Meritage Homes Q2 Earnings Call Highlights

Key Points

• Second-quarter results weakened as orders fell 9% year over year to 3,575, while home-closing revenue reached $1.4 billion and adjusted EPS was $1.42. Management said demand was broadly stable sequentially, but affordability pressures, higher rates and elevated incentives weighed on sales and pricing.
• Meritage reduced finished-home inventory by 27% and benefited from nearly 6% lower direct construction costs per square foot, helping adjusted gross margin improve sequentially to 18.6%. However, reported gross margin declined year over year because of lower revenue leverage and higher land costs.
• The company maintained its community-growth outlook and raised full-year closing and revenue expectations to roughly 5% below 2025 levels. Meritage also returned $131 million to shareholders in the quarter and plans to repurchase at least $55 million of stock quarterly for the remainder of 2026.

Meritage Homes NYSE: MTH reported lower second-quarter sales, revenue and earnings as affordability pressures and economic uncertainty contributed to a slower-than-normal spring selling season. Still, management said demand was broadly stable sequentially, construction costs improved and the company maintained its full-year outlook for community growth while raising its expectations for 2026 closings and revenue.

Executive Chairman Steven Hilton said second-quarter orders totaled 3,575, down 9% from a year earlier. The company’s average absorption pace was 3.5 net sales per community per month, compared with 4.3 a year earlier and 3.6 in the first quarter. Hilton said there was “no meaningful sequential deterioration” in demand between the first and second quarters.

Meritage closed 3,725 homes during the quarter and generated $1.4 billion in home closing revenue. Adjusted home closing gross margin was 18.6%, while adjusted diluted earnings per share were $1.42, excluding $3.9 million of inventory impairments and terminated land-deal walkaway charges. Book value per share rose 5% year over year as of June 30.

Demand varied by market as incentives remained elevated

CEO Phillippe Lord said the company continued to encounter highly localized demand conditions. Parts of Texas, Southern California, Atlanta, Raleigh and the Coastal Carolinas were among its strongest markets, particularly where available housing inventory was limited. In contrast, demand was softer in Orlando, Denver, Salt Lake City and Northern California.

Lord said temporary declines in mortgage rates during the quarter supported stronger demand and allowed Meritage to sell and close homes with lower-cost incentives. However, he noted that more recent increases in interest and mortgage rates could affect demand in the coming weeks if rates do not decline.

The company’s cancellation rate rose to 13% from 11% in the first quarter but remained below typical industry averages, according to Lord. Meritage attributed that performance in part to its shorter sale-to-close process and move-in-ready inventory strategy.

Average selling price on orders fell 3% year over year to $385,000, primarily because the company’s geographic mix shifted from higher-priced Western markets toward lower-priced Eastern markets. Home closing average selling price declined 4% to $373,000, also reflecting geographic mix, lower-priced homes selling faster than higher-priced homes within some communities, and incremental incentives on aged inventory in certain markets.

Inventory reduction and cost savings supported margins

Meritage reduced its finished-home inventory by more than 1,100 homes from the prior year, replacing older homes with newer product carrying lower direct costs. The company ended the quarter with about 5,100 spec homes, down 27% from approximately 6,900 a year earlier. Completed specs totaled 1,500 homes, down 42% year over year and representing 30% of total specs.

The company’s 15 specs per active community equated to roughly four months of supply, near the low end of its four- to six-month target range. Meritage ended the quarter with approximately 1,720 homes in backlog, compared with roughly 1,750 a year earlier. Combined specs and backlog declined 22% year over year to about 6,800 homes.

Meritage started approximately 3,900 homes in the second quarter, down 4% from the prior year but up roughly 1,400 homes from the first quarter. Nearly 60% of quarterly closings were homes sold during the quarter, producing a 200% backlog conversion rate that was within the company’s 175% to 200% target range.

Chief Financial Officer Hilla Sferruzza said direct construction costs per square foot declined nearly 6% year over year, with savings coming from both labor and materials. Those cost improvements, faster cycle times and improved leverage on higher sequential revenue helped adjusted gross margin rise 80 basis points from 17.8% in the first quarter.

However, reported home closing gross margin fell to 18.3% from 21.1% a year earlier, reflecting lower revenue leverage and higher lot costs, partly offset by lower direct costs and quicker construction cycles. Sferruzza said the company’s land basis remains weighted toward higher-cost land acquired between 2022 and 2025. She said lower-basis land is expected to begin benefiting margins near the end of 2027 or early 2028, assuming oil and gas price increases are not prolonged.

Company plans gradual shift toward first move-up buyers

Meritage said it intends over time to rebalance its portfolio toward a mix of roughly one-third first-time move-up homes and two-thirds entry-level homes. Lord said the shift reflects the company’s longstanding strategy as well as demographic changes, with Millennial buyers progressing from first homes toward second-home purchases.

The change will primarily be driven by new land acquisitions and is expected to affect financial results beginning around 2028 or later, management said. Lord said the company does not plan to move into higher-end move-up or luxury categories that generally require greater buyer customization.

Meritage expects to retain its streamlined operating approach, including limited choices and options, while making targeted adjustments for first move-up buyers. Those changes may include offering somewhat larger homes and upgraded features, as well as releasing homes earlier to accommodate customers who may need to sell an existing home.

Capital returns and outlook

Meritage ended the quarter with $807 million in cash, no borrowings under its credit facility and a net debt-to-capital ratio of 17.1%. In June, the company refinanced its revolving credit facility, increasing its size to $980 million, extending its maturity to 2031 and expanding its accordion feature to permit total capacity of up to $1.47 billion.

Second-quarter land spending declined 30% year over year to $357 million. The company expects full-year land acquisition and development spending of $1.7 billion to $2 billion. It controlled approximately 73,200 lots as of June 30, equal to a 5.2-year supply based on trailing 12-month closings.

The company returned $131 million to shareholders during the quarter through dividends and share repurchases. It repurchased more than 1.5 million shares for $100 million and raised its quarterly cash dividend 12% year over year to $0.48 per share. Meritage said it will target at least $55 million of quarterly share repurchases for the remainder of 2026, while retaining flexibility to buy additional shares based on cash flow and stock-price movements.

For the third quarter, Meritage forecast 3,300 to 3,600 home closings, $1.26 billion to $1.35 billion in home closing revenue, home closing gross margin of about 18%, and diluted EPS of $1.10 to $1.30. For the full year, the company increased its guidance for closings and revenue to approximately 5% below 2025 levels, though it said revenue could be somewhat lower if market conditions require additional incentives.

About Meritage Homes (NYSE:MTH)

Meritage Homes Corporation 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.

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