MTH - Meritage Homes reports record fourth quarter 2020 results including a 420 bps increase in home closing gross margin 50% increase in diluted EPS and 52% increase in orders over prior year

SCOTTSDALE, Ariz., Jan. 27, 2021 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, today announced fourth quarter and full year results for the periods ended December 31, 2020.

Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)

MANAGEMENT COMMENTS

“Meritage Homes achieved another record quarter, capping off a full year of outperformance in 2020. While managing the safety, health, and welfare of our employees, customers, and trade partners amidst the pandemic, we still produced our all-time largest annual volume of sales orders and home closings," said Steven J. Hilton, executive chairman of Meritage Homes. "In the fourth quarter, we continued the momentum we achieved earlier in the year by delivering our highest quarterly home closings and revenue in our Company's history. The housing market remained robust during a traditionally quiet time of year, and with a strategic focus on entry-level and first move-up markets, Meritage capitalized on the significant demand by growing volume, driving profitability, and improving return on equity."

“Our sales orders of 3,174 homes for this quarter were 52% higher than the fourth quarter of 2019," Phillippe Lord, chief executive officer of Meritage Homes, commented. "Quarterly closings of 3,744 homes represented 914 additional units, compared to the same quarter of the prior year. Home closing revenue of $1.4 billion in the current quarter, combined with our best quarterly home closing gross margin since 2006 of 24.0%, resulted in diluted earnings per share of $3.97 for the fourth quarter."

Mr. Lord added, “The sustained strength in market demand largely stems from historically low mortgage interest rates, a shortage of new and existing homes for sale, and increased demand for healthier, safer homes that are affordable. Meritage continues to deliver what customers want: quick move-in homes that match their style, budget, and timeline. For entry-level buyers, our just-in-time inventory of LiVE.NOW. ^® homes makes the dream of home ownership an immediate reality. For first move-up buyers, our streamlined Design Collections at Studio M ^® Design Centers enable customers to style their home efficiently through a stress-free experience.

“In the fourth quarter of 2020, we aggressively secured new land positions to replace communities as they close out and to expand our community count over the coming years. We invested $506 million in land acquisition and development and put approximately 11,200 new lots under control, a quarterly record," he remarked. "We secured nearly 29,500 gross new lots in 2020, a 63% increase as compared to about 18,000 gross new lots in 2019. Adjusting for land sales and terminations, we secured more than 27,200 net new lots in 2020, a 60% increase year-over-year. We believe our strong land portfolio strategically sets us up for long-term growth, as we continue to make progress toward our goal of 300 communities by mid-2022."

Mr. Lord concluded, "We are entering 2021 with a heavy backlog of almost 4,700 sold homes and more than 2,500 specs completed or under construction, giving us some additional visibility into 2021. For the full year 2021, we are projecting 11,500-12,500 home closings with home closing revenue between $4.2-4.6 billion, home closing gross margin of 22.0-23.0% and an effective tax rate of about 23.0%. At this volume, we expect to close out 2021 with approximately 235-245 communities and to realize diluted EPS in the range of $10.50-11.50.”

FOURTH QUARTER RESULTS

• Total orders for the fourth quarter of 2020 were 52% higher year-over-year, driven by an 87% increase in absorptions per store that was largely due to general market strength, as well as strong demand for Meritage’s entry-level homes which sell at a higher pace than first move-up homes. Entry-level represented almost 72% of fourth quarter 2020 orders, compared to 55% in the same quarter of 2019. Higher absorptions across all of Meritage's markets offset a 19% year-over-year decline in average community count for the fourth quarter, resulting from early close-outs of communities in 2020. Fourth quarter absorptions nearly doubled to 5.3 per month, compared to 2.8 per month in the prior year. Year-over-year absorptions were up 118% in the East region, 83% in the Central region, and 65% in the West region, with significant increases across all states led by South Carolina with 246%.
• The 28% increase in home closing revenue to $1.4 billion for the quarter reflected 32% higher home closing volume, partially offset by a 4% reduction in average sales price ("ASP") on closings due to the strategic shift in product mix toward affordable entry-level homes, as compared to the same quarter of 2019. ASPs also reflect pricing increases throughout 2020 due to strong market demand.
• Home closing gross margin improved 420 bps to 24.0% in the fourth quarter of 2020 from 19.8% in the prior year. Higher ASPs, additional home closing volume and efficiencies gained from streamlined operations more than offset high lumber costs in 2020, and all contributed to a 54% year-over-year increase in home closing gross profit to $337.8 million for the current quarter.
• Selling, general and administrative ("SG&A") expenses as a percentage of fourth quarter 2020 home closing revenue of 9.3% improved 80 bps from 10.1% in the fourth quarter of 2019, due to greater overhead leverage and cost savings achieved from technology enhancements, particularly as related to the Company's sales and marketing efforts.
• The fourth quarter effective income tax rate was 21.9% in 2020 compared to 6.3% in the prior year. In 2019, the extension of the eligible energy tax credits on qualifying energy-efficient homes occurred in December, resulting in the beneficial impact for fiscal years 2018 and 2019 reflected in the fourth quarter of 2019, generating the low tax rate.
• Fourth quarter 2020 pre-tax margin of 13.8% was 410 bps higher than 9.7% in the fourth quarter of 2019. Net earnings were $152.5 million ($3.97 per diluted share) for this quarter, compared to $103.6 million ($2.65 per diluted share) for the same quarter in the prior year. This 50% increase in diluted EPS reflects higher home closing revenue and gross margins, as well as greater SG&A leverage in the current quarter, a $5.6 million charge for early extinguishment of debt in the fourth quarter of 2019 and $20.3 million of land sale impairments in the current quarter due to the upcoming disposition of assets that no longer fit our strategy. Diluted EPS also benefited from the reduction in diluted shares after the repurchase of one million shares in the first quarter of 2020 and another 100,000 shares in the fourth quarter of 2020.

FULL YEAR RESULTS

• Total orders for the full year 2020 were 43% higher year-over-year, as absorptions were 5.2 per month in 2020, up from 3.1 per month in 2019. The 68% increase in absorptions was primarily driven by strength in the market during most of 2020, as well as the product mix shift toward the higher pace entry-level homes. For the full year 2020, entry-level represented 68% of sales orders, compared to 51% for 2019.
• Home closings for the full year 2020 increased 28% over 2019, while ASP on closings was 3% lower than the prior year due to the product mix shift toward affordable entry-level homes that was partially offset by pricing increases throughout the year. This resulted in a 24% increase in home closing revenue to $4.5 billion for the full year 2020.
• Home closing gross margin improved 310 bps to 22.0% for the full year 2020, compared to 18.9% in 2019, reflecting the benefits of higher ASPs, as well as Meritage's strategic streamlining of operations, including cost efficiencies and leverage from additional home closing volume. Home closing gross profit increased 44% to $980.4 million for the full year 2020.
• SG&A expenses as a percentage of home closing revenue for the full year improved 90 bps to 10.0% in 2020, from 10.9% in 2019, reflecting greater leverage of overhead expenses on higher closing volume, as well as operating efficiencies from technology initiatives in 2020.
• Interest expense decreased $6.2 million year-over-year, primarily due to lower debt balances reflecting the early redemption of $300 million senior notes in December 2019.
• The effective tax rate for the full year 2020 was 20.6%, compared to 17.6% in 2019. The eligible energy tax credits on qualifying energy-efficient homes were extended into 2021, which will continue to reduce the effective tax rate.
• The pre-tax margin for the full year 2020 of 11.9% was 360 bps higher than 8.3% for 2019. Net earnings totaled $423.5 million ($11.00 per diluted share) for the full year 2020, compared to $249.7 million ($6.42 per diluted share) in 2019. The 70% year-over-year increase (71% for diluted EPS) reflects greater home closing revenue and gross margin, decreased SG&A expenses and $24.9 million of total impairments in the current year, compared to $7.3 million of inventory impairments as well as a $5.6 million charge for early extinguishment of debt in the prior year. Full year diluted EPS also benefited from the reduction in diluted shares after the repurchase of 1.1 million shares in 2020.
  

BALANCE SHEET

• Cash and cash equivalents at December 31, 2020 totaled $745.6 million, compared to $319.5 million at December 31, 2019, reflecting positive cash flow from operations of $530.4 million. Real estate assets of approximately $2.8 billion at December 31, 2020 held relatively steady to prior year as a decrease in spec inventory was offset by an increase in sold inventory as well as lot and land inventory.
• More than 55,500 total lots were owned or under control at December 31, 2020, compared to nearly 41,400 total lots at December 31, 2019, with approximately 11,200 new lots added in the fourth quarter of 2020 alone representing 69 new communities. Of the 27,200 net new lots put under control in 2020, approximately 81% are for LiVE.NOW. ^® communities for entry-level homes.
• Debt-to-capital and net debt-to-capital ratios were 30.3% and 10.5%, respectively at December 31, 2020, a significant reduction from 34.0% and 26.2%, respectively at December 31, 2019.
• The Company repurchased 100,000 shares of stock for a total $8.8 million during the fourth quarter of 2020.
• On November 13, 2020, the Board of Directors authorized an additional $100.0 million for share repurchases under the Company's existing stock repurchase program. There is no stated expiration date for this program.
• On December 22, 2020, Meritage entered into an amendment to its $780 million unsecured revolving credit facility, which extends the maturity date to December 2025.

CONFERENCE CALL

Management will host a conference call to discuss its fourth quarter and full year results at 7:30 a.m. Arizona Time (9:30 a.m. Eastern Time) on Thursday, January 28, 2021. The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's website at https://investors.meritagehomes.com . Telephone participants will be able to join by dialing in to 1-877-407-6951 US toll free or 1-412-902-0046 on the day of the call.

A replay of the call will be available beginning at approximately 11:30 a.m. Arizona Time (1:30 p.m. Eastern Time) on January 28, 2021 and extending through February 11, 2021, at https://investors.meritagehomes.com .

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ABOUT MERITAGE HOMES CORPORATION
Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2019. Meritage offers a variety of homes that are designed with a focus on first-time and first move-up buyers in Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

The Company has closed over 135,000 homes in its 36-year history, and has a reputation for its distinctive style, quality construction, and award-winning customer experience. Meritage is the industry leader in energy-efficient homebuilding and a seven-year recipient of the U.S. Environmental Protection Agency’s ENERGY STAR® Partner of the Year for Sustained Excellence Award since 2013 for innovation and industry leadership in energy efficient homebuilding.

For more information, visit www.meritagehomes.com .

The information included in this press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding health of the housing market and the potential adverse impacts of the COVID-19 pandemic, and projected full year 2021 home closings, home closing revenue, gross margins, effective tax rate, diluted earnings per share and future community counts.

Such statements are based on the current beliefs and expectations of Company management and current market conditions, which are subject to significant uncertainties and fluctuations. Actual results may differ from those set forth in the forward-looking statements. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations, except as required by law. Meritage's business is subject to a number of risks and uncertainties. As a result of those risks and uncertainties, the Company's stock and note prices may fluctuate dramatically. These risks and uncertainties include, but are not limited to, the following: disruptions to our business by COVID-19, fear of a similar event, and measures implemented by federal, state and local governments or health authorities to address it; the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; the ability of our potential buyers to sell their existing homes; changes in interest rates and the availability and pricing of residential mortgages; our exposure to information technology failures and security breaches; legislation related to tariffs; inflation in the cost of materials used to develop communities and construct homes; the adverse effect of slow absorption rates; impairments of our real estate inventory; cancellation rates; competition; changes in tax laws that adversely impact us or our homebuyers; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest money or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; home warranty and construction defect claims; failures in health and safety performance; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; changes in or failure to comply with laws, regulations and building codes; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our compliance with government regulations, the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth or impact the costs of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; negative publicity that affects our reputation and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2019 and our Form 10-Q for the quarter ended September 30, 2020 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com .