Hello, and welcome to the Meritage Homes Fourth Quarter 2023 Analyst Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Emily Tadano, Vice President of Investor Relations and ESG. Please go ahead, Emily.

Thank you so much. Good morning and welcome to our analyst call to discuss our fourth quarter 2023 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. 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 2022 Annual Report on Form 10-K and most recent 10-Q. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our press 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 will now turn it over to Mr. Hilton. Steve?

Thank you, Emily. Welcome to everyone listening on our call. I'll start with a brief discussion covering market trends and provide an overview of our recent company achievements. Phillippe will cover how our strategy drove our results and highlights of our operational performance. Hilla will provide a financial overview of the fourth quarter and 2024 forward-looking guidance. Home buying demand this quarter was healthy as rates dropped below 7% in December. As we previously discussed, two of the largest population cohorts, the millennials and recently Gen Zs are having life events that lead to increased levels of need-based housing that currently cannot be met by the constrained resale of home supply in the market. These macro conditions are shifting buyer demand for move-in ready inventory into the new home space, giving us a competitive advantage with these consumer segments. Our fourth quarter 2023 sales orders increased 60% over last year's fourth quarter as we pushed through the tougher months of October and November and capitalized on market conditions in December when interest rates loosened. We delivered 3,951 homes in the fourth quarter of 2023, our second highest quarterly closings and achieved a record backlog conversion of 110%, which led to home closing revenue of $1.6 billion. Home closing gross margin for the quarter was 25.2%, which combined with SG&A of 10.7% resulted in diluted EPS of $5.38. We increased our book value per share by 17% year-over-year to $126.61 at December 31, 2023, and generated a return on equity of 17% for the full-year 2023. Even with our higher ending book value, our price-to-book increased 56% year-over-year from 0.9x to 1.4x, reflecting impressive growth in shareholder value. As is well documented, mortgage rates have moderated recently and the general market expectation is for rates to either hold steady or move further down as the economy stabilizes into the balance of 2024. We believe this will make housing more affordable and continue to give people confidence that now is the right time to buy a home. Now on to Slide 4, our recent milestones. We continue to focus on our DE&I efforts and with the feedback we gathered from our employees, we launched our first three employee resource groups this past quarter, starting with a focus on multicultural women and family structures. We hope that over time these employee-led groups will create inclusive and collaborative environments within the greater Meritage culture. While we pursue these DE&I initiatives for our team members, it's also humbling to see these efforts recognized externally. In the fourth quarter, we joined the list of U.S. News and World Report’s Best Companies to Work For and the Phoenix Business Journal’s Best Places to Work, an honor for us in our hometown. Given our long tradition to make a company-wide impact on philanthropic causes, we continue to work with two specific non-profits for a second year in a row. During the quarter, we packed over 250,000 meals for No Child Hungry and completed our Tree Planting Program with Arbor Day Foundation. To cap off the year, we received the Arizona Housing Fund’s Partner of the Year award, which is focused on addressing the homelessness crisis in Arizona. Lastly, in addition to earning a spot on Newsweek's list of America's Greenest Companies for 2024, we were excited to move into our newly built LEED-certified corporate headquarters in Scottsdale this quarter. With that, I'll now turn it over to Phillippe.

Thank you, Steve. I want to first thank our Meritage team for achieving yet another great year leading to our market share gains. Their hard work and dedication continue to change the lives of our customers and generate value for our shareholders. Turning to Slide 5, our sales orders for the fourth quarter were 2,892 homes, up 60% year-over-year due to a continuation of a stable housing environment. During the quarter, we leaned into our spec building strategy and through the slower months of October and November, we held true to our plan of pre-starting enough inventory to meet expected demand. This allowed us to capture volume in the quarter and replenish our supply for the upcoming spring selling season. 88% of the order volume in the fourth quarter of 2023 came from entry-level homes, which has comprised over 80% of total sales orders since the second half of 2021. The average sales price on orders this quarter of $415,000 was up 6% from the prior year. The elevated quarterly cancellation rate of 39% in the fourth quarter of 2022 impacted both volume and ASP last year as canceled homes with higher sales prices reduced the average sales price reported. The fourth quarter 2023 cancellation rate was 13%, which is roughly in line with our historical averages. The fourth quarter 2023 average absorption pace of 3.6 per month improved from 2.2 in the prior year. We experienced normal seasonality this quarter with an expected slowdown in pace around the holidays. Despite all the uncertainty and twists and turns in 2023, we are proud to report that we still achieved our targeted average monthly pace of 4.0 net sales per month in 2023. While the last four years haven't followed this historical seasonality trend, it feels like we are starting to return to a more traditional sales pattern. In order to attain our targeted 4.8 sales pace, we adjusted pricing and made use of our full suite of incentives as needed on a community-by-community and home-by-home basis. As a builder, particularly an affordable builder, we have always offered a range of incentives to buyers. Historically, our consumers have opted to use incentives for closing costs, option upgrades, lot premiums, price concessions, or financing incentives. Since early 2022, rate locks and buy downs were the primary incentive choice as they were the most efficient way to solve for a payment. As rates have pulled back into the sixes, we are seeing customers once again choosing the incentive that best fits their needs. The pullback in rate-related incentive utilization has allowed us to offer less costly alternatives and has given us the flexibility to increase pricing where the market has allowed it. In the fourth quarter of 2023, our average community count of 271 was essentially flat to the prior year and down 4% sequentially compared to the third quarter of 2023. We opened 28 new communities this quarter and 111 new communities during the year, turning over 41% of our communities since the start of the year. We remain focused on bringing new communities online in 2024 and growing our total community count. The strength of home buying demand in 2023 exceeded industry expectations and we closed out more communities throughout the year than we originally forecasted. We still anticipate further fluctuations, some small ups and downs over the next few quarters, but expect more meaningful growth in the second half of 2024 as we bring our existing land under development online. We own all the lots we need in order to grow our community count mid to high-single-digits year-over-year by the end of 2024 and almost all of what we need to grow our community count more meaningfully in 2025. Now moving to Slide 6. During the fourth quarter of 2023, we continued to achieve a balanced performance across our geographic footprint between the East, Central, and West regions. All of the regions achieved year-over-year growth in volume and sales pace and saw an uptick in performance during the quarter into December. The Central region had the highest regional average absorption pace of 4.1 per month, compared to 2.6 last year. Double-digit growth in average community count combined with a robust supply of move-in ready homes allowed the Central region to capture market share and grow its fourth quarter 2023 order volume by 72% year-over-year. The East region achieved an average absorption pace of 3.5 per month this quarter compared to 2.5 in the prior year. Given some of the tightest levels of available existing homes for sale in these markets, we experienced the lowest cancellation rate in the East. With the strong start pace in Q4, the East entered the New Year with the highest volume of per store available move-in ready inventory, which we believe positions it to gain market share in the spring selling season. The West region had an average absorption pace of 3.0 per month, which was 88% higher than the prior year’s fourth quarter of 1.6 as market conditions and buyer sentiment improved throughout the year, notably in our most challenged markets of 2022, including Arizona and Colorado. As a testament to our spec building strategy, this quarter marked the first quarter in one of our newer markets, Salt Lake City, where we had available spec inventories to record both its first sale and closing. We have made concerted efforts over the last year to realign our geographic footprint more evenly across our markets, with an increased focus on our community count in the East region, which includes Florida, Georgia, Tennessee, and the Carolinas. These high-growth but lower ASP markets should generate a greater share of our business. Additionally, land acquisitions for the past several years in all of our markets have been focused on a lower price point to ensure sustained affordability for our product. The combination of the mix shift in both location and product type will be visible in our 2024 results and will be reflected in our ASP returning closer to the $400,000 level, which has been our long-term objective. While this shift will create some pressure on our leverage in the short-term, we believe this is the right strategy for Meritage given the demographics we are targeting. There is a lack of supply of homes at this price point, which should drive a higher absorption pace and elevated demand, both of which will translate into improved long-term returns. Now turning to Slide 7. With over a third of our closings this quarter also sold intra-quarter, we achieved a backlog conversion rate of 110%, which is once again a company record and notably higher than our ongoing target of 80% plus. Our streamlined operations enable us to build homes more efficiently and achieve one of the quickest cycle times in the industry. Historically, it has taken us four to five months on average to build a home and while our cycle times remain roughly the same from Q3 and Q4 at about 140 calendar days, it improved about six to seven weeks on a year-over-year basis and is nearing our long-term run rate goals. Given our strategy, as the production environment continues to stabilize, we will reset our backlog conversion targets. With the solid demand we're experiencing, we continue to accelerate starts to replenish and build up our specs to ensure sufficient move-in ready inventory for the 2024 spring selling season. Our quarterly starts of approximately 4,000 homes in the fourth quarter were up from about 2,000 in the prior year and are consistent with our quarterly cadence for most of 2023. As part of our business model, we align our starts with our expected next quarter sales pace. Our spec-only strategy gives us the flexibility to ramp up in a strong demand environment or pull back starts in an uncertain environment as we did in the second half of 2022, so we do not overbuild and erode margins or compromise customer expectations. We had approximately 5,900 spec homes in inventory as of December 31, 2023, up 20% from about 4,900 specs as of December 31, 2022. This represented 22 specs per community this quarter, which equates to six months of supply on the ground. We are intentionally at the upper end of our optimal level of 4- to 6-month supply of spec inventory as we prepare for the spring selling season.

Thank you, Phillippe. Let's turn to Slide 8 and cover our Q4 financial results in more detail. Fourth quarter 2023 home closing revenue was $1.6 billion, reflecting a 13% lower home closing volume and 5% lower ASPs compared to the prior year. The decrease in ASP on closings was due to more costly financing incentives and geographical mix. Home closing gross margin was 25.2% in the fourth quarter for both periods. This year's home closing gross margin benefited from improved cycle time and lower lumber costs, which were partially offset by increased financing incentives and higher lot costs. Although full-year direct costs per square foot in 2023 were slightly higher than in 2022, costs declined in the second, third, and fourth quarters, ending this year lower than last year. About half of these savings were derived from lower lumber and the balance from our concentrated efforts to rebid all costs with our trades. Looking forward to 2024, as Phillippe mentioned, there has been a pullback in customer utilization of financing incentives this quarter and as rates continue to decline, we expect this trend will continue. We expect to harvest savings from lower incentive costs as homes from recent sales start to flow through our financials in a quarter or two. However, homes in our newer communities also have higher lot costs resulting from elevated land development spend over the past two to three years, which is muting the pickup from lower financing incentives. As we're covering the topic of home financing, we wanted to share this quarter's customer credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages. Our FICO score is near 740, DTI is around 41, which is slightly more elevated than what we have seen historically, although it's in line with our mix shift to primarily all entry-level at this time. LTVs remained in the mid-80s and almost all of the buyers who utilized our mortgage company, which is around 80% to 85%, received some type of financing incentive. Fourth quarter 2023 home closing margin included $3.2 million of terminated land deal walkaway charges compared to $4.2 million in the prior year. Prior year fourth quarter home closing gross margin also included non-recurring charges of $10.9 million in warranty adjustments related to two specific cases, which were partially offset by $5.4 million in retroactive vendor rebates. There were no similar items in the fourth quarter of 2023. Excluding all the non-recurring items, adjusted home closing margin was 25.4% and 25.7% for fourth quarter 2023 and 2022, respectively. As we frequently shared, our long-term target of at least 22% gross margin is about 200 basis points above our historical average. We continue to strengthen our relationships with national vendors, streamline operations, and reduce cycle times. We are evaluating how the pieces of the strategy come together in a stable environment, and we will be reassessing if our 22% goal has any opportunity for further improvement. SG&A in the fourth quarter of 2023 was 10.7% of home closing revenue compared to 8.4% in the fourth quarter of 2022. The 230 basis points deterioration in leverage was primarily a result of increased performance-based compensation, higher commission rates, and lower home closing revenue leverage. We're actively working to reduce our SG&A and expect to see an improvement to 10% or better in 2024. Our longer-term SG&A target is 9.5% as our volumes are expected to grow over the next several years. The fourth quarter's effective income tax rate was 23.2% this year compared to 23.3% in 2022. The rate in both periods includes energy tax credits on qualifying homes under the Internal Revenue's inflation reduction act. All in, lower home closing revenue and greater overhead costs led to a 24% year-over-year decline in fourth quarter 2023 diluted EPS to $5.38. As for full-year 2023 results compared to 2022, orders were up 12%, closings were down 1%, and our home closing revenue decrease 2% to $6.1 billion. We had a 380 basis point decline in home closing gross margin to 24.8%, primarily due to more costly incentives, increased lot costs, and slightly higher full year direct costs. SG&A as a percentage of home closing revenue was 10.2% in 2023 versus 8.3% in 2022, as a result of higher commissions and marketing costs reflecting the different sales environment, increased performance-based compensation, insurance spend, and a greater investment in technology. Net earnings declined 26% to $738.7 million. As we turn to Slide 9, we had a disciplined approach to balance sheet management. We had nothing drawn on our credit facility, cash of $921 million, and a net debt-to-cap of 1.9% as of December 31, 2023. Our net debt-to-cap remains well below our max ceiling, which is in the mid-20%. We also generated $355.6 million in operating cash flow and $59.7 million in total cash flows for the full year 2023. Our healthy balance sheet allows us to pursue a comprehensive capital allocation plan that's focused on long-term shareholder value expansion through both growth in the business and returning capital to shareholders. While our goal is to consistently pay out dividends and repurchase stock, when the economy is strong and growing, we look to allocate more cash to land acquisitions and development, and when there's volatility or uncertainty in the market, we pull back some of our spend and hold a higher cash balance. We strategically deployed capital across four categories: investments in land, share repurchases, cash dividends, and periodically debt redemption. In the fourth quarter of 2023, we accelerated our investments in internal growth with $654 million spent on land acquisition and development, which was up 86% from the prior year and our highest ever quarterly spend. We increased land spend throughout the year as market conditions improved, demonstrating the resiliency in demand and spending a total of $1.9 billion on land acquisition and development in 2023. We expect full-year 2024 land spend to increase to $2 billion to $2.5 billion as we develop our own land and ramp up our lot portfolio for community count growth. This quarter, we bought back nearly 25,000 shares of common stock, or 0.1% of our shares outstanding at the beginning of the quarter for $4.1 million even with the stock price run-up. This brings our full-year 2023 repurchases to $59 million, buying back approximately 438,000 shares or 1.2% of shares outstanding at the beginning of the year. Our approach to buybacks has been consistent since we started the buyback program about five years ago. Our first objective is to neutralize annual dilution from new equity issuances, which can occur either pro rata each quarter or faster or slower based on market conditions. Second, we gauge the market for other share repurchase opportunities throughout the year. While we do have annual targets related to repurchases, the amount and timing each quarter may vary based on what we're seeing in the market. Over the past five years, we repurchased 10% of our stock, cumulatively 3.7 million shares, on average 3% below our stock price, totaling $315 million. We will continue this buyback strategy in 2024 and beyond. $185 million remained available under our authorization program at December 31, 2023. This quarter, we spent $9.8 million on our quarterly cash dividend payment of $0.27 per share. We initiated cash dividends at the beginning of 2023, totaling $39.5 million returned to shareholders for the year. In the coming weeks, we will be resetting the 2024 quarterly cash dividend amount and we'll be sharing that externally once approved. From time to time, we may pay down all or portions of our public debt, as we did in the third quarter of this year. For full-year 2023, we strategically deployed a total of $2.2 billion in capital spend activities, comprised of $1.9 billion in land spend, $150 million for a partial debt redemption, $59 million on share repurchases, and almost $40 million of cash dividends. This compares to $1.5 billion in land spend and $109 million in share repurchases in fiscal 2022. On to Slide 10. In the fourth quarter of 2023, we ramped up our land approvals by putting about 7,600 net new lots under control to position us for future community count growth. As a reminder, in the fourth quarter of 2022, we intentionally pulled back on new land acquisitions to assess how the markets were adjusting to the elevated rate environment. During that time, we didn't place any new lots under control and terminated land deals of roughly 3,700 lots that no longer met our underwriting standards. This quarter was the first quarter since early 2022 where we meaningfully put more lots under control than home starts. As of December 31, 2023, we owned or controlled a total of about 64,300 lots, equating to a 4.6-year supply, compared to approximately 63,200 total lots or a 4.5-year supply as of December 31, 2022. As a reminder, our target is a 4- to 5-year supply of lots. The new lots added this quarter represent 43 future communities, all for entry-level products. In our pipeline, we also have another approximately 28,000 lots where due diligence is still ongoing. About 72% of our total lot inventory at December 31, 2023 was owned and 28% was optioned, similar to the prior year where we had a 73% owned inventory and a 27% optioned lot position. I want to take a moment to reiterate that our land financing strategy has remained consistent for the past decade or so. We have always been focused on balancing strong returns, while ensuring we had sufficient liquidity to fund future land spend. You've heard us note in the past that we do not have an artificial target for the percentage of option land. While that's still true, we wanted to clarify that we're not opposed to land banking. We just haven't had the need to pull that lever over the past four years as we had excess liquidity. As a reminder, in the early 2000s, about 90% of our assets were off book and we were one of the most active builders in the land banking space. We still have very deep land banking relationships that we continue to cultivate and we'll activate them as needed. As we look into the next couple of years and expect a period of high growth, we don't expect to finance all acquisition and development with our own capital, and we plan to leverage these relationships with our land bankers to ensure we grow responsibly. As we structure our long-term capital plan to balance growth, shareholder returns and key metrics required to keep our investment grade status, we're comfortable that we have a methodical path to meet our cash needs without taking undue risk. Finally, I'll direct you to Slide 11 for our guidance. We believe our nearly 5,900 specs give us dry powder for the spring selling season, and will allow us to capitalize on improving consumer sentiment from the pullback in mortgage rates. Our targeted focus on the affordable entry-level segment and more balanced shift in our geographic footprint to our newer markets in the Southern U.S. will result in a reduction in ASP in 2024 into the low 400s, which we believe is the right long-term trajectory for our business. For the full-year 2024, we are projecting total closings to be between 14,000 and 15,000 units, home closing revenue of $5.8 billion to $6.2 billion, home closing gross margin around 23% to 23.5%, SG&A of 10%, which will spike in the first quarter from certain accelerated compensation arrangements and lower revenue leverage than in the subsequent quarters, an effective tax rate of about 22.5% to 23% and diluted EPS in the range of $16.50 to $18.10. As for Q1 2024, we are projecting total closings to be between 3,320 units, home closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 23.5% to 24%, an effective tax rate of about 22.5% to 23% and diluted EPS in the range of $3.30 to $3.60. The first quarter EPS guidance is inclusive of about $7 million of costs to unwind a rate lock, which will be incurred through our Financial Services segment. With that, I'll turn it over to Phillippe.

Thank you, Hilla. With January in the books, we are off to a strong start and we are feeling positive about the spring selling season. We had a nationwide sales event in January and it feels like potential homebuyers are excited about the industry environment and are comfortable pivoting to the new home space where inventory is more plentiful. We will report back on the spring selling season on our next call in April. To summarize on Slide 12. We believe our available spec inventory and anticipate growth in community count in the second half of the year, coupled with our focus on pace over price, position us favorably in the industry to grow our market share. While still earning outsized return, we have remained true to our strategy supporting our spec building model and disciplined land purchases, and with all the flexibility we have incorporated, we have specific levers we can pull to minimize risk during uncertain times, and quickly maximize opportunities during high growth periods. Our capital allocation strategy is disciplined and likewise flexible so we can toggle between cash priorities with a singular purpose of long-term shareholder value creation. With that, I will now turn the call over to the operator for instructions on the Q&A.

Our first question is from Truman Patterson from Wolfe Research.

First, just on your ‘24 gross margin guide. I think it implies down about 150 basis points and also second quarter through the fourth quarter being below that of the first quarter. I'm just hoping you can help us think through what's embedded in that guidance: land inflation, stick and brick inflation, as well as kind of the core pricing that's assumed in that. Are you assuming pricing just stable as of January?

Thanks for the question. So the numbers that we've guided, you can see they're higher in Q1 and then they pull back a little bit for the full year. That's as new land is going to be coming online in the new community openings, which is coming online at a higher basis. Obviously, the land development costs over the last couple of years are starting to flow through the financials. We didn't assume a pullback in incentives even though we're starting to see some; it's not something that we can telegraph just quite yet. The numbers that you're seeing in Q1 is what's currently in our backlog. Obviously with 110% backlog conversion in the current quarter, we pretty much have a good handle on what's going to convert in Q1, but we're not modeling additional pullback and incentives or pricing power for the back half of the year.

Okay, great. Thanks for that. And then, I missed some of the spec commentary earlier on, but your community count is sitting around 270 kinds of today. And then you mentioned, last call of it kind of growing sequentially through the next four or five quarters or so. Is that how we should also think about your active spec count and orders perhaps maybe a little bit more subdued than normal seasonality in the first half of the year and then a little better than normal seasonality in the back half of the year?

Yes, I think that's right. We're carrying more specs per store right now, because we always ramp up the amount of specs we come into the spring selling season, because we expect to sell more houses during the spring than we do in the back half of the year. And then we'll carry less specs towards the back half of the year when we expect seasonality. But obviously, in the back half of the year, you're going to see our community count start to grow. So you'll have less spec per community, but you'll have more communities.

First one is, it seems like at the midpoint, the SG&A dollars in 2024 are down a bit. I mean, revenue is down ever so slightly, I think. I guess the question is, if we think about the components, how are you thinking about sort of G&A? I mean, are you thinking about that to be sort of flattish year-over-year? And then maybe the commission bucket, what are your assumptions within there?

Yes. So we have commission and selling cost is one category and obviously G&A is another. So you're definitely going to see some pullback in the commission and selling cost. Maybe a tick on the commission, but the big chunk of that is going to be from marketing and maybe some extra steps that we're doing, not so much the pure commission rate, but extra programs that we were doing to spur sales when the market was a little bit less strong when interest rates ticked up in the middle of 2023. So there's a piece of the savings that's going to be coming from the selling costs component. On the G&A, I think you're going to see that number coming down as well. It's a combination of maybe three kinds of big areas. The first is the performance-based compensation that a lot of the plans have been restructured to better align with what we expect to see in 2024 and beyond. There is a focus on all discretionary spend. So you're going to see that have a different level of control obviously with three years of COVID 2023 being the year where we did a lot of travel and a lot of meetings, and it's something that's going to be pared back slightly. The last category is going to be on technology spend. So you're going to see all of those categories kind of tick back in line to the percentage that they should be as a function of total revenue. So we're comfortable coming back to that 10% threshold, which is what we said is our long-term threshold and we're so comfortable that we're even putting out the number that beyond as our units start to materially grow into the future years, we think that we can bring that down below the 10% to 9.5% as a longer-term target.

And then on the cash flow, you guys generated about $356 million in cash flow from ops in 2023. I mean, it probably will be another good year this year. Just I guess curious on what your thoughts are around cash flow? And maybe what would it take and I appreciate the detail you gave on capital allocation, but what would it take for you guys to become a little bit more aggressive, if you will, in terms of the buyback program?

I mean, I think our first priority, we are growing our spend from $1.9 billion to $2 billion to $2.5 billion, so obviously we want to maintain what we're doing on the share repurchases. We're going to be putting out new numbers for the dividend, so stay tuned for that and we're growing our land development and acquisition spend in 2024. Beyond that when there's excess cash, we always look at the market for opportunistic times to jump in and buy incremental shares. So I think that's definitely something that we'll be looking for.

Yes, I think what's happening to our stock price today would make us interested in buying some more shares right now.

I found it interesting that you're not including a pullback in incentives or pricing power even though you think that you're seeing some signs that might allow you to do that. I was wondering if you could describe for us if there's any difference between what you're seeing in the market, let's say, this is like I guess February now versus what you were seeing in the market last year. I think particularly with respect to your customers coming out of a sort of a high mortgage rate environment, kind of like what they were coming out of late 2022? If you could sort of compare contrast what you're feeling in the market today versus, let's say, a year ago?

It's two different environments. Last year, we were emerging from a significant spike in rates, which was the first such increase in a long time. Buyers were not really used to that situation. This time, as rates rose in the fourth quarter, buyers seemed more familiar with it. As we head into the spring, it appears that buyers already believe it's a good time to purchase, and our focus is now on connecting them with the right home. Buyer psychology feels somewhat different. Additionally, nothing is occurring in January that we didn't anticipate. During the elevated rate periods in the fourth quarter, we were still selling houses, and it honestly felt seasonal to us.

Hilla, I think at one point when we met up over the last couple of months, you had talked about the leverage you get from an incremental unit, I think what you talked about, absorptions going from, let's say, four, if they were to go to five in a community, let's say. You were suggesting that you could have the benefit you get to sort of lever the overhead was very significant. I was wondering if you could just sort of remind us, again, of what the sensitivity or the incremental margin would be for you guys on if your absorption, let's say, moves from four to five?

Yes. So, I don't have the math at my fingertips for four to five in the number of communities that we have obviously. But typically the fixed component as our overhead between the first quarter and the last quarter of the year, we get an extra 100 basis points of leverage. That's how impactful selling and closing the incremental homes becomes for us. So that's why events like our flash sale that we just had, a big nationwide sale in January, getting those incremental sales, even if they come with a little bit more of an incentive, end up yielding better total margins because the incremental volume compensates for that.

And this is Phillippe. Just to emphasize, our approach to pace versus price has evolved. We used to focus on finding a balance between the two. Now, our priority is on pace, and we only consider price if we can achieve it. We're consistently focused on increasing pace to drive volume and market share in our business, as well as our manufacturing operating model. When we can also secure price and margin, we will. Over the past three years, we have faced unprecedented conditions but have managed to achieve both. Ultimately, it's not about balancing the two; it's about prioritizing pace. If we can achieve margin on top of pace, we will pursue it.

I just wanted to clarify, Hilla, at the end of your comments kind of throughout that in the first quarter you expect $70 million of hit in your financial services…

It’s 7, not 70. 7.

Okay.

You said two 7. Sorry, I misspoke.

I'm sorry. You said two seven?

No. Just, seven. The number 6, 7, 8. 7.

Thank you. That seems to indicate it's not too significant. The question is, as I calculate for fiscal '24 using the midpoint of your revenue, home closing gross margin, and SG&A, I'm coming close to the upper end of your EPS range. If my calculations are off, please let me know. What might I be overlooking? Is there something below the line or perhaps a level of conservatism in your estimates? I would appreciate your insights on this.

Yes, there's nothing else below the line outside of that, that loan charge will take in the first quarter on unwinding some rate locks. So I think your math is right. We can definitely take a deeper dive on the modeling offline. But yes, I think your math is right, just making sure that both Phillippe and I mentioned in the prepared remarks that you're going to see some shift in geography into our lower ASP markets, which is driving part of the pullback in EPS temporarily as we ramp up. We think that these are the high growth markets that we want to be in an affordable price that's the most attractive to today's consumer. But in the meantime, as we shift to the lower ASP before the impact of the higher volume pick in with community count growth, there's going to be a temporary dip in 2024.

Okay. No, that's helpful. And then I guess just as a follow-up. Kind of looking past ‘24, I obviously understand we might be reluctant here. But number one, the ASP shift that you've described into the low 400s, it seems like we're thinking that you do the math on the closings and the revenue, you'd be around 410 plus or minus. Just want to make sure we're thinking about that, that shift would primarily or predominantly occur in ‘24 and there wouldn't be any incremental spillover in '25. And also at the beginning of the call, you kind of said that you expect community count growth to meaningfully accelerate in '25. Just in terms of the right way to think about that, if you're growing year-end mid to high-single-digits this meaningfully accelerate. I assume that would mean some type of low-double-digit rate, if 24% is already mid to high. Just want to make sure I'm thinking about some of those parameters correctly.

Yes, I think that's an appropriate modeling variable. I think that the expectation that we're making the majority of the shift geographically in 2024 is probably right. It's hard to predict what every community in a big portfolio is going to do, but the big shift in ASP will be in 2024. So there's not like a sequential one to come after that. So I think that's a fair assumption. And then, yes, you should definitely expect to see something greater in community count growth in 2025 versus 2024. I don't know that we're putting a number or a percentage around it, but more than 24 in a percentage basis.

Yes, I mean, obviously, we bought a tremendous amount of land this year and a lot of that land starts to come on in 2025.

One last quick clarification, if I could squeeze it in. In answer to an earlier question, first-quarter gross margins are assuming incentive levels. Is it fair to say like roughly current incentive levels just given the high turnover in the spec model, I'm thinking most recently December, January. And you talked about that assumption as '24 progresses that you're kind of assuming current incentive levels meaning in the last couple of months. Just wanted to make sure that I understood that right relative to the higher incentive levels that maybe you and the industry were seeing in October and November?

No, you got that right. Yes, we're modeling incentives more that exist in our current backlog that were mostly December sales as we've rolled into January. Although those are more elevated than historical averages, it's definitely less than what we've experienced in the spike in rates. There's definitely going to pullback on rate lock usage, but we're still running north of historical averages.

The first question, we've heard from a few builders putting out kind of intermediate term growth targets and I think 5% to 10% seems to be the consensus that everybody has agreed upon in the industry. And if I look at your guide for '24, it seems like you're expecting growth in a similar range on at least from a volume perspective, maybe towards the lower end of that. But if I look at your spec start pace the last few quarters, you've been starting roughly 4,000 homes a quarter annualizing out to 16,000 units, which is obviously above what you're guiding for in '24 from a closing perspective. So I thought I heard you kind of say you're comfortable with your spec supply and you kind of aim to have a higher supply heading into the selling season, which makes sense. But, is there something that's given you pause on not kind of maintaining this 4,000 quarterly starts pace based on kind of what you're seeing in the markets? Or any color you can give there would be helpful.

No, it's not; there's nothing about the pace of specs. In fact, we'll probably ramp up our spec starts pace in the back half of this year because we'll have community count growth. It's just the absorption pace that we're assuming throughout the balance of the year around four a month is really driving the total guide for closings for the year. In order to increase that, we would have to assume a higher absorption pace than what we're currently getting in the market.

Yes, Alan, there's nothing magic about 4,000, right? It's just a number that makes sense at our current community count level. As Phillippe mentioned, we're going to be ramping up community count towards the back half of the year. So if we're looking to keep that 4 to 6 target of specs per store, 4- to 6-month supply of targeted specs per store as we increase our store, that number will go up with the community count.

And then the second question, your ROE has got as high as 30% during the pandemic phase. And if I look at, you know, your guidance for '24, it implies some further compression down to something more in the low teens, which it's probably going to be maybe a little bit below the industry average. And if I just kind of think through the components of that, your inventory turnover has kind of stalled a little bit here as you've built up some spec supply. Obviously, the cash is building up on the balance sheet, which I think you talked a little bit about, Hilla, and the strategy there. But I'm just curious if you guys have an intermediate to longer-term target on ROE and what else can be done to drive that up and assuming the current market conditions stay kind of where they are currently for the foreseeable future?

I mean, it's really going to be lower this year because we're ramping up our business. We're putting a lot of land on our books and that land doesn't come to the market until 2025. So, that's really the drag. As the earnings go up and our growth goes up in 2025 and beyond, we think we can get that back above 20% long-term. So, it's really a point in time because we didn't buy land in the back half of the year and then we've ramped up our land spend and spent almost $2 billion this year, and a lot of those communities aren't going to come to the market until the back half of this year and 2025.

You have to look at it in two different buckets. The first is a return on inventory, like WIP inventory and that's super quick. We have 110% conversion on our backlog, so that's actually accelerating. It's what Phillippe mentioned, which is we're in the growth mode, obviously as you're looking to increase community count, and you're spending quite a bit more. We were $1.5 billion last year in 2022 on land and development spend, and we're guiding to $2 billion to $2.5 billion in just 24 months later. So that increase, it's definitely going to be a drag on return on inventory. But as those units come to market, there's going to be a large acceleration on the return part of the equity. And I think that the combination of our share repurchases, which is obviously one way to impact the E on return on equity and now the dividend, hopefully, the combination of those two are going to end up resulting in an improvement in both the R and the E in the calculation beyond 2024.

Hilla, could you elaborate on what would be necessary for land banking to become a greater focus for your team? What are your current concerns? I understand that having strong balance sheets allows you to hold onto more for self-development. However, as you look ahead, is the availability and cost of land banking in the markets where you want to expand a factor? I'm interested to know what needs to occur for this to play a bigger role in your land portfolio strategy.

Our growth objectives surpass our capability to use our own balance sheet without becoming uneasy about our liquidity position or our net debt-to-cap ratio. This has not been an issue for the past three years. However, as we plan for growth over the next three years, we realize that we cannot expand as rapidly as we desire by solely relying on our balance sheet. Therefore, the cost of capital is now justifiable for us, and we will begin to use land banking to meet our growth targets. It's primarily about effectively using our balance sheet while maximizing our liquidity and capital market opportunities. We have successfully maintained our position as a top five builder through retained earnings, all while keeping a very low debt-to-cap ratio and ample liquidity. As we aim to grow from 15,000 units over the next three years, we will implement land banking to help manage that growth.

Now Carl, if you think that our last debt deal was at sub four and land banking costs two to three times that and you have a billion dollars of cash, it's tough to make the math work on why you'd want to do land banking. But as we're intentional about the growth and looking to accelerate that beyond our available cash flow, we're definitely going to be utilizing land banking in the next year or so.

I'd just say, we have seen land costs easing in some of our markets, so that may also open up our appetite for land banking if it continues to trend positively.

It's not availability in the market.

And to your earlier point, Alan's question, you feel like you've almost perfected to some degree the backend on the WIP turn. So the field production side, you've got turns really strong. Now we focus on the more on the front end. Phillippe, can you talk just a little bit about how the time it's taking to get lots from raw stage to finished lot and then into the field? You're talking about 120 or so stores for in '23 that you've invested in some way, shape, or form and that being ’25. Is that time extending at all in terms of how long it's taking, and are there markets where it's improving at all?

I would say it's kind of stable. Everything sort of changed coming out of COVID. The cities have moved very, very slowly. It takes much longer to get your plans through plan checks. The land development is taking longer as well. There's more regulation there. So it all changed out of COVID. We used to believe that we could get lots on the ground in 12 to 18 months and now it's 18 months to two years depending on the market. And it hasn't changed for a while. That's kind of what we run our forecast out at. We usually are fairly conservative when we buy new land. We assume closer to two years versus 18 months. And if things go faster than that, they go faster than that. I'd say it's really sticky. We haven't seen cities become more efficient as it relates to getting land and titles and getting our development agreements approved. And frankly, we haven't seen the developers be able to move any faster as well. So it's kind of right there, that's the assumption and it's not getting any worse, but it's not getting any better.

And I want to reiterate that we have hit our community count openings. We turned over 41% of our starting inventory from a community perspective since the beginning of the year. We opened over 110 communities this year. So it was really the closeouts that impacted our community count. So that elongated time cycle that's in all the numbers that we're already giving you; we've kind of been operating in this environment for a while.

My first question is, when you think about the potential for some existing homes inventory to come back online over the course of the year as rates move lower. Can you talk about how you can compete against that? And perhaps the benefit that you're going to have as you are moving down in some of these ASPs to a more entry-level first-time kind of buyer, the ability that will give you to sustain that sales pace that you're targeting?

I think it's really about what we are doing. Ever since we've changed our strategy, we've really focused on our specifications. To compete with the existing home market, it's essential to have products that consumers can move into on their preferred timeline. Many people choose existing homes because they can move in when they want, whereas buying a new home typically means following the builder's timeline. So, we've increased our specifications and our move-in ready inventory to remain a viable option for those shopping for existing homes, eliminating time as a factor. Now it simply comes down to location and price. We believe that if the existing home market slows down due to falling rates and the current lockout effect changes, we'll continue to be a strong option because we have move-in ready inventory.

And then one of the things that you mentioned in your commentary is that part of the gross margin benefit that you saw was efforts to renegotiate with your suppliers. As you think over time about the growth that you're expecting and perhaps the leverage that you're gaining with that, how do you think about the puts and takes to the margin over time? As your land costs adjust and relative to that 22% target that you have, what are some of the levers that you can pull in there?

I think that we do think there's an opportunity to revisit that 22%. As we grow, all of those numbers should improve, right? So for right now, we're experiencing elevated lot costs coming through, but the new land that's coming through is not at these exceptionally high levels. They're still elevated, but they're starting to become more normalized. So land over time should revert back to more normalized numbers. We'll definitely have to create a purchasing power. So some push on direct and then of course that leverage that we talked about that fixed component. And then hopefully over time, also the incentives will normalize. So we see a lot of positives kind of beyond 2024, which is still a little bit murky. It's hard to see all the pieces of 2024, but we see everything trending in the right direction over time to get us to a number that's likely something nicer than 22%. We don't have a number yet, but we're working through that math and as soon as we have improved internal targets, we'll be sharing those externally.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Phillippe for any further closing comments.

Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you very much.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.