. So, we are not offering the same rate that we used to offer maybe 18 months ago or 12 months ago. However, it is also not 100 bps higher, which is what that mortgage rate has increased. So it is kind of splitting the baby. So it is a little bit of a bigger spread, even though our actual rate has increased a bit that we are offering in the rate buydown.

Speaker 12

Okay. Got it. Thank you for that. Secondly, on SG&A, great discipline there obviously, amid a very tough top-line dynamic. How should we think about, I am not asking for guidance, but just maybe if you could give us a sense of the dollar amount of savings maybe you have clawed back this year, and if there is any expected kind of incremental flow-through next year in terms of the specific actions you have taken on the discretionary spend.

Speaker 3

Well, I will give you some high-level thoughts. As far as specific dollars that we saved this year, I do not know if we have that detail today, but we can see. There is still more opportunity for us to operate more leanly in a potentially up-and-down environment, if you will. Hard to say what 2027 is going to look like, but I think we are all expecting it to be less than we were six months ago. So there is opportunity for us to get more efficient as a company as we move into next year. I think in addition, we are just finally starting to really benefit from some of the investments we made in technology.

Speaker 3

We have a number of areas around the company that we have spent a lot of time in the last couple of years developing a technology that allows us to be more efficient and operate our business in a more efficient way, and those benefits will continue to be a tailwind for us as we move into 2027 and even beyond because we have some other stuff that is in the works. So more to come on that. We think we can operate more efficiently. We think there is still more meat on the bone there. We will continue to operate our business in a very disciplined fashion, considering the efficient operating model that we have as a company. Hila, if you want to comment on anything dollar-wise.

Speaker 4

Yeah. Not specific dollar-wise, but if you look at commission and selling costs, almost all of that is variable, right? So we break out commission and selling costs and then just regular G&A. So almost all of commission and selling costs are variable. It is a function of either volume or ASP on the commission. So that is moving directly with the pace that we are seeing and is not necessarily a management function. So all of the savings that you are seeing are in the G&A category, and those are all intentional. There is very little in that category. That is variable. That is moving on its own. So all of the actions that you are seeing, the decline year-over-year that you are seeing is true cost savings. So you can kind of look at it that way if you are trying to quantify it.

Speaker 12

Great. Thanks so much.

Speaker 4

Thanks, Mike.

Operator

Thank you. Our final question comes from Jay McCanless with Citizens. Please go ahead.

Speaker 13

Hey, good morning, everyone. My first question, Philippe, you talked about certain areas of the country where there is going to be more pressure from your competitors to move through some of their specs. Is that part of the reason you guys are choosing not to give guidance, is that maybe you have got some extra specs in those areas and it is going to be a tougher competition to get to year-end than it might have been otherwise?

Speaker 3

No. That is not the main reason we are not giving out guidance. Look, we had more visibility in Q3 than we do right now, and we did not quite hit the mid-range of our guidance. I think with the lack of visibility we currently have, until there is more visibility and certainty and we feel like the market is not kind of moving from week to week, we are just not going to provide guidance in that environment because we are real time. Literally, everything that happens in that quarter shows up in our numbers, and right now things are moving around so much in so many different ways. Less about the inventory by other competitors and more about just the macro environment.

Speaker 13

Got it. The second question I had, from a labor availability standpoint, it sounds like that got tougher for everyone this quarter. Maybe talk about what you all are seeing and is it having any impact on your 60-day commitment that you have with buyers?

Speaker 3

We are seeing similar evidence of this activity, not only watching our own sites but our competitor sites. Fortunately, given our operating model, all specs, repeatable product, no design studio, et cetera, the actual impact of that has been pretty negligible at all. Couple locations here and there, but really at an enterprise level, we are not seeing it. As we sit here today, we see the activity, but it has not impacted our cycle times.

Speaker 13

Okay. That is great to hear. Thank you.

Speaker 3

Okay. Thank you, operator. I would like to thank everyone who joined our call today for your continuing interest in Meritage Homes. We hope you have a wonderful rest of your day and a great weekend. Thank you so much.

Operator

This concludes today's Meritage Homes Third Quarter 2026 Analyst Call. Please disconnect your line at this time and have a wonderful day.

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