MTH - Meritage Homes reports third quarter 2021 results including record gross margin of 29.7% and diluted EPS of $5.25

SCOTTSDALE, Ariz., Oct. 27, 2021 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, reported third quarter results for the period ended September 30, 2021.

MANAGEMENT COMMENTS

“During the third quarter of 2021, we navigated ongoing industry-wide supply chain disruptions and produced the highest third quarter of home closings in our Company's history. We delivered 3,112 homes and produced a 10% year-over-year increase in home closing revenue to $1.3 billion. This led to two new Company quarterly records: highest gross margin of 29.7% and highest diluted EPS of $5.25,” said Steven J. Hilton, executive chairman of Meritage Homes. “These strong results reflect the elevated homebuying demand in the market today and our successful operating model.”

“The housing market remained solid,” Phillippe Lord, chief executive officer of Meritage Homes, said. “The continuing demand stemmed from market conditions related to historically-low interest rates and limited housing supply. It also resulted from homebuying activity from millennials and baby boomers, the largest groups fueling demand over the last few quarters. We believe these underlying demographic factors will not fundamentally change in the near future, but may be bumpy if interest rates move materially in a short amount of time."

Mr. Lord continued, "In the third quarter of 2021, we continued metering our orders pace to align our starts with production, but our average absorption pace still remained elevated at 5.0 per month. This compared to our all-time highest third quarter average absorption pace of 5.8 per month in the third quarter of 2020. As a result of our metering efforts, quarterly sales orders of 3,441 homes were 11% lower than prior year despite 5% more average communities year-over-year.”

“Our ending community count increased by 16% year-over-year from 204 at September 30, 2020 to 236 at September 30, 2021. Sequentially, we added 10 net communities from 226 at June 30, 2021," Mr. Lord remarked. "Working through delays in permitting, zoning and entitlement as well as land supply chain constraints, we opened 40 new communities this quarter. With our excellent progress over the last two quarters, we remain confident in our ability to achieve our goal of 300 active communities by mid-2022. The anticipated community growth of over 50% from year end 2020 will position Meritage to expand our market share, leverage our operating costs and drive profitability.”

Mr. Lord added, “We continue to find new land positions while remaining disciplined in our underwriting standards and put about 9,800 net new lots under control during the three months ended September 30, 2021, which compared to approximately 9,000 net new lots under control in the same period in 2020. Our total lot supply is now nearly 70,000 lots, a 46% year-over-year increase compared to nearly 48,000 at September 30, 2020. We invested $526 million in land acquisition and development this quarter. Including this incremental spend, our net debt to capital ratio of 17.5% at September 30, 2021 reflects ample liquidity and a strong balance sheet, which in turn provide us flexibility for further growth in the future.”

Mr. Lord concluded, “As we continue to manage through the current supply issues, we are projecting 12,600-12,900 home closings for the full year 2021, which we anticipate will generate $5.05-5.15 billion in home closing revenue. Home closing gross margin is projected to be 27.50-27.75%. With an increase to the projected effective tax rate of 23.0%, we expect diluted EPS to be in the range of $18.75-19.40 for 2021, a year-over-year increase of over 70%.”

THIRD QUARTER RESULTS

• The total orders of 3,441 for the third quarter of 2021 reflected a decrease of 11% year-over-year, driven by a 15% decline in average absorption pace from 5.8 to 5.0 per month. In the third quarter of 2021, we metered our orders pace to address production constraints. This was partially offset by a 5% increase in average communities in 2021. Entry-level represented 84% of third quarter 2021 orders, compared to 69% in the same quarter in 2020. Stemming from the elevated demand for our products over the past few quarters and constrained housing supply, the sustained favorable pricing environment led to year-over-year increases in average sales price ("ASP") for both orders and backlog. Even as our product mix continued to shift toward entry-level homes, ASP on orders in the third quarter of 2021 exceeded $430,000.
  
  
• The 10% year-over-year increase in home closing revenue to $1.3 billion for the third quarter of 2021 resulted from 4% higher home closing volume and 7% higher closing ASP. Despite the product mix shift toward entry-level homes, the increase in closing ASP was primarily attributable to the sustained strength in housing demand and the significant price increases the market has absorbed in recent quarters.
  
  
• The 820 bps improvement in third quarter 2021 home closing gross margin to 29.7% from 21.5% a year ago mainly resulted from pricing power and leveraging of fixed costs on greater home closing revenue, which more than offset higher lumber prices and increases in other commodity costs.
  
  
• Selling, general and administrative expenses ("SG&A") were 9.3% of third quarter 2021 home closing revenue, an 80 bps improvement over 10.1% in the prior year, resulting from greater leverage of fixed expenses on higher home closing revenue, cost savings from technology innovations that particularly benefited our sales and marketing efforts and lower broker commissions.
  
  
• The third quarter effective income tax rate was 23.3% in 2021 compared to 19.5% in 2020. Eligible energy tax credits on qualifying energy-efficient homes closed under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019 reduced the rate in both years.
  
  
• Third quarter 2021 pre-tax margin increased 880 bps to 20.7%, compared to 11.9% in the third quarter of 2020. Net earnings were $200.7 million ($5.25 per diluted share) for the third quarter of 2021, an 84% increase over $109.1 million ($2.84 per diluted share) for the third quarter of 2020. Strong earnings growth reflected higher closing volume, pricing power, expanded gross margin and the improved overhead leverage, which led to an 85% year-over-year improvement in earnings per diluted share.
  

YEAR TO DATE RESULTS

• Total orders for the first nine months of 2021 decreased 1% year-over-year, driven by 7% greater average absorption pace, offset by a 7% decrease in average community count compared to the first nine months of 2020.
  
  
• Home closing revenue increased 18% in the first nine months of 2021 to $3.6 billion due to 15% improved home closing volume and 3% higher closing ASP given the favorable pricing environment.
  
  
• The 640 bps improvement for home closing gross margin in the first nine months of 2021 to 27.4% from 21.0% primarily resulted from higher ASP and better leveraging of fixed costs on greater home closing revenue.
  
  
• SG&A expenses improved 90 bps year-over-year to 9.4% of home closing revenue, compared to 10.3% in the first nine months of 2020, due to operating efficiencies and improved leverage of fixed expenses on higher home closing revenue.
  
  
• Loss on early extinguishment of debt of $18.2 million was recognized in the first nine months of 2021 in connection with the early redemption in April 2021 of the 7.00% senior notes due 2022.
  
  
• The effective tax rate for the first nine months of 2021 was 22.3%, compared to 19.9% for the first nine months of 2020. The effective tax rate in both periods benefited from tax credits earned for qualifying energy-efficient homes under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019.
  
  
• Net earnings were $500 million ($13.06 per diluted share) for the first nine months of 2021, an 85% increase over $270.9 million ($7.04 per diluted share) for the first nine months of 2020, primarily reflecting higher closing volume, pricing power, expanded gross margin and the greater overhead leverage in 2021.
  

BALANCE SHEET

• Cash and cash equivalents at September 30, 2021 totaled $562.3 million, compared to $745.6 million at December 31, 2020, reflecting investments in real estate and development and share repurchases. Real estate assets increased from $2.8 billion at December 31, 2020 to $3.6 billion at September 30, 2021.
  
  
• A total of nearly 70,000 lots were owned or controlled as of September 30, 2021, compared to approximately 48,000 total lots at September 30, 2020. In the third quarter of 2021, about 9,800 net new lots were added, representing an estimated net 45 future communities, of which 87% are for entry-level communities.
  
  
• Debt-to-capital and net debt-to-capital ratios were 29.1% and 17.5%, respectively, at September 30, 2021, compared to 30.3% and 10.5%, respectively, at December 31, 2020.
  
  
• In the first nine months of 2021, we repurchased 395,461 shares of stock for a total of $37.0 million, of which 95,461 shares totaling $9.5 million were repurchased during the third quarter of 2021. Since September 30, 2021, we repurchased an additional 243,885 shares totaling $24.0 million and have $153.4 million remaining available to repurchase in our authorized share repurchase program as of October 25, 2021.

CONFERENCE CALL

Management will host a conference call to discuss its third quarter results at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time) on Thursday, October 28, 2021. The call will be webcast live 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 via webcast beginning at approximately 12:00 p.m. Pacific Time (3:00 p.m. Eastern Time) on October 28, 2021 and extending through November 11, 2021, at https://investors.meritagehomes.com.

About Meritage Homes Corporation

Meritage Homes is the sixth-largest public homebuilder in the United States, based on homes closed in 2020. The Company offers a variety of homes that are designed with a focus on entry-level and first move-up buyers in Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

Meritage Homes has delivered over 145,000 homes in its 36-year history, and has a reputation for its distinctive style, quality construction, and award-winning customer experience. The Company is the industry leader in energy-efficient homebuilding and an eight-time 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 expectations about the housing market in general; projected 2021 home closings, home closing revenue, home closing gross margins, effective tax rate and diluted earnings per share; future community counts; trends in construction costs; and expectations about our future results.

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, except as required by law, to update or revise any forward-looking statements to reflect future events or changes in these expectations. 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: changes in interest rates and the availability and pricing of residential mortgages; inflation in the cost of materials used to develop communities and construct homes; supply chain constraints; our ability to obtain performance and surety bonds in connection with our development work; the ability of our potential buyers to sell their existing homes; legislation related to tariffs; the adverse effect of slow absorption rates; impairments of our real estate inventory; cancellation rates; competition; home warranty and construction defect claims; failures in health and safety performance; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our potential exposure to and impacts from natural disasters or severe weather conditions; the availability and cost of finished lots and undeveloped land; the success of our strategy to offer and market entry-level and first move-up homes; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our limited geographic diversification; the replication of our energy-efficient technologies by our competitors; shortages in the availability and cost of subcontract labor; our exposure to information technology failures and security breaches and the impact thereof; the loss of key personnel; changes in tax laws that adversely impact us or our homebuyers; our inability to prevail on contested tax positions; failure to comply with laws and regulations; our compliance with government regulations; negative publicity that affects our reputation; potential disruptions to our business by an epidemic or pandemic (such as COVID-19), and measures that federal, state and local governments and/or health authorities implement to address it; 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, 2020 and our Form 10-Q for the quarter ended June 30, 2021 under the caption "Risk Factors," which can be found on our website at https://investors.meritagehomes.com .