Meritage Homes Q2 2026 Earnings Report

Meritage Homes EPS Results

• Actual EPS: $1.42
• Consensus EPS: $1.30
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: $2.04

Meritage Homes Revenue Results

• Actual Revenue: $1.41 billion
• Expected Revenue: $1.43 billion
• Beat/Miss: Missed by -$20.17 million
• YoY Revenue Growth: -14.10%

Meritage Homes Announcement Details

• Quarter: Q2 2026
• Date: 7/29/2026
• Time: After Market Closes
• Conference Call Date: Thursday, July 30, 2026
• Conference Call Time: 11:00AM ET

Meritage Homes (NYSE:MTH) is a national homebuilder and residential developer headquartered in Scottsdale, Arizona. Founded in 1985 as Winchester Homes and later rebranded to Meritage Homes, the company specializes in designing, constructing and selling single‐family detached and attached homes. With a focus on energy efficiency and sustainable building practices, Meritage Homes markets its properties under the GreenSmart program, which integrates high‐performance features aimed at reducing long‐term energy and water consumption for homebuyers.

The company’s core activities encompass land acquisition, residential community planning, home design, construction management and real estate sales. Meritage Homes offers a range of floor plans and design options—from entry‐level single‐story homes to larger, multi‐bedroom models—across growing suburban and master‐planned communities. Standard features often include ENERGY STAR appliances, enhanced insulation packages and smart home technology. Prospective buyers work with in‐house design centers to personalize finishes, fixtures and layouts prior to construction.

Meritage Homes serves markets in the Western, Southwestern and Southeastern United States, including key regions such as Arizona, California, Texas, Florida, Georgia, the Carolinas, Nevada and Colorado. The company operates through a network of local divisions, each responsible for land development, municipal approvals and on‐site homebuilding. Stephen J. Hilton, who co‐founded the business, currently serves as president and chief executive officer, guiding Meritage Homes’ strategic growth and commitment to quality construction standards.

Meritage Homes Q2 2026 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: Soft demand pressured results: Q2 orders fell 9% year over year, closings declined 11%, revenue dropped 14% to $1.4 billion, and diluted EPS decreased 33% to $1.37. Adjusted gross margin declined to 18.6% from 21.4% a year earlier as lower volume and higher land costs outweighed cost savings.
• Neutral Sentiment: Management reported stable sequential demand, with absorption of 3.5 homes per community per month versus 3.6 in Q1, but said affordability pressures, economic uncertainty and recently higher mortgage rates remain risks. Incentive usage stayed elevated, though lower per-home costs and temporary rate relief helped limit the impact in Q2.
• Positive Sentiment: Operational execution and inventory discipline improved: Direct construction costs per square foot fell nearly 6% year over year, cycle times remained below 110 days, and finished-home inventory declined by more than 1,100 homes. Specs and backlog combined were down 22% year over year, positioning the company to manage supply in a softer market.
• Positive Sentiment: Meritage maintained a strong balance sheet with $807 million in cash, no revolver borrowings and 17.1% net debt to capitalization. The company returned $131 million to shareholders in Q2, including $100 million of buybacks, and has reduced its year-to-date share count by nearly 5% while raising its quarterly dividend 12%.
• Neutral Sentiment: Full-year guidance was raised to approximately 5% below 2025 closings and revenue, supported by expected 5%-10% community-count growth and second-half openings. Q3 guidance calls for 3,300-3,600 closings, approximately 18% gross margin and diluted EPS of $1.10-$1.30; management expects margin recovery to remain limited until lower-cost land vintages begin flowing through results in late 2027 or early 2028.

Presentation

[Operator]

Greetings. Welcome to the second 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.

[Emily Tadano, VP of Investor Relations and External Communications at Meritage Homes]

Thank you, operator. Good morning and welcome to our analyst call to discuss our second 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 two 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.

[Emily Tadano, VP of Investor Relations and External Communications at Meritage Homes]

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?

[Steven Hilton, Executive Chairman at Meritage Homes]

Thank you, Emily. Welcome to everyone joining today's call. Today, I'll begin with a brief overview of market conditions and our second quarter results.Phillippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions, driving quarterly sales orders of 3,575, which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration, as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in the first quarter. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first move-up price points.

[Steven Hilton, Executive Chairman at Meritage Homes]

We believe that our strategy of having sufficient available home inventory, combined with our growing community count, positions us to quickly convert demand into sales this quarter from brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times, and working. These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6%, and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of June 30th, 2026, book value per share increased 5% year-over-year. With that, I'll now turn it over to Phillippe.

[Phillippe Lord, CEO at Meritage Homes]

Thank you, Steven. Our strategy of pre-started inventory, streamlined operations, and go-to-market tenets enables us to be agile in our reactions to current market conditions. We leverage this strategy to generate additional direct cost savings to enhance our returns as incentives remain elevated this quarter. Our move-in-ready homes and strong realtor relationships help us compete in an environment where the homebuyer values a quick close through clarity and certainty in the home-buying process. While market conditions remain softer than normal, we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1,100 homes year-over-year as we replaced older inventory with an increased volume of new product with lower direct costs.

[Phillippe Lord, CEO at Meritage Homes]

At the same time, we have kept our cycle time sub 110 calendar days for the fifth consecutive quarter and even found a few more days of improvement, allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improve liquidity while allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of June 30th, 2026, was up 9% year-over-year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Despite the small dip, we are reiterating our expectation of a 5%-10% full year 2026 community count growth year-over-year.

[Phillippe Lord, CEO at Meritage Homes]

We also achieved another quarter of lower construction cost per foot as our purchasing teams collaborated with our strategic trades to find incremental savings and efficiencies that benefited all parties. We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year-over-year to $357 million in the second quarter from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings in the second half of 2026 and into 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases.

[Phillippe Lord, CEO at Meritage Homes]

By maintaining our operational and financial discipline, we believe we are well positioned to navigate uncertainties today while preparing for growth and increased shareholder returns as the market conditions improve. Part of that longer-term plan includes an intentional shift of a portion of our business to first-time move-up homes as we continue to serve one of our key buyer demographics, the Millennial customer, as they begin to look toward their next home purchase while still continuing to offer our entry-level product for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends. Our goal is to be around one-third, two-thirds mix of first move-up and entry-level homes consistent with the demographics of the U.S. population.

[Phillippe Lord, CEO at Meritage Homes]

We are intentionally rebalancing our portfolio to achieve that over time, starting with a heavier allocation to the acquisition of land for first-move-up customers. Second quarter 2026 orders were 9% lower year-over-year, primarily due to a 19% decline in average absorption pace, which was partially offset by a 14% increase in average community count. Cancellation rate of 13% was a little higher than the 11% in Q1, but still remained below typical industry averages as we benefit from a quick sale to close process. Our average absorption pace was 3.5 homes per community per month during the second quarter, compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation.

[Phillippe Lord, CEO at Meritage Homes]

While long-term objective remains an average of four net sales per month for the year, we will not sacrifice profitability or complete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385,000 was down 3% from prior year due to geographic mix shifting from higher ASP West region into the lower ASP East region. Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per home incentive costs. We grew our active communities 9% year-over-year from 312 in the prior year to 340 by June 30th. Q2 was 1% lower than the 345 active communities in Q1 as timing played a factor this quarter.

[Phillippe Lord, CEO at Meritage Homes]

Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter and 67 year-to-date. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2. Very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in Q2, although the needed volume incentives varied notably. Parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolinas were among our strongest performers, demonstrating more market strength in geographies with limited inventory.

[Phillippe Lord, CEO at Meritage Homes]

We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into a potential path for recovery longer term. In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace. Demand trends were softer in Orlando, Denver, Salt Lake City and Northern California. Now turning to slide seven. Q2 starts totaled approximately 3,900 homes, down 4% year-over-year, yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick close strategy and within our target range of 175%-200%.

[Phillippe Lord, CEO at Meritage Homes]

Our ending backlog was approximately 1,720 as of June 30, 2026, compared to approximately 1,750 homes as of June 30, 2025. As for the combined total of specs and backlog, we had around 6,800 units at June 30, 2026, 22% less than the approximate 8,700 specs and backlog we had at June 30, 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. We ended the quarter with approximately 5,100 spec homes, down 27% from approximately 6,900 specs in the prior year and up 7% sequentially from Q1. The 15 specs per store this quarter translated to about four months supply, intentionally near the lower end of our target four to six months supply due to today's demand environment and our improved cycle times. Comparatively, in the second quarter of 2025, we had 22 specs per store or five months of supply.

[Phillippe Lord, CEO at Meritage Homes]

We reduced our completed specs to 1,500 units in Q2, which was 42% lower than prior year and 30% of our total specs, our lowest percentage in two years and right around our target of one-third. This compared to 38% in the prior year and 46% in the first quarter. A balanced approach of reducing aged inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes for our store. Although we are starting Q3 with lower backlog, we believe the spec home inventory provides the path to achieve our Q3 guidance. With that, I will now turn it over to Hilla to walk through our financial results. Hilla?

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Thank you, Phillippe. Let's turn to slide seven and cover our Q2 results in more detail. Second quarter 2026 home closing revenue of $1.4 billion was 14% lower than prior year, due to 11% lower home closing volume and a 4% decrease in ASP on closings to $373,000. While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, the decline in ASP was primarily due to geographic mix. To a lesser extent, product mix within our communities also impacted ASP, with lower priced homes outselling higher priced ones, and in certain markets where we had a greater amount of aged spec inventory, we used incremental incentives this quarter to sell those homes. With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

During the temporary dips in rate this quarter, we sold and closed homes with lower cost incentives, which reduced our per home incentive burden. Looking ahead, incentive costs and utilization will continue to be inversely correlated to interest in mortgage rates, which remain highly volatile and move on both domestic and international political developments. Home closing gross margin of 18.3% in the second quarter of 2026 was 280 bps lower than prior year's 21.1% as a result of lost leverage on lower home closing revenue and higher lot costs, both of which were partially offset by improved direct costs and faster cycle times. Second quarter 2026 home closing gross margin included $3.6 million of real estate inventory impairments and about $300,000 in terminated land deal walk-away charges, compared to no impairments and $4.2 million in terminated land deal walk-away charges in the prior year.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for the second quarters of 2026 and 2025, respectively. We are encouraged that the volume of impairments remains relatively limited, and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price. Our current land basis is primarily comprised of higher cost land vintages from the 2022-2025 timeframe. Although this higher basis will continue to be a margin headwind in the near term, we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

In Q2, direct costs per square foot were down nearly 6% year-over-year, reflecting the disciplined purchasing and vendor negotiations Phillippe already covered, with savings generated by both labor and materials. As we've noted, our newer starts should benefit from this lower cost basis and will be reflected in our margins in the second half of this year. Sequentially, adjusted gross margin improved 80 bps to 18.6% from 17.8% in Q1, driven primarily by better leverage on higher home closing revenue and improved direct costs from newer inventory. While we do not anticipate a significant gross margin recovery this year, our long-term target remains 22.5%-23.5% under normalized market conditions, where incentives and interest rates are more in line with historical averages.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Selling, general, and administrative expenses as a percentage of second quarter 2026 home closing revenue were 10.4% compared to 10.2% in the second quarter of 2025, as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the lost leverage on lower home closing revenue. Despite the tougher sales environment, we did not increase sales and marketing spend on a per sale basis. Our longstanding realtor relationships continue to provide a competitive advantage, generating a consistent level of repeat business from our broker network. External commissions remain stable both year-over-year and sequentially, while our co-broke percentage continues to run in the low 90% range. We remain committed to growing our annual closing volume, which should drive operating leverage and support our longer-term SG&A target of 9.5%.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

The second quarter's effective income tax rate was 24.8% this year, compared to 23.9% for the second quarter of 2025 due to higher state income taxes. As a reminder, we expect only a limited impact from the June 2026 expiration of the energy tax credits for the balance of this year and into the future, as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credits. Overall, lower home closing revenue and gross profit led to a 33% year-over-year decrease in second quarter 2026 diluted EPS to $1.37 from $2.04 in 2025. Adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walk-away charges. To highlight the key results for the first half of 2026, on a year-over-year basis, orders were down 7%, closings were down 12%, and our home closing revenue decreased 16% to $2.5 billion.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Adjusted home closing margin of 18.2% was 350 basis points lower than 2025. SG&A as a percentage of home closing revenue was 11%, and net earnings decreased 46% to $146 million. Adjusted diluted EPS was $2.24 for the first six months of 2026, including impairments and walk-away charges. Before we turn to the balance sheet, it's worth noting that our customer credit metrics remained healthy and unchanged during the second quarter. FICO scores, DTI, and LTV all track closely with historical averages, continuing a trend we've seen for several years. Lack of deterioration in customer credit quality validates that amid ongoing market volatility, consumer psychology continues to play a strong role alongside affordability concerns in home buying decisions. On to slide eight.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

As of June 30, 2026, we maintained a healthy balance sheet supported by $807 million in cash, no outstanding borrowing under our credit facility, and a net debt to cap ratio of 17.1%. Additionally, in June, we refinanced our revolving credit facility to increase the facility size to $980 million, extend the maturity from 2030 to 2031, and increase the accordion feature to permit a facility size of up to $1.47 billion. We are committed to supporting our long-term growth trajectory while prudently managing our capital structure and maintaining our investment-grade credit rating. As such, our net debt to cap ceiling remains in the mid-20s range. Our capital allocation strategy looks to balance both growth and shareholder returns. As we have been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $357 million in Q2.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

With lower demand, we are focused only on the most attractive land opportunities, increasing our land spend for first-time move-up communities and optimizing development schedules. Our forecasted land acquisition and development spend is expected to be between $1.7 billion and $2 billion for full year 2026. We returned $131 million of capital to shareholders via buybacks and dividends this quarter, up 74% from $76 million in the same period last year. We bought back over 1.5 million shares or 2.3% of shares outstanding at the beginning of the quarter for $100 million. We repurchased the shares this quarter at an average 16% discount to book. To date, in 2026, we have spent $230 million on share buybacks, reducing our December 31st, 2025 outstanding share count by nearly 5%. As of June 30, 2026, $284 million was available under the repurchase program.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Given the instability of the current environment and with the path for interest rate trends remaining uncertain, we will continue to execute on our share repurchase commitment, but pare it back slightly to a minimum of $55 million per quarter for the balance of the year while continue to increase that opportunistically, repurchasing incremental shares on cash flows and dips in our stock price. 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 dividend this quarter totaled $31 million and $63 million year to date. For the first half of 2026, we returned $292 million of capital to shareholders or 201% of our total earnings to date this year. Slide nine.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

In the second quarter of 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of about 300 terminated lots. These lots primarily reflect communities for 2028 and beyond, as we own or control most of the lots we need to meet our community count targets through 2027. In the second quarter of 2025, we put nearly 1,800 net new lots under control. As of June 30, 2026, we owned or controlled a total of about 73,200 lots, equating to 5.2-year supply to last 12 months closings, slightly above our target of four to five-year supply, but reflective of the upcoming community count growth we expect over the next 18 months. We also had approximately 15,300 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

We continue to target around a 40% option lot ratio. About 69% of our total lot inventory at June 30, 2026 was owned and 31% was optioned. This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% option lot position in the prior year, reflecting our terminated lots in late 2025. We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits, as we do not believe every land deal can absorb the incremental cost of an off-balance sheet structure. Finally, I'll direct you to Slide 10. Based on current market conditions and year-to-date results, we are upping our guidance for full year 2026 home closings and revenue to around 5% below full year 2025 results. Although home closing revenue could trend a bit lower if market conditions require higher incentives.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

For Q3 2026, we are projecting total home closings between 3,300 and 3,600 units, home closing revenue of $1.26 billion to $1.35 billion, home closing gross margin around 18%, an effective tax rate of 24.5%-25%, and diluted EPS in the range of $1.10 to $1.30. With that, I'll turn it back over to Phillippe.

[Phillippe Lord, CEO at Meritage Homes]

Thank you, Hilla. In closing, we believe our second quarter results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from the first quarter to the second quarter. Throughout this quarter, we remained focused on controlling what we can control, strategically reducing aged inventory as we target the right level of inventory per store, balancing pace and price, and allocating capital thoughtfully to maximize returns. Looking ahead, with community count expected to grow in the second half of 2026, we believe we have the units to achieve our full-year revenue guidance despite ongoing market challenges. Combined with our balanced approach to capital allocation, we believe Meritage is well-positioned to navigate the current uncertain environment and deliver strong shareholder value long-term. 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. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Trevor Allinson with Wolfe Research. Please go ahead. Your line is open.

[Trevor Allinson, Analyst at Wolfe Research]

Hi. Good morning. Thank you for taking my questions. First one's on the better-than-expected gross margin in the quarter despite rates going higher. Can you talk about what drove the beat in the quarter? It sounds like maybe you're getting some better cost structure coming through. Can you perhaps quantify those tailwinds in the quarter, should we expect incremental savings on the cost structure moving forward?

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Thanks, Trevor. I'll take the gross margin question. For us, it's a combination of a couple things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition. We also had that 6% year-over-year improvement on direct costs, which is helpful. Also, we mentioned this, because such a high percentage of our homes sell and close in the same period, there was a nice dip in interest rates in the middle of the quarter where we were able to sell homes at a lower incentive and still close them in the same quarter. We saw all of those benefits come together despite the higher lot cost that's still rolling through the financials. We were able to harness all of those benefits together and deliver that 18.6 adjusted gross margin.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

On a go-forward basis, I don't know that we're modeling continuing improvement on direct margin, although or on direct costs, I should say, but the savings that we've had so far should continue to push through the financial statement. The rest of the gross margin for the balance of the year and into next year is really a discussion of volume of incentives and overall volume of closings.

[Trevor Allinson, Analyst at Wolfe Research]

Okay. Makes sense. Thanks for that, Hilla. The second question's on your shift back for a portion of your business more towards first-time move-up. I think from a demographic outlook by age cohort, that makes a lot of sense. What's the timeline to make that shift? Is it still your expectation you're going to offer a 60-day guaranteed full spec model on those homes? Any changes to your go-to-market strategy as you serve a little bit higher-end buyer?

[Phillippe Lord, CEO at Meritage Homes]

Yeah, great question. It'll take a little bit of time because we pivoted pretty meaningfully to entry-level during the last five years. As we pivot back to a more balanced 30%-70%, it's really about sourcing some new land and bringing that land on the market. More of a 2028 and beyond type of impact. As it relates to the operating strategy, it's going to be pretty aligned with what we do as it relates to not offering choice and options. We are going to tweak the go-to-market when it comes to when we release the homes. We'll probably be releasing the homes earlier because many of those folks have homes to sell. There will be some tweaks on sort of our focus around the closing-ready guarantee, as well as pieces of the realtor strategy.

[Trevor Allinson, Analyst at Wolfe Research]

Makes a lot of sense. Thanks for all the color into Buffalo report.

[Operator]

Thank you. We'll take our next question from Stephen Kim with Evercore ISI. Please go ahead. Your line is open.

[Stephen Kim, Analyst at Evercore ISI]

Yeah. Thanks a lot, guys. Just a follow-up on this shift. I know you guys, when you first rolled out this very significant shift to the move-in-ready homes, it was something that you had spent a lot of time thinking about and preparing for. I just wanted to try to understand this pivot, or tweak, let's say, to move a third back to the first-time move-up. Was this something that you always envisioned you would eventually do and maybe something has just precipitated or caused you to maybe advance that a little earlier? Or is there something that fundamentally has changed your thinking about maybe being 100% first time, this was not initially contemplated, but you are contemplating it now? If so, what was that change or this thing that you've seen in the market?

[Phillippe Lord, CEO at Meritage Homes]

Yeah. It really was something we already had always intended to be, even when we rolled out our strategy seven years ago and tweaked our strategy four years ago. We always believed that the second consumer segment for us was the first move-up. Someone still looking for a move-in-ready home, someone still looking for a home that they can move in quickly, but buying their second home, potentially buying their second new home, potentially. It's always been part of our strategy. What's really changed is fundamentally the land market has changed, right? As land has gotten more expensive. Prior, we could really underwrite a lot of entry-level land, and now there's a more balanced opportunity out there in the market, and we see more opportunities to source MU-1 land, that's really the change in the market.

[Phillippe Lord, CEO at Meritage Homes]

I think that's been just sort of something that's been happening over time. This has always been part of our strategy, now the land market is really lending itself to that opportunity.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

I would add one more thing, Stephen. We talked a little bit about it in the script, but the shift in the age of the population cohorts in the U.S., Millennials are the largest population cohort. We were initially targeting our efforts towards that group, and as they were buying their first home, they were obviously an entry-level buyer. Here we are 10 years later, and they're ready to buy their next home. We're continuing to follow the same demographic groups across their homebuyer journey. Obviously, as younger cohorts enter their home buying stage, they're continuing the entry-level push, but we're also following the Millennial buyer, and hopefully we'll be their first and second-time home provider.

[Stephen Kim, Analyst at Evercore ISI]

Gotcha. Yeah. Lots of interesting things there. I guess following up on that, Phillippe said that the land market, I guess, has gotten a little bit looser perhaps at the first-time move-up, you see some opportunities there, and you also indicated that this is something that you've contemplated even years in advance that you would eventually do this kind of pivot. One of those sounds opportunistic and could also change back.

[Phillippe Lord, CEO at Meritage Homes]

Right.

[Stephen Kim, Analyst at Evercore ISI]

Next year, the land markets there may be less opportunity at first-time move-up and so forth. I'm just trying to understand how much of this is opportunistic, in terms of the land strategy and opening up, and then how much of it is something that regardless of what the land market stratification looks like, you just think that this is the right time to move to that higher price point. You have talked a lot about how the cycle time is reduced, and it enables you to build more quickly. I just wanted to see if you could elaborate a little further on maybe some of the tweaks that you're going to make to your product if you're building a bigger product that takes a little longer. I would think the customer maybe wants a little more personalization and things of that nature.

[Stephen Kim, Analyst at Evercore ISI]

Could you just elaborate a little bit more on maybe some of the differences that you see in going after the MU-1 customer again?

[Phillippe Lord, CEO at Meritage Homes]

Yeah. Probably four questions there. Let me try to answer them all. I think, first of all, this is not opportunistic. This is something that we've intentionally had as a goal of our business. The market's been very different for the last five years. We've played in the market the way the land market supported. First-time land was much more available and priced correctly for the last five years. Now that bifurcation is starting to close. One MU land is making more sense and is more underwritable. Can that change? Certainly, it can change. We're always going to balance out the business between entry level and first move-up based on the inputs in the business. Long-term, our strategy is to be a third one MU and two-thirds entry level.

[Phillippe Lord, CEO at Meritage Homes]

Certain markets will allow us to do more of it, and other markets will allow us to do less of it. We're glad we have our regional and national footprint to kind of play in the market the right way. As it relates to the tweaks to our operating model, I really feel like it's like a tweak. It's a modification on the margin. We're not going to start offering design studios. We're not going to start offering a bunch of personalization. We're just going to build a nicer home. Homes that are 50 foot wide versus 40 foot wide don't necessarily take longer to build. You just build them the same way, but you might offer some nicer features.

[Phillippe Lord, CEO at Meritage Homes]

Maybe those buyers will get nicer cabinets, countertops, flooring, and maybe some other things that we'll tweak to make sure we're delivering the right value to that customer because they're looking, like you said, for their second home. I don't see a big change in our kind of core operation strategy, but maybe some things on the margin that we'll tweak to make sure we deliver the right value to that customer segment.

[Stephen Kim, Analyst at Evercore ISI]

All right. Great. Thanks so much, guys.

[Operator]

Thank you. We'll take our next question from Alan Ratner with Zelman. Please go ahead. Your line is open.

[Alan Ratner, Analyst at Zelman]

Hey, guys. Good morning. Thanks for all the detail here. I won't beat the drum on the move-up pivot, I'll just ask one quick question on that front. It seems like M&A activity has accelerated a bit across the industry, I'm curious if you would consider M&A as an avenue to maybe accelerate that process towards building up the first-time move-up market share.

[Phillippe Lord, CEO at Meritage Homes]

Yeah. We're very encouraged to see that well-respected and smart long-term investors are investing in the home building industry and really reinforcing the confidence in the sector that we have and the value of scale and repeatable platforms. We look at M&A through a very strategic lens. It's not just about scale at any cost. It's about can we go out and acquire assets that will allow us to play in different markets or consumer channels. 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well. There's a number of Midwest markets that seem really interesting right now. For us, it's about a strategic ad versus just incremental scale.

[Alan Ratner, Analyst at Zelman]

Got it. Makes sense. Second question. You made the comment about intra-quarter where rates briefly dipped, that gave you an opportunity to maybe pull back a little bit on incentives. I just wanted to clarify, did you actually reduce the incentives you were offering, or were you kind of maintaining the same mortgage rate buydown programs that you were offering, it was just costing less to buy down to that rate given what was going on in the market? I just wanted to clarify. Is there kind of an ability, if we do see further moderation of rates, to actually pull back more significantly on incentives, or it was just a cost dynamic?

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

It's tranched. The first step when rates pull back a bit, it's a lower cost offering. If we're offering 499 if the rates drop, we don't start offering 399. It's just costing us less to offer the same incentive because the differential to the interest rate is still significant, not that it's an interesting incentive. We have seen that when rates drop a second tick down, the utilization drops. It kind of comes in waves. First, the cost per rate lock is lower, and then the utilization shifts to a different type of discount, a more traditional discount in our sector. It was great to see that when the market started to briefly return to normal, consumer behavior followed.

[Phillippe Lord, CEO at Meritage Homes]

I would just add that from a long-term perspective, with inventory levels being down and BTO builders now pivoting back strongly to BTO and out of spec, we're just seeing a general stability in the incentive environment. I can't predict what's going to happen with the economy and some consumer psychology things out there, but at least we don't see the incentive wars happening to the level that they were happening last year and into this year.

[Alan Ratner, Analyst at Zelman]

That's great to hear. Thanks a lot.

[Operator]

Thank you. We'll take our next question from John Lovallo with UBS. Please go ahead. Your line is open.

[John Lovallo, Analyst at UBS]

Good morning, guys. Thanks for taking my questions as well. The first one is, the roughly 18% gross margin outlook for the third quarter has clearly spooked some folks out there coming off the 18.6% in the second quarter. I don't want to get too cute here, but would you consider 18.3%, 18.4%, 18.5% to be around 18%? If not, what other than the lower quarter-over-quarter closings would drive the gross margin down for the second quarter?

[Phillippe Lord, CEO at Meritage Homes]

Yeah, it's primarily leverage. Rates did increase through June. You saw incentive utilization, rate buydown utilization increase in June, which can hit the 18% on the margin. We're kind of sitting here around 18%, depending on what rates do. Is it going to be a little bit lower or a little bit higher? It just depends on what happens intra-quarter. We guided to around 18% in Q2 and ended up at 18.6% because rates were favorable. It's just really dependent on that factor.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Yeah. I think the first part of Phillippe's response was also very important. It's the leverage. You can look at the midpoint of our closing guidance and where we ended up Q2 versus Q3 and see that there's going to be maybe 20, 30-ish basis points that are just a function of leverage. Obviously, looking at our full-year guidance, you can extrapolate to what you think Q4 is going to be. There's going to be a pickup and an improvement where the leverage will go in the other direction. It's so tough on these intra-quarter kind of discussions, especially when so much of your sales volume is unknown for us, and we're closing still 200% of our backlog.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Visibility into the units and to the incentive that will be part of those closing units is not as clear, which is why we've shifted our commentary from providing an exact number to kind of saying around a number, because there's still a lot of movement in the closing universe for us for Q3.

[Phillippe Lord, CEO at Meritage Homes]

Yeah. Rates, again, have been increasing since mid-June. They're probably the highest they've been as we roll into July, which is typically the lower seasonal kind of period.

[John Lovallo, Analyst at UBS]

Okay. Yeah, no, I think the fourth quarter comment was going to be my next question, that we should see the reversal of that gross margin. Let me just ask, the fourth quarter deliveries are implied to be up about 10% year-over-year. That would either seem to imply that you're expecting a decent ramp in orders in the third quarter here, or that you're willing to work the backlog down pretty meaningfully as we move through the year. How should we sort of think about this? I just want to make sure that the idea here is that you're not going to ramp incentives to try to drive orders to meet that full-year delivery.

[Phillippe Lord, CEO at Meritage Homes]

Yeah. Again, everything we say is predicated on how this plays out economically and politically over the next six months. The Q4 guide is mostly predicated on community count growth. As we said, we have still some material community count growth happening into Q3 and Q4, and that's driving the incremental closings for Q4. We're not expecting the market to improve. In fact, we're probably pretty conservative about what we think the back half is going to look like from an incentive and absorption standpoint. It's 100% tied to the community count growth that we expect in the back half of this year.

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Remember, just for us, the way that we count an active community is a sale. For us, we don't sell until we're ready to close within 60 days. For us, an active community can start producing closings same quarter that it becomes active, not just sales in the same quarter that it becomes active. We have quite a ramp of communities that's coming up if you look at where we started the year and that 5%-10% guide on ending community count, where all of those will be delivery closings.

[Phillippe Lord, CEO at Meritage Homes]

Yeah. That's a great point. Our starts were up because we were starting homes for these communities that we're getting ready to open, and we don't open up communities until we can close homes.

[John Lovallo, Analyst at UBS]

Yeah. That makes a lot of sense, guys. Thank you.

[Operator]

Thank you. We'll take our next question from Susan Maklari with Goldman Sachs. Please go ahead. Your line is open.

[Susan Maklari, Analyst at Goldman Sachs]

Thank you. Good morning, everyone. Thanks for taking the question. I want to start on the cost side. The 6% savings that you've realized is impressive there. Can you talk a bit more about what is driving that and how you're thinking about the ability to realize further incremental benefits in the coming quarters?

[Phillippe Lord, CEO at Meritage Homes]

Yeah. The 6% savings year-over-year, and we're down 2% sequentially, it's both labor and materials. We saw it sort of broad-based. We're seeing some savings in both categories. As Hilla noted in her prepared remarks, that our lower cost new starts are replacing aged inventory, which is being captured in the third quarter 2026 gross margin guidance. I'm not sure we're anticipating further cost savings on new starts that are going to go out in Q3. We are seeing a little bit of headwinds in lumber that may play out here over the next couple quarters. Due to that factor, we're not modeling any more improvements from here for now.

[Susan Maklari, Analyst at Goldman Sachs]

Okay. All right. That's helpful. Maybe as we think out, and you reiterated the longer-term target for the gross margin, as you think about the mix shift that will come through as you start to integrate more of the move-up product in there, what does that mean in terms of the path for profitability in the business, and how should we think about the shift that will come through and how you can hit that target?

[Phillippe Lord, CEO at Meritage Homes]

I think the long-term target of 22.5%-23.5% is not mix related. It's purely based on the way we underwrite land. Right now, we're not achieving our underwriting because primarily incentives are running extremely hot. We typically underwrite land at a much more normal incentive environment. The bridge between where we are and the bridge to where we want to be is 100% interest rate and incentive related. 1 MU land should typically be higher revenue, and you should get more leverage from the higher ASP, but we don't really underwrite 1 MU land at a higher margin than we underwrite entry-level land. Again, this will take some time. We have about 10% of our business is 1 MU right now, and there's probably some opportunity to pivot some of our existing land book to 1 MU because they're in the right locations.

[Phillippe Lord, CEO at Meritage Homes]

Most of it's going to come from new land that we're sourcing today. The impact of the mix to 1 MU won't really play out in our P&L until 2029 and beyond.

[Susan Maklari, Analyst at Goldman Sachs]

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

[Operator]

Thank you. We'll take our next question from Rafe Jadrosich from Bank of America. Please go ahead. Your line is open.

[Rafe Jadrosich, Analyst at Bank of America]

Hi. Good morning. Thanks for taking my questions. Following up on John's question earlier, on the second half delivery guidance relative to the first half, I think it's about 1,000 more deliveries. If I look at the backlog and completed specs, it's sort of flattish. Do starts need to pick up further from here to hit the back half delivery guidance? Can you give any color on the community count cadence third quarter versus fourth quarter?

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Yeah, we don't give community count cadence. It's just way too difficult. A municipality approves something, you drop below, or doesn't approve something, you drop below a certain number of units, then you can no longer count a community as active. It's just way too refined for us to try to figure out the specific timing on a September 30 versus December 31st. We're still really comfortable with our 5%-10% growth year-over-year. Obviously, as you're running it through your model and trying to hit that full year units number that we are fairly comfortable with at the 5% below full year 2025. Agree, there is a ramp-up in volume. As Phillippe already mentioned, it's a function of the community count. You already started to see a little bit of that spec start happen now, right?

[Hilla Sferruzza, EVP and CFO at Meritage Homes]

Our starts volume increased quite a bit between Q1 and Q2 as we are getting inventory ready for these communities. Again, that four to six month supply of available inventory is something that we are very focused on. I think we mentioned several times during the prepared remarks between the inventory that we are carrying to start Q3 and into Q4 and that sub 110-day cycle time, we feel really confident that we have everything that we need to hit our full year guidance.

[Rafe Jadrosich, Analyst at Bank of America]

Okay. That's helpful. Can you just remind us the lag time between when lumber prices move and when that starts to show up in your deliveries?

[Phillippe Lord, CEO at Meritage Homes]

It's staggered. We don't hedge, but we have 30, 60, or 90-day locks at different points in time throughout the country, we kind of create natural hedges. It's a little bit of noise, but within 90 days, you should start to see some of it flow through into our construction, and then you should see that flow through into our numbers in about a quarter. I think a couple of our peers said about two quarters, and I think that that's probably the right number for us as well.

[Rafe Jadrosich, Analyst at Bank of America]

Okay. That's helpful. Thank you.

[Operator]

We'll take our last question from Jade Rahmani with KBW. Please go ahead. Your line is open.

[Jade Rahmani, Analyst at KBW]

Thank you very much. Just on the first time move-up strategy, have you considered broadening that to beyond first time move-up to the broader move-up market?

[Phillippe Lord, CEO at Meritage Homes]

No. I think, again, we've had this strategy in place for a long time. We feel like with our operating model and the way we want to play in the market and where the demographics are the strongest, we want to stay in that one MU price point. We don't want to expand beyond that into a two MU or a luxury buyer. Those folks typically want choice and customization, which we're not going to offer based on the way we build homes. For those reasons, it's really mostly a value-focused one MU consumer segment.

[Jade Rahmani, Analyst at KBW]

Thank you very much. On land banking, I was wondering what you thought the value that it provides is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone are offering in the land banking space.

[Phillippe Lord, CEO at Meritage Homes]

Yeah, it's a good point. It's why we haven't done a lot of land banking over the last five years. That reason, we were sitting on a bunch of cash, and then the price of land banking was pretty expensive, and the optionality of land banking had really changed. At some point, as a company of our size, we believe land banking allows us to control more land to allow us to grow our business at a better return on equity. At some point it makes sense when your balance sheet reaches a point where that extension creates that incremental value. That's how we think about it. It's why we haven't done it a lot.

[Phillippe Lord, CEO at Meritage Homes]

It's why we're trying to get it to 40% over time because we would like to, as we're trying to grow from 15 to 20,000 units, we want to control more land for less of our balance sheet at play.

[Jade Rahmani, Analyst at KBW]

Makes sense. Thanks.

[Phillippe Lord, CEO at Meritage Homes]

Okay. Well, thank you, everybody. Thank you, operator. I want to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a wonderful rest of your day and a great weekend.

[Operator]

This concludes today's Meritage Homes second quarter 2026 analyst call. Please disconnect your lines at this time and have a wonderful day.

Participants

Executives

• Emily Tadano, VP of Investor Relations and External Communications
• Steven Hilton, Executive Chairman
• Phillippe Lord, CEO
• Hilla Sferruzza, EVP and CFO

Analysts

• Trevor Allinson, Analyst at Wolfe Research
• Stephen Kim, Analyst at Evercore ISI
• Alan Ratner, Analyst at Zelman
• John Lovallo, Analyst at UBS
• Susan Maklari, Analyst at Goldman Sachs
• Rafe Jadrosich, Analyst at Bank of America
• Jade Rahmani, Analyst at KBW