Meritage Homes CORP Q4 FY2024 Earnings Call

Greetings. Welcome to the Meritage Homes Fourth Quarter 2024 Analyst Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, it is now my pleasure to introduce Emily Tadano, Vice President of Investor Relations and ESG. Emily, you may now begin.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth-quarter 2024 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. 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. 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 2023 annual report on Form 10-K and subsequent 10-Qs. 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. As a reminder, on today's call and in our earnings presentation, the first-quarter 2025 guidance reflects the 2-for-1 stock split completed on January 2, 2025. However, historical metrics for 2024 and earlier are not adjusted for the stock split. 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.

Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll start by highlighting our 2024 results. Philippe will cover how our new strategy drove our results and talk about our quarterly performance. Hilla will provide a financial overview for the fourth quarter and forward-looking guidance. First, let me start by welcoming our newest Board member, Ms. Geisha Williams, to Meritage. We look forward to her insights and contributions to our Board. The Board has been committed to continuous and ongoing Board refreshment in order to balance institutional knowledge from long-tenured directors with fresh perspectives from new members. Over the past five years, we have reduced the average tenure of our Board members, enhancing the diversity of perspectives and experiences of our Board by adding five new directors. Now let's turn to our results. The fourth quarter of 2024 capped off another record-setting year for Meritage. Our fourth quarter 2024 deliveries of 4,044 homes combined with home closing gross margin of 23.2% and SG&A leverage of 10.8%, resulting in diluted EPS of $4.72. 2025 marks both the official start of the first full year of operations under our new move-in strategy and Meritage's 40th year anniversary. Over the past four decades, we've been on an incredible journey from the first home we built in Arizona to now having built nearly 200,000 homes for families across 12 states. We have a great management team at Meritage, and our commitment to growing the business has driven us to where we are today. To celebrate this anniversary, I'd like to recap some highlights from the full year 2024 and reflect on Meritage's success over the last several years. We generated our highest annual closing volume of 15,611 homes, and despite our average sales price coming down to below $400,000 by the end of the year, we still achieved a company high closing revenue of $6.3 billion in 2024. Our full-year home closing gross margin of 24.9% remained historically elevated and was still above our long-term target. We are proud of what we accomplished this year as we navigated through a volatile mortgage rate environment. Our book value per share expanded 21% over a three-year compounded average growth rate from 2022 to $143.98 per share. We maintained a mid to high-double-digit return on equity over the last three years, ending 2024 with an ROE of 16.1%. We earned over $1 billion in annual EBITDA for each year over the last three years. Our construction cycle times have returned to our historical average of 120 calendar days in the fourth quarter of 2024. At the peak of the supply chain issues in 2023, we were over 190 days. That was also when our backlog conversion dropped to around 50%, and as of December 31, 2024, our backlog conversion reached a company record of 177%. We've also demonstrated our commitment to returning capital to shareholders. We have purchased nearly 6% of our outstanding shares in Meritage stock since the start of 2022. Combined with quarterly cash dividends we initiated in 2023, we have returned almost $0.5 billion to shareholders in the last three years. To top it all off, Meritage first achieved top five builder status at the end of 2022 and has held that title for two years in a row. We will know definitely in the next couple of weeks or so, but I believe we have retained the top five position based on 2024 closings. And we achieved all of this while delivering our customers a first-rate experience, achieving our highest customer satisfaction scores in 2024 with an avid score of 95%. As we move forward in 2025, we are excited about our opportunity to increase our market share as we compete against new build and resale homes alike. And with that, I'll now turn it over to Philippe.

Thank you, Steve. First, let me start by saying that we at Meritage feel very grateful that our Southern California employees and families are not directly impacted by the wildfires. Our hearts go out to everyone who has been and continues to be affected. Our communities are not directly affected. Our foundation will contribute $500,000 to the relief efforts as we hope for a quick rebuild and recovery. As we shared on our last call, we entered the Gulf Coast markets at the end of October by completing the acquisition of Elliott Homes. Now to add to that new footprint, we also recently expanded our Alabama operations to include our start-up in Huntsville, a thriving market with economic expansion, job growth, and immigration. We've been acquiring land in the Huntsville area for several quarters and plan to open our first community to sales there later this year. Next, I want to touch on the backdrop of Q4. As expected, the homebuilding industry has returned to somewhat historical patterns and experienced relatively normal sales seasonality in the fourth quarter, although the volatility in the rate environment certainly added to the complexity. While the Fed cut rates in September and November, mortgage rates increased instead of decreasing after such actions, causing us to extend and expand our financial incentive commitments to our customers. With our focus on affordability, we secured 3,304 orders with an average monthly absorption of 3.9, slightly better than what we would have expected to achieve during the typical slower quarter. As a result of our 60-day closing commitment, which includes carrying inventory to a more advanced construction stage prior to releasing the home for sale, our backlog conversion rate was 177% this quarter, which generated 4,044 home deliveries and home closing revenue of $1.6 billion. Home closing gross margin was 23.2%, which, combined with SG&A leverage of 10.8%, resulted in diluted EPS of $4.72 for the fourth quarter of 2024. Now turning to slide four. Our sales orders for the fourth quarter were 3,304 homes with 91% of the volume coming from entry-level homes, which was up from 88% in the prior year. Orders were 14% higher year-over-year, due to an 8% increase in average sourcing pace, up from 3.6% per month in the fourth quarter of 2023 and a 5% increase in average communities. The cancellation rate this quarter was 10%. This low rate is partially due to the implementation of our move-in strategy, which shortens the timeline from sale to close and reduces buyer hesitation. ASP on orders this quarter of $400,000 was down 4% from the prior year due to a greater utilization of financing incentives, as well as product and geographic mix shift. With our focus on affordability, we have been and will continue to offer our financing incentives, including rate buydowns for as long as they are needed for us to maintain our sales pace and help buyers solve for an affordable payment. The fourth-quarter 2024 ending community count was 292, increasing 5% from 278 at September 30, 2024, and 8% from 270 at December 31, 2023. The count as of December 31, 2024 does not include any communities from the Elliott Homes acquisition. We spent the first couple of months post-acquisition starting homes in our Gulf Coast division and will release these homes for sale as soon as they are 60-days from completion. This quarter, 39 new communities came online, bringing our total full-year openings to 129. With our goal of 20,000 units by 2027, we anticipate a double-digit year-over-year increase in community count by the end of 2025. Before I cover our operational performance this quarter, I wanted to provide some high-level commentary on what we are seeing so far in Q1. Consistent with commentary from other builders so far, January started off a little slower, but we saw the return of demand in the back of the month and continue to feel comfortable that the upcoming spring selling season will be healthy, especially with the recent rollout of our national sales event. Moving to the regional level trends on slide five. The average absorption pace improved year-over-year across all of our regions in the fourth quarter of 2024. The central region, comprised of our Texas market, had the highest regional average absorption pace of 4.7 per month and a quarterly backlog conversion rate of over 200%. We have intentionally increased our complete speculative inventory in advance of the spring selling season in this region and believe we are well-positioned here. In the fourth quarter of 2024, the East region had an average absorption pace of 3.8 net sales per month and includes several of our startup divisions. Although we are experiencing more levels of retail in the Florida market, existing homes are not necessarily comparable to our ASPs, our offerings typically don't represent direct competition. The West region experienced a 10% year-over-year growth in average absorption pace to 3.3 net sales per month in Q4. While Colorado and Salt Lake City remain some of our more challenging markets due to affordability issues, we continue to see strength throughout the rest of the West region in Arizona and California. Looking to the balance of 2025, we believe favorable demographics for our product offering and undersupply of homes at our price point, along with stability in the job market, will drive solid housing demand for affordable homes at the right monthly payment, which aligns with our strategy. Now turning to slide six. Under our new strategy, we look at the total specs and backlog to assess our desired inventory levels. Most of the orders in the first four to six weeks of the quarter will become intra-quarter closings. We are comfortable with our approximate 8,600 spec and backlog units as of December 31, 2024, as we head into the spring of 2025. We started nearly 3,600 homes in the fourth quarter of 2024, which was down 6% sequentially. Since our cycle times are back to our historical averages, we can now align our spec starts more closely with sales. We had over 7,000 spec homes in inventory as of December 31, 2024, up 20% from 5,900 specs as of December 31, 2023. This represents a little more than 24 specs per community this quarter, which was on the upper end of our four to six-month supply target as we prepare for the higher spring selling season demand. As expected, we have been completing our specs to a later stage of construction prior to listing them for sale to ensure our customers can benefit from our 60-day closing ready commitment. As such, we increased the percentage of completed specs to 40% as of December 31, 2024. As we continue to execute on our new strategic shift, we will be reevaluating our optimal complete spec targets. Of our home closings this quarter, 98% came from previously started inventories, up from 92% in the prior year. With over 50% of this quarter's closing also sold within the quarter, our ending backlog intentionally declined from about 2,500 units as of December 31, 2023, to approximately 1,500 homes at December 31, 2024. We believe we are very near our stable point of spec count with our current backlog conversion case. I will now turn it over to Hilla to walk through our financial results.

Thank you, Phillippe. Let's turn to slide seven and cover our Q4 results in more detail. We generated $1.6 billion of home closing revenue this quarter, which was a 3% year-over-year decrease, but primarily resulted from 5% lower ASPs, offset by a 2% pickup in closing volumes to 4,044 units. The drop in ASP was a combination of great utilization of financing incentives, as well as product and geographic mix shift. While a greater percentage of our customers needed assistance with rates this quarter, the cost per home was lower compared to Q4 of 2023, but did increase sequentially from the third quarter of 2024, in line with the corresponding increases in mortgage rates. As we mentioned previously, we anticipate the use of financing incentives to remain elevated for the near future. Comp closing gross margin of 23.2% in the fourth quarter of 2024 was down 200 bps from 25.2% in the fourth quarter of 2023. Our 2024 margin reflects greater utilization of financing incentives and higher lot costs, which were partially offset by lower direct costs and shorter construction cycle times. We are still targeting a long-term gross margin of 22.5% to 23.5%. Breaking down the components of gross margin as land and development costs are still running above historical averages, we expect lot costs to remain elevated in 2025 and 2026. Conversely, we have been able to reduce direct costs on a per square foot basis each quarter since the beginning of 2023 due to a combination of our purchasing team's ongoing cost negotiations, the volume discounts from our increased production and the overall increased capacity in most supply chains. On a year-over-year basis, our margins reflect about 3% lower cost per square foot this quarter versus 2023. Our cycle times improved another five days from Q3 to Q4, and we are now at our target build time of an average of 120 calendar days, which is also driving gross margin savings. Going forward, maintaining the cycle time would allow us to turn our WIP inventory three times a year and keep a lower volume of specs on hand. And lastly, during the quarter, labor capacity remained consistent. Top of mind right now are tariffs and the immigration policy. We do not have any clarity at this point. But as an industry, we have experienced extreme supply chain constraints a couple of years back and are routinely dealt with labor shortages, especially over the past decade. For Meritage, our all-spec strategy has and will continue to allow us to pivot and offer a substitute if product availability or cost issues arise. We have been expanding our sourcing channels over the past several years, particularly since COVID, so we remain nimble and ready to adjust to any potential international trade implications. We are confident that our people and our strategy will help us successfully navigate any future headwinds. Turning back to the P&L, SG&A as a percentage of home closing revenue in the fourth quarter of 2024 was 10.8%, compared to 10.7% in the fourth quarter of 2023. While Q4 represents a 90 bps increase from Q3 this year, we are pleased that we were able to maintain our leverage relatively in line with last year on lower revenue and in a tougher selling environment, which showed an increase in external commission. Once the mortgage rates moved in the wrong direction this quarter, we intentionally adjusted commissions. They are commonly used selling tools in challenging markets and can be used interchangeably with higher marketing spend or greater utilization of incentives to drive sales. We are confident that our strong relationships with the broker community continue to be a differentiator for us, and we plan to use all available tools, including increased commissions or incentives to drive our desired orders volume. Full-year SG&A as a percentage of home closing revenue was 10.1%, fairly consistent with 2023, as higher commissions impacted the incremental leverage gained on higher revenue. Our long-term target for SG&A as a percentage of home closing revenue is 9.5% or better as we grow our markets and leverage our overhead platform. The fourth quarter's effective income tax rate was 22.1% this year, compared to 23.2% for the fourth quarter of 2023. Both periods benefited from energy tax credits on qualifying homes under the Inflation Reduction Act with some incremental qualifying homes in 2024 driving the tax savings. For 2025, the IRS implemented higher thresholds to achieve these tax credits, and we anticipate fewer of our homes will qualify. While we are not planning to eliminate or pull back on any of our energy-efficient offerings, we have elected not to add these new requirements to our homes. We do not believe that the incremental cost to earn energy tax credits will be viewed as value-accretive by our customers and will not meaningfully benefit our homes, especially as we continue to focus on affordability. We remain fully committed to building 100% energy-efficient homes going forward. Overall, lower home closing revenue and gross profit led to a 12% year-over-year decrease in fourth-quarter 2024 diluted EPS to $4.72 from $5.38 in 2023. I will add a little to Steve's comments about full-year 2024 results. As compared to 2023, orders were up 11%, closings were up 12%, and our home closing revenue increased 5% to $6.3 billion. Full-year 2024 home closing gross margin of 24.9% was slightly up from 24.8% for full-year 2023, due to lower direct costs and improved cycle times, which were partially offset by greater utilization of financing incentives and higher lot costs. Net earnings increased 6% to $786 million, and our diluted EPS totaled $21.44 for the year. Before we move on to the balance sheet, I wanted to cover our Q4 2024 customer credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages with FICO scores in the mid-730s and DTI around 41 to 42. LTVs were still in the mid-80s. On to slide eight. We maintained a healthy balance sheet at December 31, 2024, with nothing drawn on our credit facility and a net debt to cap of 11.7%. As we continue to grow our land position, our net debt to cap ceiling remains in the mid-20s range. We ended the year with $652 million in cash, compared to $921 million at December 31, 2023, as we increased our investments in real estate and also completed the Elliott acquisition this quarter. Our capital allocation in the fourth quarter of 2024 remains centered on investing in growth and returning cash to shareholders. This quarter, we spent about $742 million on land acquisition and development, which was up 13% from the prior year, inclusive of the Elliott acquisition. For full-year 2024, our land spend totaled $2.5 billion. We expect full-year land spend to be around $2.5 billion for the next several years. As we nearly tripled our quarterly cash dividend on a year-over-year basis to $0.75 per share in 2024 from $0.27 per share in 2023, our cash dividends totaled $27 million this quarter and about $109 million for full-year 2024. We spent $40 million to buy back nearly 220,000 shares in Q4, well above our $15 million systematic quarterly commitment. On a full-year basis, we spent nearly $126 million on share buybacks, repurchasing over 730,000 shares, or 2% of our shares outstanding at the beginning of the year. During the fourth quarter of 2024, our Board approved an additional $250 million in authorized share repurchases. And as of year-end, $309.1 million remains available to repurchase under the program. We returned a total of $235 million of cash to shareholders in 2024, a 138% increase year-over-year. And as we announced earlier this month, given our confidence in Meritage's long-term growth trajectory, subsequent to year-end, we completed a 2-for-1 stock split on January 2, 2025. In the fourth quarter of 2024, we secured and put about 14,400 net new lots under control. This included the approximately 5,500 lots we obtained through the acquisition. In the fourth quarter of 2023, we put just over 7,600 net new lots under control. As of December 31, 2024, we owned or control a total of about 85,600 lots, equating to a 5.5-year supply of 2024 closings, but fairly in line with four to five years of forward-looking 2025 demand. We also had nearly 33,500 lots that were still undergoing diligence at the end of the fourth quarter. As we accelerate our land acquisition to support our goal of 20,000 units in about three years' time, we are actively sourcing off-balance sheet land financing to ensure our balance sheet is not overburdened. About 62% of our lot inventory at December 31, 2024 was owned and 38% was optioned, compared to the prior year where we had a 72% owned inventory and a 28% owned lot position. Finally, I'll direct you to slide 10 for our guidance. Based on current market conditions, we are now guiding to full-year 2025 closings of 6,250 to 16,750 units and $6.6 billion to $6.9 billion in home closing revenue. We are projecting the following for Q1 2025: total closings between 3,200 and 3,500 units; home closing revenue of $1.26 billion to $1.40 billion; comp closing gross margin of around 22%; an effective tax rate of about 24%; and diluted EPS in the range of $1.59 to $1.83. With that, I'll turn it back over to Philippe.

Thank you, Hilla. To summarize on slide 11. Looking at our full-year 2024 results, we are proud of what we've been able to accomplish in a volatile market and attribute the success to our scale and strategic focus on delivering affordable move-in ready homes. As we look into the spring selling season, we will lean into pay-over-price and our new strategy to continue growing our market share and creating further long-term value for our shareholders. With that, I will now turn the call over to the operator for instructions on the Q&A.

Thank you. We'll now be conducting a question-and-answer session. And our first question today comes from the line of Michael Rehaut with JPMorgan. Please proceed with your questions.

Thank you for taking my questions. Good morning, everyone. I'd like to discuss the factors influencing the gross margin trajectory, particularly the significant role of incentives and the potential for further easing in the first quarter. How should we consider, assuming incentives stabilize in the first quarter, any other factors we might expect as we move through 2025 regarding lot costs or construction expenses? I'm also interested in how upcoming changes in community mix might affect the initial 22% starting point for the first quarter, assuming incentives remain steady.

Thanks for the question, Mike. I think overall this is just a function of the incentives. When we're closing and selling so many of our homes in the same quarter, the current market is what we're modeling. So it's primarily an incentive issue. Although, as Philippe mentioned, the slight pullback in demand in the first couple of weeks of January is causing us to model a slightly lower volume which, as you know, also impacts the margin. So this is just modeled on what we're seeing in the market today. There's definitely opportunity for improvement if the volume picks up or if we can pull back on the cost of financing incentives.

Okay, great. I'm curious about whether the current demand level will allow you to meet the full-year closings guidance, or if additional measures, such as increasing incentives, would be necessary to achieve that target. What assumptions are you considering for the market conditions when looking at the second to fourth quarter?

Yes. Thanks, Mike. This is Philippe. I think we feel very comfortable with our full-year closing guide based on current market conditions, which are getting better as we move through January. So we're optimistic that January was just a little bit slow for other reasons, and the spring selling season is starting to materialize in a way that makes more sense based on the current pattern. But I think we're still going to be relatively conservative given that we're operating in a 7% mortgage rate environment, and we're not expecting that to get any better. So we feel really comfortable that we can hit our number in that environment with the current incentive structure based on the current demand we're seeing. I'm optimistic actually that rates are going to hopefully settle down here and maybe get a little bit better. I think we can possibly recover in February and March and get back to a 17,000 number over time. We have the lots and the inventory and the communities to achieve 17,000 units, but we're just being conservative based on the 7% mortgage rate environment.

Great. Understood. Thanks for the color. Appreciate it.

Thank you. Our next question is from the line of Alan Ratner with Zelman & Associates. Please proceed with your question.

Hey, guys. Good morning. Nice job in a tough sales environment in the quarter. Phillippe, I think you kind of somewhat answered the question I had in your last comment about having the lots and the communities for 17,000 closings. But I guess I'll ask it a little bit differently in the sense of if I interpret your prior comments, I think that you have a fairly similar strategy as some other spec builders in that you're more volume-focused and price and margin are going to be a lever to achieve a certain closing number or volume target. With your margin at 22%, I guess my question is, is there a level where that shifts a little bit, where you lighten up a bit on the volume? Or are you willing to take that margin lower if need be to achieve that target?

Yes, great question. I don't know if the market is that elastic at a 7% rate environment. Based on what we're seeing today, we feel like achieving 4% to 4.5% net sales per store, at least 22% to 23% is probably the sweet spot for us and optimizes our land book. If rates get better, I think we can lower incentives and possibly get a little bit more. I would argue that if rates get better, we'll go after volume more aggressively. If rates get worse, we're just going to have to increase our incentives to achieve the same volume. So that's how we're kind of looking at it. We obviously would take lower margins if rates got worse, because we still got to maximize our pace. But if rates got better, I think we could get pace and margin at the same time.

I think you heard from several of our peers already, it's not a demand issue. There's definitely demand out there in the marketplace. It's an affordability issue. We're not going to cut margins to something that doesn't make sense, but we still have quite a bit of breathing room between where we are today and where we think we'll need to do considering we're already in a 7% interest rate. So I think that we're fairly comfortable that we'll be able to achieve the margins that we've set out there.

Perfect. That's helpful. And then as we just kind of think about the build-up to 20,000 closings to '27. So if we take the midpoint of your '25 guide, call it 5% growth, plus or minus, would seem to suggest you need to accelerate that to 10% annually in '26 and '27. Do you feel like you have the organic growth for that? Or is M&A a possibility or likelihood to contribute towards that?

Yes. I think with our acquisition of Elliott Homes and then the entry into Huntsville, we have more than enough of a market platform to get to 20,000 units by increasing our market share across our existing footprint. So really no M&A. We might buy land portfolios here and there, but no real company M&A in that strategy at 20,000 units. And we have all the land we need right now to achieve that growth in 2026 and 2027. We really are only buying land at this point to grow from '27 to '28. The land book's in place, and the community count's in place to get there in our existing footprint.

As we mentioned, we have about 86,000 lots owned and under control already and another 33,000 lots that we're working through diligence. So to Philippe's point, that 100,000-plus lots are already available if we want to pull the trigger.

I appreciate it. Thanks a lot.

Thank you.

Our next questions are from the line of John Lovallo with UBS. Please proceed with your questions.

Good morning, guys. Thank you for taking my questions as well. The first one is at the midpoint; the sales guide implies about 6.5% year-over-year growth. So if we think about SG&A and leverage, how are you thinking about the ability to get to 10% or below, sort of as you guys talked about in 2024?

Yes. I think our long-term goals for SG&A as we go from here to 20,000 units is to get to 9.5% or better. The path on the way there just kind of really depends on the market and what we're seeing with commissions. And then we're investing quite a bit in our new strategy. We have infrastructure that we have to put in place. We have IT and technology that we have to put in place. So we think we can operate at 10% or better on our way up to the 20,000 units. But the real goal is to set our business up to get to 9.5% or better at 20,000 units.

Understood. And then obviously there's a lot of concern about certain markets in terms of inventory, I mean, Texas being one of the more broader markets. I think Austin in particular, I mean, your performance there was really strong with absorption in Texas up 14%. Just curious if you could give us any color on what you're seeing across the major markets in Texas in terms of overall inventory and just demand, perhaps.

Yes, that's a great question. I’ll approach it in a few ways. Our absorption in Texas is currently the strongest in the company, indicating that the market remains very robust. We have excellent locations and communities at competitive price points, so we’re performing quite well. It’s more about specific submarkets rather than the entire market as a whole. There are certain areas in Austin, San Antonio, and even parts of Houston and Dallas that have experienced a bit more slowdown, primarily due to affordability compared to existing homes. However, there are also submarkets within that region that are thriving. Additionally, when we look at resale, it seems that it isn’t really coming back at our price point or product offering. Therefore, resale doesn’t directly compete with what we provide. Based on our research, although the resale market is returning to a more typical state, it doesn't pose significant competition to our offerings.

And just to state the obvious, they are paying the 7% on the retail for their mortgages, which is again why the new build space continues to have an advantage in today's interest rate environment.

Yes, all makes sense. Thank you, guys.

Thank you. Our next question is from the line of Trevor Allinson with Wolfe Research. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. First, we get a lot of questions from investors about homebuilder completed inventory levels. Clearly, your business model is designed to have more completed or near-completed inventory level so that you can up your 60-day guarantee. The comment we hear from investors is that in a slower market, completed inventory could perhaps be a little riskier from a price discounting perspective. Question is, do you share that view? And then if not, can you talk about why you disagree with that view?

Well, at the macro level, obviously, this is a supply and demand business. In my humble opinion, demand is still much stronger than the current supply markets, even with new homebuilders filling the gap that the existing home market currently isn't filling because of a lock-in effect. So I think currently, I don't share that view. I think we're still meeting the demand that's out there because the existing home market is not. Over the long term, when we look at Meritage Homes specifically, we don't offer anything else but completed inventory. So I think where discounting becomes part of the equation is when we offer something else. When all you offer is specs, you can't buy a build-to-order, and this is all we offer. There's not as much discounting that's required. But when you have a bunch of specs in the community and you offer build-to-order in that community, that's where we saw in the past downturns where discounting really happened. So we kind of view our product as very homogenous, and therefore, we're not feeling that over time we're going to have to discount our product more because we have more inventory. We're competing directly with the retail market. We're providing you a new home opportunity instead of buying a used home, and we don't feel like we'll have to discount that.

Yes, there are two ways to see the difference between speculative homes and non-speculative homes. The first is at the time of purchase. If you buy a speculative home, you would expect a discount if you miss the chance to customize it in the design studio. The second instance occurs when builders take back a home that was canceled after going through that process, which puts it at a disadvantage compared to existing homes. Both planned and unplanned speculative homes contribute to the margin gap for those offering both types. For us, when a home is canceled, we simply have an inventory home that we can sell quickly, so there’s no difference for us since there are no comparable options.

Yes. Makes a lot of sense. I appreciate that color. And then second question is on community count in 2025, talked about double-digit growth. How should we think about the cadence of that community count growth throughout the year? And does it skew more heavily to any one of your regions? Thanks.

Regionally, I need to review that and can follow up with you on a one-on-one call. I believe it's probably more pronounced in the South and Southeast than in other areas, but it's occurring everywhere. The growth trend began in Q2 and will continue from there. With Elliott Homes becoming operational, you can expect a noticeable increase starting in Q2 due to all the activity generated. Overall, growth will be steady across most regions, although it may lean slightly more towards the Southeast.

Thank you. Good luck moving forward.

Thank you. Our next question is from the line of Stephen Kim with Evercore. Please proceed with your question.

Yes, thanks a lot, guys. I appreciate all the color. I had to step off briefly, so I hope I don't repeat anything. But I guess my first question relates to your longer-term land strategy. Hilla, you had sort of hinted that there might be something innovative coming there. Just curious if you could give us any update. And I guess as a prompt, I've been hearing that you're looking into expanding your JVs. Some folks in the industry have been talking about a level of financing availability that's quite high, I've been hearing in the multi-billion-dollar range. And so I was curious if you could talk about what you're doing there and how we might see that affect your overall land holdings and inventory balance in the next, let's say, two to three years?

Thanks for the question, Stephen. And your little birdies telling you what's out there are correct. We actually have signed our first relationship with a partner on a joint venture structure that will allow us to finance land, particularly in California, in a significantly more efficient manner. As everyone is aware, California is a fantastic place to buy land, but it's also one of the most difficult parts of the country to get that land ready to go vertical. So we have a partner who is extremely well versed with California land development, who is providing financing for some off-balance sheet structures for us. So you'll definitely see an increase of off-balance sheet usage for us, particularly in California. The structure is a little bit different than a traditional land bank, and we're not going to get into the minutiae of details on here, but it provides a healthy return for both parties in a way that's slightly more accretive than a traditional land bank structure. So we're going to give it a shot. We're going to roll with it for a little while, see how it works. We've already put a couple of deals into this venture, so we're already up and running. And then based on the success, which we expect to be fantastic, we'll see how we can roll something similar throughout the rest of the country.

Yes. I think this is Philippe, and I'll just add that the opportunity we see at Meritage Homes involves some larger, longer-term deals across the country. The longer-term projects in California, due to the regulatory environment, can drive significant capital efficiency if we place them in a joint venture structure. Typically, these larger deals have more margin, which presents an opportunity to partner with a joint venture and compensate them while still maintaining our usual homebuilding margins.

That's great to hear. I'm really interested to see how that develops. Concerning your operating margin, I appreciate you addressing and sharing the long-term sustainable levels you foresee for gross margin and SG&A. I was impressed to find that they are essentially the same as what you indicated about six to seven months ago, which I find encouraging. However, I recognize that the topic of long-term sustainable margins is a significant discussion point for investors. Many believe that operating margins will return to the high-single digits, while your perspective seems quite different. I would love for you to elaborate on the noticeable decline in profitability we've witnessed within the builders' community over the past six to seven months and why that doesn’t alter your outlook on longer-term sustainable margins. This clarification would greatly benefit investor understanding.

Yes. Thanks for the question, Steve. I think at the start of this, I'll just say it all starts with how we buy land. So we bought 14,000 lots here in the last quarter. We're up to 85,000 lots from 60,000 lots. And as we look at those lots, although land has certainly gotten more expensive, we haven't had to compromise our long-term underwriting and what the margin profile can be on that land based on our current operational structure. Now clearly, we're operating in an elevated incentive environment right now, but that is largely driven by the 7% interest rates. That's really what's impacting the last two quarters of margin. If those elevated incentive rates weren't running, we'd be well above our structural long-term. And once again, we're not having any issue finding land across our geographic footprint to support the long-term margins or better that we see going forward. Now if rates stay elevated for the next five years when we bring all that land into the market and we have to continue operating in this elevated incentive environment, but they could be lower like they are right now, but long-term, in a normal rate environment, we feel very good about our long-term prospects given the land that we're buying.

I would say that the margins we are reporting for Q1 reflect the current market conditions. Additionally, based on our unit guidance, we expect this to be a low-volume quarter with a midpoint target of 16.5. If conditions remain stable for the rest of the year, we anticipate an improvement in margins simply from increased volume. Therefore, you should see a return to long-term margin levels by the end of the year, even in this challenging environment.

We delivered for the full year 2024 north of 24% margins, and that was in a very competitive interest rate environment where consumers were going through some bit of shock. And really Q3 and Q4 was the impact of that, but we still achieved well above our long-term targets. So I think we feel really comfortable based on our cost structure, our ability to drive efficiencies in this new operating model that we're going to be right where we need to be long-term.

I appreciate everyone's time and attention, but I would say that we're optimistic as we head into 2025, because unprecedented housing demand remains strong. With rates stabilizing, we believe we will see an improvement in the marketplace, thereby allowing us to capitalize on our growth strategy. Thank you, everyone.

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. Goodbye. This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.