Earnings Call Transcript - MTH Q1 2026

Operator, Operator

Greetings, and welcome to the First Quarter 2026 Meritage Homes Analyst Call. Please be advised that today's conference is being recorded. I would now turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead.

Emily Tadano, VP, Investor Relations and External Communications

Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. 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 2025 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve?

Steven Hilton, Executive Chairman

Thank you, Emily, and welcome to everyone joining today's call. Today, I'll begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we are cautiously optimistic that lower interest rates and tenant demand will translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks into the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost days of sales, military operations in Iran commenced at the end of February, increasing interest rates, gas prices and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled 3,664, 5% below last year's first quarter as our slower absorption pace was almost fully offset by our increasing community count. While we still believe the long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher-than-anticipated use of incentives. Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with an exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31, 2026, our book value per share increased 6% year-over-year. And with that, I'll now turn it over to Phillippe.

Phillippe Lord, CEO

Thank you, Steve. Given the current environment in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities which we then grew to 345 by March 31, another company record. In the near term, we expect total volume and top line results will largely be driven by increased community count, not higher per-store absorptions. Our first quarter 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31, 2025, and up 3% sequentially compared to 336 at December 31, 2025. During the quarter, we brought on 40 new communities throughout all of our regions. We reiterate our expectations of 5% to 10% full year community count growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that you've mentioned, we believe that long-term demand remains supported by favorable demographics and undersupply of affordable homes in the U.S. and when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.40 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to Slide 4. First quarter 2026 orders were 5% lower year-over-year, primarily due to an 18% decline in average store pace, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid- to high-teens as we benefit from a quick sale-to-close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue 4 net sales per month where community level market dynamics would not support it. While over the long term, we strive to be a 4 net sales per month in all markets as we believe we best leverage our fixed cost at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive conditions, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts as well as geographical mix shifting from the higher-ASP West region into the lower-ASP East region. We saw a nice uptick in March. It wasn't quite as strong as a typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on Slide 5. As always, sales performance was driven by local market conditions in the first quarter. All markets require additional incentives; in some markets such as Dallas, Houston and Phoenix, consumer demand is comparatively more elastic where incremental volume is achievable with only small incremental incentives. Other markets such as Austin, parts of Florida and Charlotte continue to be tougher selling environments. Turning to Slide 6. We've been rightsizing our start pace, and we have inventory to align with our faster cycle times. We maintained a sub-110 calendar day construction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated starts to approximately 2,500 homes, 30% less than last year's Q1 and 6% lower than Q4. We traditionally align our start pace with our sales pace, but due to faster cycle times and the need to work through inventory in certain locations, we reduced our start pace this quarter. We expect our go-forward start pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year-over-year from approximately 2,000 homes as of March 31, 2025, to approximately 1,900 homes as of March 31, 2026. We reiterate our long-term backlog conversion target of 175% to 200% with respect to carrying fewer finished specs in the future. Internally, we look at our inventory as a combined total of specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy 6 quarters ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 9% sequentially from Q4. The 14 specs per store this quarter was a significant decrease — the lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under 4 months of inventory, intentionally at the low end of our target of 4 to 6 months supply of specs due to the slower demand expectations and improved cycle times. Comparatively, in the first quarter of 2025, we had 23 specs per store or 5 months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the fourth quarter of 2025, still above our target of approximately one-third complete specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results.

Hilla Sferruzza, Executive Vice President and CFO

Thank you, Phillippe. Let's turn to Slide 7 and cover our Q1 results in more detail. First quarter 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting a tougher demand environment this quarter. As Phillippe noted, with nearly 70% of closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L, while our closings and revenue reflect our intentional decision to limit incremental incentives and focus on both margin and pace. Overall ASP and closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. Our closing gross margin of 17.5% for the quarter was 400 basis points lower than prior year's 22% as a result of the increased use of incentives, higher lot costs and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense and faster cycle times. First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairment and $1.4 million in terminated land deal walkaway charges compared to no impairment and $1.4 million in terminated land deal walkaway charges in the prior year, coupled with about 20 basis points from lost leverage on lower-than-anticipated closing revenue. These impairments also impacted margins by about 30 basis points. Our current land basis is primarily from 2022 through 2024 and will continue to negatively impact margins in 2026. Based on what we're seeing in the market today, we expect some margin relief will start at the tail end of 2027, due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per square foot on a year-over-year basis as we were able to flow through to the income statement the lower costs from our extensive vendor negotiations. However, lumber costs have started to trend higher this quarter, and as a result of the Iran conflict, we are monitoring any potential long-term inflationary impact on oil prices. Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in the first quarter of 2026 was 11.8% compared to 11.3% for the first quarter of 2025 despite curtailing discretionary spend. Although SG&A dollars declined year-over-year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key driver to our success. Our broker relationships remain strong with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year-over-year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year compared to 23.3% for the first quarter of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credit was significantly reduced starting in 2025 when the higher construction threshold went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before I move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain consistent with our historical averages. Despite market volatility, we haven't seen much movement in these metrics over the last year or two, validating our belief the hesitation in the market is at least partially a psychological decision versus a purely financial one. On to Slide 8. Our balance sheet remains healthy at March 31, 2026, with cash of $767 million, nothing drawn under our credit facility and a net debt-to-capital of 17.4%. As a reminder, the ceiling for net debt-to-capital ratio remains in the mid-20% range. As we've been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter or 2.7% of shares outstanding at the beginning of the year for $130 million, nearly 3x more than Q1 of 2025 as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value. With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buy back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shifts. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For the first quarter of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide 9. In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31, 2026, we owned or controlled a total of about 75,500 lots, equating to a 5.2-year supply based on the last 12 months' closings. In today's market conditions, we believe that this is the right amount of year supply of lots to meet our growth targets. We also had approximately 14,600 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31, 2026 was owned and 30% options compared to the prior year, where we had a 62% owned inventory and a 38% option lot position. As we shift more land off balance sheet, we are doing so very slowly and cautiously remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional costs as we do not believe that all or most land today belongs off book. While we have set 40% as an initial off-book target, our actual percentage will be determined higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I'll direct you to Slide 10. Based on current market conditions, we are updating our guidance for full year 2026 on closing volume and revenue to be at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, home closing gross margin around 18%, an effective tax rate of 24.5% to 25% and diluted EPS in the range of $1.18 to $1.46. With that, I'll turn it back over to Phillippe.

Phillippe Lord, CEO

Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it's worth reinforcing what sets Meritage apart. We are a top 5 homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differs from peers and is anchored on three tenets: our 60-day closing guarantee, move-in ready inventory and strong realtor engagement. Together, who we are and how we operate give us a competitive advantage in the move-in-ready space to provide homebuyers certainty and consistency. Amid today's market backdrop, our priorities are centered on balance sheet strength and disciplined capital allocation. We are maintaining a plan to keep certain construction land deals off balance sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. As we execute our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage is well positioned to capture incremental market share as demand conditions improve and normalize and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Operator, Operator

We'll take our first question from Trevor Allinson with Wolfe Research.

Trevor Allinson, Analyst, Wolfe Research

First one is on your spec count, which you noted a little lower than in several years. I think we've heard other builders talk about a reduction in specs across the industry helping take some pressure off of margins here. So appreciating you guys operate a spec model. Are you seeing both your lower spec count and also kind of industry lower spec count ease the market pressure here? And is that something you expect to support margins moving forward even if demand remains choppy?

Phillippe Lord, CEO

Yes, Trevor. I think that's absolutely the condition we're seeing. A lot of builders are either pivoting away from carrying as much finished inventory as they did before during COVID and the supply chain environment, and they're moving to reduce finished inventory, selling homes earlier in the cycle. And then some folks are pivoting more to a builder-purchase-option model, which is clearing out a lot of inventory in the market. So I think we saw across all of our markets less finished inventory that we were competing with and we're optimistic as we move throughout the year that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build specs and carry them to a later stage.

Trevor Allinson, Analyst, Wolfe Research

Okay. That's really very helpful. And then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land bankers versus more traditional land options or other structures? And then any detail on how those agreements are structured with an eye on your ability to walk away? And then just generally, your view on use of land bankers moving forward for your off-balance sheet needs.

Hilla Sferruzza, Executive Vice President and CFO

Yes, I can take that one. So about 38% of our total inventory control is off book. Of that, about one-third is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don't cross-collateralize. So we always have the ability, if any deal goes sideways, to walk away from that deal without additional cross-collateral implications that would make us stay in a transaction that doesn't structurally or financially work any longer. So we're very cautious from that perspective. The only thing at risk for us would be the deposit and any other ancillary costs.

Phillippe Lord, CEO

And the only thing I would add is, as Hilla said, it's a very small percentage with true lot financing. But because it's not cross-collateralized, working through those deals on a one-by-one basis is much easier. We have had some scenarios where we've gone back to our land bank finance partners and asked for some more time to stabilize the market, stabilize our inventory levels. Again, working on one deal at a time creates more opportunity to do so.

Hilla Sferruzza, Executive Vice President and CFO

And I think we addressed this in our prepared remarks, because we're very selective at the get-go as to what deals even go off book; they typically have a little bit of breathing room on the margin versus having arbitrary targets where we're forcing deals off book to hit a percentage. So for us, the ability to work with our off-book partners is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them.

Operator, Operator

Our next question comes from Stephen Kim with Evercore ISI.

Stephen Kim, Analyst, Evercore ISI

If I could follow up on the land bank question. Can you give us a sense for roughly what percent of your land bank deals you've been extending your takedown schedules? And am I right in thinking that in a typical land bank deal, if any individual land bank deals to extend, let's say, 6 months, that might drive roughly 100 basis points lower gross margin on the remaining lots versus the initial expected lot price?

Phillippe Lord, CEO

Thanks, Stephen. So first, we have such a small percentage of our land book in land banker lot financing. So even when you look at what percent of our deals required us to restructure— and when I say restructure, maybe we needed a quarter delay in the next takedown to manage inventory or stabilize margins—that was very small as well. Most of our deals are performing fine. We're continuing to take takedowns, and we're moving through the inventory as we planned. As far as your other question, I think it's a little bit of an oversimplification. It really depends on the deal, how many lots are buying per quarter and the structure of the deal. In some cases, I think some land bankers are willing to actually give you a takedown with no carry cost just to keep you in the deal rather than taking back the lots and owning the loss. So it's hard to give a single-number answer; it depends on your relationship and the deal. Hilla, do you want to add anything?

Hilla Sferruzza, Executive Vice President and CFO

Yes. I mean, it depends what part of the cycle and how many assets you still have on book, part of that math and, of course, what your interest rate is. But for us, bad things don't get better with age. So if we're asking for a delay, it's typically for us to rework a product lineup or to value engineer something—we're not just holding and crossing our fingers and thinking something arbitrary is going to get better in three to six months. Again, that's kind of the point of being very selective as to what deals you're putting in an off-book structure in the first place. If you can't work a freebie, it's typically going to cost you whatever your interest burden is for that six-month hold. So yes, there needs to be an implication, but 100 basis points is a little heavy as a general rule.

Stephen Kim, Analyst, Evercore ISI

Okay. Appreciate that. Yes. And I also appreciate your comments about how there's a human component to this. It's not all just simply math. I think that's an important point to make. If I could also talk about your long-term gross margin target of 22.5% to 23.5%, which obviously is where you weren't that long ago and is something that's quite above where you are currently. You've talked in the past, Hilla, about the importance of volume in achieving your level of gross margin. And so am I right to assume that that long-term target is consistent with at least 4 per community absorption rate? Or do you think there's an opportunity to hit that gross margin level long term with a lower level of absorptions than you had envisioned in the past?

Phillippe Lord, CEO

I'll take part of that question. I think it's a lot easier to get to our long-term goal around 22.5% at 4 net sales per month. We're much more efficient at that level — we leverage our fixed and variable overhead much more meaningfully. We're able to navigate the vertical cost environment more effectively. So the path at 4 net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in direct margin, which you might be able to hold on to by improving direct margins at a slower pace. So there is a path at 3.5 per month versus 4, if you will, but the 4 net-sales-per-month scenario is the most straightforward way to reach our long-term margin target.

Hilla Sferruzza, Executive Vice President and CFO

Yes. Phillippe is exactly right. There are two components. The first is just absolute volume and the second is volume per store. We're much more efficient at 4-plus. So we definitely want that because costs at the local store level—the superintendent and the cost of running that location—are leveraged better, but there's also costs at the division level that get better leverage with higher volume. We think that there is an opportunity for both. Right now, the opportunity for us is at a higher store count. So hopefully, you'll see that improvement just between Q1 and Q2; the volume that we are guiding to on closings in Q2 is nicer than where we are today, and we guide to a higher margin than where we ended the quarter and part of that is going to be the incremental leverage. But once we get back to that four net sales per month average, there is another bump for us on incremental leverage above that.

Phillippe Lord, CEO

And we see our path from where we are to where we want to go both this year and in future years is really driven by the following things: the volume, we have the higher store count so we think we can get incremental volume; less inventory in the market to compete with, so a stronger pricing backdrop; and then reducing our incentives over time. A lot of the incentives that are currently in the market are psychological. We're trying to convince folks that it's a good time to buy—it's part of affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, we can see a path there.

Operator, Operator

Our next question comes from Alan Ratner with Selman.

Alan Ratner, Analyst, Selman

First question on the margin guide. I was pleasantly surprised to see that you expect to hold margins roughly steady quarter-over-quarter. I would have thought given what we're hearing from other builders and the macro environment that there might have been some additional pressure there, at least flowing through in Q2. It sounds like some of that is top-line leverage, but I'm curious if now that you've reset some of the absorption goals at least for the near term, whether the 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today.

Phillippe Lord, CEO

Yes. A lot of good questions in there. I do think that there's a couple of things that feel like it's forming a potential floor. Now, this is, again, dependent on geopolitics and other factors out of our control that can impact this. But in the industry, we see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there's less inventory out there, consumers feel a little more urgency than when there's a lot out there. So I think that is helpful. I think the volume is critical. We have the highest community count we've ever had. We're projecting more community count growth through the rest of this year. Even at these slower absorption paces, we think we can get there without having to give up more margin to get there. So we're optimistic about that. And then look, in the beginning of Q1, we actually started feeling better about things—February was okay. The war in Iran caused people to take a step back in certain markets, but March was pretty good. So we started feeling like we had some stability and predictability in the market. It's just really hard to tell every week whether that's going to be maintained. But I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we've opened and the opportunity those give us to gain volume throughout the year.

Hilla Sferruzza, Executive Vice President and CFO

Two other points on margin, Alan. First, as we continue to improve our direct costs and work through our finished spec inventory, you're going to start to see even better direct costs coming through. That's a benefit you'll see starting in Q2 and continuing through the latter part of the year. All new communities are built with the new cost structure, so the more volume we have from those, the better that piece is. And then just doing the math, if you look at our closings this quarter and what we're guiding to for next quarter, the back half of the year is going to be higher volume at our current projections, even at the low end of the full year guidance we provided. So that leveraging component is going to have an even more material impact for us through the back half of the year.

Alan Ratner, Analyst, Selman

Great. Second question: I know you don't give specific cash flow guidance, but the last couple of years cash has been a drag as you've been ramping spec supply and gearing up for significant community count growth. It feels like both of those are hitting an inflection point here where spec inventory is coming down a little and community count is still going up but not at the same rate. Pretty strong cash flow in the first quarter, at least seasonally. Can you give color on where you expect cash flow to shake out for the year? Are we past the biggest burn period and maybe cash should start to improve even if earnings are under pressure year-over-year?

Hilla Sferruzza, Executive Vice President and CFO

We don't have specific cash flow guidance, but the discipline to get down to 14 specs per store is an incredible effort by the team, especially if you think that just a year ago we were at 23 specs per store. That's relieved a lot of cash. That measured approach on land development while increasing shareholder returns has let us hold steady. Because we have faster cycle times and we're timing starts with sales pace, you shouldn't see something too detrimental occur on cash flows. Our cash position is a good place for us given the size of the balance sheet. So you'll see more measured cash utilization as we're bringing stores online, but a lot of the spend has already been incurred. We're monitoring WIP units and the stick-built costs that we're spending before we close the homes.

Operator, Operator

Our next question comes from Michael Rehaut with JPMorgan.

Michael Rehaut, Analyst, JPMorgan

I wanted to start with broader thoughts around the demand backdrop. So far this earnings season, we've heard slightly different narratives. Some builders say trends are stabilizing and incentives are stabilizing while others highlight ongoing choppiness. You've highlighted choppiness across your footprint despite March being a bit stronger. I was hoping to get a sense if you are generally cautious — is it certain markets you're exposed to? You highlighted parts of Florida, Charlotte, Austin; is it a price point issue or the fact that you're more in the spec area where there's inherently more competition? Just trying to reconcile where you are within the industry and how that relates to your commentary.

Phillippe Lord, CEO

You kind of answered your own question in some ways, but I'll expand. We're more cautious than optimistic at the moment. Our buyer profile seems to lack the confidence that other buyer profiles might have; they're more stressed from an affordability standpoint and cost of living. So procuring those sales is more challenging, which makes us cautious. Also, our footprint is primarily in Sunbelt states where prices stretched the most over the last five years and affordability was most challenged. There's higher levels of inventory we compete with and many entry-level builders operating in our space. For all those reasons — buyer profile and geography — we feel cautious right now.

Michael Rehaut, Analyst, JPMorgan

Understood. Secondly, you reiterated your outlook for this year and you still have strong community-count growth in 2026. How should we think about 2027 and 2028 given your current land position, particularly since volumes are a big driver of leverage and you may be less confident near-term about absorption improvements? How should we think about community count growth over the next two to three years?

Phillippe Lord, CEO

Great question. I feel really good about 2027. We will have 5% to 10% community count growth this year over last year. I think we'll be able to hold or grow that incrementally in 2027, though it's hard to pin down exacts until schedules are dialed in. We are phasing developments more slowly and rationalizing new land, so we'll see how the back half of this year plays out. For 2028, it's farther out; we have 75,000 lots, so we have the ability to grow into 2028 as well. We're being conservative on new land deals. Land prices have stabilized or come down in some places and terms are better, but underwriting remains challenging in the current incentive environment. We've been slow to ramp up new land acquisition, but we have enough land to get where we need to go and we can selectively add if necessary.

Hilla Sferruzza, Executive Vice President and CFO

The goal is not to shrink. We have the ability to maintain or grow and we'll take our cues from the market.

Operator, Operator

Our next question comes from Susan Maklari with Goldman Sachs.

Susan Maklari, Analyst, Goldman Sachs

My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers even though they are seeing more caution in the market and how that came through in the low cancellation rate this quarter?

Phillippe Lord, CEO

It's really low, Susan. Until it rises, we're not seeing tension from it. A lot of cancellations are due to buyers stepping away because they feel it's not a good time, but the number is very low because we have such a quick sales-to-close process with our 60-day closing guarantee and move-in-ready homes. When people can imagine moving into the house within 60 days, they start planning their lives. So the cancellation rate is extremely low and we expect it to remain that way given our strategy.

Hilla Sferruzza, Executive Vice President and CFO

Everything Phillippe said is spot on. The amount of time between contract execution and closing is so short that buyers simply don't have time to rethink and tour other homes that might convince them away from the commitment they've already made. Even though our commitment is 60 days, the actual execution is often faster than that — at a 254% backlog conversion, we're getting folks from sale to move-in in well under 60 days. Cancellations that do occur are typically events outside the home purchase — something in their financial position or personal life — not because they had time to shop other homes.

Susan Maklari, Analyst, Goldman Sachs

That is helpful. My second question is on SG&A. You mentioned there was some lost leverage this quarter. As you think about the back half of this year, how do you expect that to come through to SG&A? And as we think over time, can you talk a bit more about the back-office automation and other savings you're implementing?

Hilla Sferruzza, Executive Vice President and CFO

Typically Q1 is our high watermark for SG&A; we have certain retirement and compensation triggers that disproportionately skew expenses into the first quarter. Based on our full year guidance for closings, Q1 was the lowest volume quarter, so you should see an improvement in SG&A leverage for the balance of the year. Regarding back-office automation, a lot of homebuilding still involves taking one piece of paper and typing it into another system — closing documents, title or escrow information, mortgage documents. We're finding ways for AI and technology to interpret documents and auto-feed data into our systems, which will drive efficiencies and is part of the path to our 9.5% SG&A target. Those benefits are more meaningful at higher volumes since they reduce manual work, improve accuracy and reduce rework. We also have customer-facing initiatives coming that will further drive SG&A leverage and enhance the customer experience. Stay tuned for some announcements from our sales and marketing teams.

Operator, Operator

Our next question comes from John Lovallo with UBS.

John Lovallo, Analyst, UBS

So you opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption given higher levels of interest and wait lists. Did you experience higher absorption in these new communities and how many more communities should we expect as we move through the year?

Phillippe Lord, CEO

Thanks, John. Most of the communities we opened in Q1 opened late in the quarter. They met or exceeded our expectations; they didn't underperform. Q2 will tell us more about whether they're hitting their stride, but they are in very good locations with strong positioning, margins and pricing. As we said in the script, we expect 5% to 10% community count growth year-over-year, so you can expect a little more in the back half of this year to reach that target.

John Lovallo, Analyst, UBS

Okay. That's helpful. And then in the prepared remarks and press release, you called out storm impact in the first quarter. Were those deliveries captured in the quarter or do you expect them to be captured in the second quarter? Any way to quantify the number of units?

Phillippe Lord, CEO

January was softer than we thought and the primary reason was the winter storm affecting multiple markets. Mobility was impacted so we didn't see the traffic we'd expected toward the end of January. As you can see from our results, we missed our internal expectations and we think the storm is a key reason. If we had closed an extra 200 to 300 homes, we'd have been closer to plan. Those buyers are often pushed out and will close in subsequent months into Q2. Our business is just-in-time, so whether we captured that buyer or not, it can happen next month or the month after. The lost days of sale in January were not fully recaptured in February or March.

Hilla Sferruzza, Executive Vice President and CFO

Yes. There were lost days of sale — you don't typically double up when stores reopen and capture two days of sale in one day. There were three, four, five lost days of sale in a large portion of our markets in January. We tried to accelerate activity, but consumer confidence also softened with higher inflation and interest rates and higher gas prices. We view those as true lost days; we're working to catch up and you can see that in our healthier Q2 projections relative to Q1.

Operator, Operator

Our next question comes from Jay McCanless with Citizens.

Jay McCanless, Analyst, Citizens

First question: Hilla, in the script you talked about land vintages mostly being 2022 to 2024. How much of either total lots or owned lots are in that vintage range?

Hilla Sferruzza, Executive Vice President and CFO

That's pretty granular and we're not providing that breakout. We always have some long-term communities in later phases and newer communities in earlier phases. Community sizes tend to be between 100 and 150 lots and with an absorption around 3.5 to 4.5 net sales per month you can estimate how quickly we burn through them. The main comment was to explain why lot costs are running a little hotter currently. We expect that pressure to begin to ease by the end of 2027.

Jay McCanless, Analyst, Citizens

Second question on the West segment: a fifth quarter in a row orders were down year-over-year and community count is mid-80s. What's the near-term strategy? Are there older communities you need to sell through before you can start to grow there again?

Phillippe Lord, CEO

The West region — California, Colorado and Utah — has been more challenged. The narrative in Denver and parts of Northern California is clear; affordability has been under a lot of pressure. Arizona has been varied, with some strong pockets. Land prices in the West are sticky, regulatory hurdles are higher and affordability is constrained. We're intentionally reallocating a significant part of our business to the East of the West region. That doesn't mean we've abandoned those markets — the land is valuable and irreplaceable — but we're willing to run the West region at a slower pace to maximize margin. You'll continue to see the West region be a smaller part of our business long term.

Jay McCanless, Analyst, Citizens

If I could sneak one more in: Any sense for when you think external finished-spec inventories will be down to a level that gives you better pricing power? Time horizon, say 12 to 18 months?

Phillippe Lord, CEO

The builder group has done a good job navigating aged inventory; there's still some overhang, including some finished specs. I already feel better going into Q2 that the environment is less competitive, but I think there's still more to go. I can see a much different competitive inventory environment as we work through the rest of this year and into 2027. Also, the industry pivot away from finished specs in general is helpful for us since specs and move-in-ready inventory are our business — less competition there is a tailwind for our product.

Operator, Operator

And our final question comes from Jason Sabshon on for Jade Rahmani with KBW.

Jason Sabshon, Analyst, KBW (on for Jade Rahmani)

I wanted to ask about AI. Across various surveys, the construction industry ranks quite low in terms of expected AI impact. You commented on deployment opportunities in back-office automation and customer acquisition. Are you seeing any other areas where AI could make a difference, such as supply chain management or construction management?

Hilla Sferruzza, Executive Vice President and CFO

AI will have a place across all functions. We're starting with low-hanging fruit and learning from early deployments. The savings opportunities on the cost side are massive when you think holistically about your data and the ability to automate workflows. Once you manage your data in a warehouse and apply AI consistently, there's no limit to the functional areas that can benefit — procurement, supply chain, construction management, scheduling, risk detection, warranty management, and more. But we'll crawl, walk, run — take the easy steps first and then expand.

Jason Sabshon, Analyst, KBW (on for Jade Rahmani)

Got it. And final question: Is there a certain level of mortgage rates where you'd expect an inflection in buyer activity?

Phillippe Lord, CEO

Good question. We think buyer psychology tends to change around 6% mortgage rates or slightly below 6%. Anything below that heading toward 5% would likely unleash demand because of the affordability impact. So roughly 6% is a key psychological threshold for us; lower rates create more tailwind for the industry. 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 the day and a great weekend. Thank you.

Operator, Operator

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