Meritage Homes Corporation (MTH) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary reveals strong community count growth and strategic inventory management, with a focus on shareholder returns through increased buybacks and dividends. Although margins are slightly declining, management's optimistic guidance and strategic initiatives indicate a positive outlook. The Q&A section supports this with plans for cost optimization and market share gains. Despite some uncertainties, the overall sentiment is positive, suggesting a stock price increase of 2% to 8% in the coming weeks.
Key Financial Performance
Orders Increased by 4% year-over-year to 3,636 units due to a greater community count. However, the average absorption pace decreased by 7%.
Backlog Conversion Rate Achieved a 211% backlog conversion rate, with more than 60% of orders in Q3 closing within the quarter.
Home Closing Revenue $1.4 billion, down 12% year-over-year due to a 7% decrease in home closing volume and a 5% decrease in average selling price (ASP).
Adjusted Gross Margin 20.1%, down from 24.9% in the prior year, primarily due to increased use of incentives, higher lot costs, and reduced leverage of fixed costs.
Adjusted Diluted EPS $1.55, down from $2.67 in the prior year, reflecting lower revenue and higher costs.
Community Count 334 communities, a 20% increase year-over-year, driven by high land acquisition and development spending in prior years.
Average Selling Price (ASP) on Orders $389,000, down 4% year-over-year due to increased use of incentives and discounts.
Spec Homes Inventory 6,400 homes as of September 30, 2025, down 6% year-over-year and 8% sequentially from Q2.
Land Spend Reduced by 14% year-over-year to $528 million in Q3 2025, reflecting a cautious approach to market conditions.
Shareholder Returns $85 million returned to shareholders in Q3 2025, including $55 million in share repurchases and $30 million in dividends.
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Operating Highlights
Affordable move-in ready homes: Focused on providing affordable homes with a 60-day closing-ready guarantee to offer certainty to homebuyers.
Spec strategy: Implemented a 100% spec strategy to provide flexibility in ramping up or slowing down starts based on real-time demand.
Community count growth: Achieved a 20% year-over-year increase in community count, ending Q3 with 334 communities, the highest in company history.
Regional performance: Strong absorption pace in Dallas, Houston, Southern California, and the Carolinas, while Austin, San Antonio, Florida, Northern California, and Colorado faced affordability challenges.
Backlog conversion rate: Achieved a 211% backlog conversion rate, with over 60% of Q3 orders closing within the quarter.
Cycle time improvement: Reduced cycle times to approximately 105 calendar days from 110 days in Q2.
Land spend reduction: Reduced land acquisition by 70% year-over-year to align with market conditions.
Incentive offerings: Continued to offer tailored incentives to address affordability concerns and boost demand.
Shareholder returns: Returned $85 million to shareholders in Q3 through share repurchases and dividends.
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Risk or Challenges
Market Conditions: Market conditions were softer than expected in Q3 2025, with declining consumer confidence amid a tough economic backdrop and ongoing affordability concerns. This has led to a decrease in demand and increased hesitancy among homebuyers.
Economic Uncertainty: The tough economic backdrop, including affordability concerns and lower consumer confidence, has negatively impacted demand for homes. Lower mortgage rates have not significantly improved demand due to buyer psychology and economic concerns.
Incentive Burden: The company has had to rely heavily on incentives to drive sales, which is running higher than typical industry levels. This has impacted margins and is expected to continue in the near future.
Geographic Market Challenges: Certain markets, such as Austin, San Antonio, parts of Florida, Northern California, and Colorado, are facing softer market conditions due to affordability concerns and lack of buyer urgency.
Land and Inventory Impairments: The company incurred $14.5 million in real estate inventory impairments and terminated land deal charges in Q3 2025. This reflects challenges in land valuation and market conditions.
Gross Margin Pressure: Home closing gross margins declined significantly year-over-year due to increased use of incentives, higher lot costs, and reduced leverage of fixed costs on lower home closing revenue.
Supply Chain and Labor Costs: While supply chain and labor conditions have improved, the company is still facing elevated land development costs, which are expected to impact margins until at least 2027.
Regional Variability: Demand varies significantly by region, with some areas performing well while others face challenges. This variability complicates strategic planning and resource allocation.
Tax Credit Changes: Fewer homes qualified for energy tax credits under the Inflation Reduction Act due to higher construction thresholds, increasing the company's effective tax rate.
Inventory Management: The company is holding a higher percentage of completed spec homes than its target, which could impact margins if not managed effectively.
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Guidance & Outlook
Community Count Growth: The company anticipates holding its community count steady from Q3 to Q4 2025, ending the year with mid-double-digit year-over-year growth. For 2026, additional double-digit year-over-year growth in community count is expected.
Land Acquisition and Development: Land acquisition and development conditions are stabilizing, which is expected to benefit gross margins in late 2027 and into 2028. The company reduced land acquisitions by 70% year-over-year in Q3 2025 to align with market conditions but expects no material impact on near or midterm growth plans.
Home Closings and Revenue: For Q4 2025, the company projects total home closings between 3,800 and 4,000 units, with home closing revenue of $1.46 billion to $1.54 billion.
Gross Margin: Q4 2025 home closing gross margin is expected to be between 19% and 20%, reflecting a higher incentive environment and the closing of completed specs that do not yet reflect recent cost savings.
Earnings Per Share (EPS): Diluted EPS for Q4 2025 is projected to range between $1.51 and $1.70.
Long-Term Gross Margin Target: The company maintains a long-term gross margin target of 22.5% to 23.5%, contingent on economic stabilization and reduced incentive burdens.
Backlog Conversion Rate: The company expects a long-term backlog conversion rate between 175% and 200%, supported by shorter cycle times and efficient inventory management.
Market Trends and Incentives: The company anticipates the cost and utilization rate of incentives to taper off as market conditions stabilize. However, incentives are expected to remain elevated in the near term due to affordability concerns and consumer sentiment.
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Shareholder Return Plan
Quarterly Cash Dividend: Increased by 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024.
Total Cash Dividends: $30 million in Q3 2025 and $92 million year-to-date.
Capital Returned to Shareholders: For the first 9 months of the year, $237 million of capital was returned to shareholders, representing 64% of total earnings.
Share Repurchase Program: $55 million spent in Q3 2025 to repurchase over 772,000 shares, an 83% increase from the prior year and 22% greater sequentially.
Year-to-Date Share Repurchases: $145 million spent, reducing the 2024 year-end outstanding share count by almost 3%.
Board Approval for Additional Repurchases: An additional $500 million authorized for share repurchases, with $664 million remaining available as of September 30, 2025.
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Key Q&A
Q:What is the impact of the strategy pivot on inventory turnover and cash generation?
A:The strategy pivot has led to a reduction in inventory turnover from over 1x to about 0.7x over the last 12 months. Management believes there is an opportunity to optimize the spec strategy, aiming for a 4-month supply of specs by 2026, down from the current 5-6 months. This optimization, along with improvements in the land pipeline and deal efficiency, is expected to drive higher ROE and more free cash flow.
Q:How does community count growth in 2026 affect margins and absorptions?
A:Management expects community count growth in 2026 to be strong. While new communities are being opened at margins similar to current levels, they are not expected to be a headwind or tailwind to margins. The higher volume from incremental communities should help leverage fixed costs better, but margins are not expected to reach long-term targets due to the current incentive environment.
Q:What is the outlook for spec inventory and starts in the near term?
A:Management plans to reduce spec inventory per community from 19 to closer to 16 based on current market conditions. Starts will align with sales pace but are expected to increase due to community count growth. Older inventory will be worked through in Q4, and new homes will be started at lower costs.
Q:What is the expectation for orders in Q4 compared to Q3?
A:Management does not expect Q4 absorptions per store to exceed Q3 levels. The focus will be on optimizing profitability rather than chasing incremental volume. Older specs with higher costs will be cleared to redeploy capital for new homes at lower costs.
Q:What is the margin outlook for new communities and the impact of incentives?
A:New communities are expected to come on at margins similar to current levels, with limited upside due to the competitive environment and affordability challenges. Incentives have increased, with approximately 40% related to financing and 60% to other discounts. Forward purchase commitments are a significant component of financing incentives.
Q:What is the guidance for Q4 margins and share repurchase strategy?
A:Q4 margins are expected to decline modestly to around 19.5% due to clearing older spec inventory and a frothier incentive environment. Share repurchase cadence is expected to be at least at the current level, with potential for opportunistic increases.
Q:How quickly can the sales environment change with improved consumer confidence?
A:Management believes the sales environment can change very quickly with improved consumer confidence. The company is well-positioned to capture market share with its move-in ready inventory and streamlined operations.
Q:What is the long-term margin target and the path to achieving it?
A:The long-term margin target is 22.5%-23.5%. Achieving this depends on reducing incentives, improving consumer confidence, and leveraging scale and cost efficiencies. Management believes the building blocks are in place to reach this target with a more favorable macro environment.
Q:How is the company gaining market share in the current environment?
A:The company is gaining market share from the existing home market and other affordable builders by offering move-in ready homes with a closing-ready guarantee. This strategy appeals to buyers seeking affordability and certainty.
Q:What is the outlook for cost structure and potential savings?
A:The company has achieved significant cost savings over the past year, particularly in direct costs and cycle times. While there may be some opportunities for further savings, potential headwinds include tariffs and labor issues. The focus is on maintaining current cost levels and leveraging new land development contracts for future savings.
Q:What is the trend in lot inflation and its impact on costs?
A:Lot inflation is expected to continue or worsen into 2026, with potential improvement starting in 2027 and becoming more meaningful in 2028. The impact on costs is influenced by the incentive environment and land development contracts.
Q:What is the impact of the 60-day closing guarantee on market share?
A:The 60-day closing guarantee is helping the company gain market share by providing certainty and appealing to buyers who might otherwise consider existing homes. This strategy is particularly effective in a competitive environment.
Q:What is the expected cadence of community count growth in 2026?
A:Management expects another double-digit year of community count growth in 2026, with more details to be provided in Q1. The growth is expected to drive volume and offset seasonal variations in sales.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance on lot cost inflation for 2026, stating only that it is consistent with peers and expected to worsen before improving in 2027-2028. Additionally, they did not provide detailed guidance on the cadence of community count growth in 2026, deferring specifics to the next quarter.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
California
Hilla
Meritage Homes
SGA
VP
affordability concern
bps margin
closing bps
closing guarantee
closing home
community land
concern Slide
control lot
cost saving
date
decision
demand environment
end community
estate inventory
geography
housing market
impairment land
impairment walkaway
incentive burden
incentive market
inventory charge
inventory impairment
lack
land book
land charge
land deal
leverage home
market trend
opportunity lot
rate home
share repurchase
spec store
store month
supply spec
use incentive
walkaway charge
MTH Transcript
Meritage Homes Corporation (MTH) Q4 2025 Earnings Call Transcript
Unknown1-29
The earnings call summary shows mixed signals. The company has strong community count growth and a positive long-term margin target, but the near-term guidance is flattish with some headwinds like higher interest rates and regional challenges. The Q&A reveals management's conservative approach and uncertainties, such as unclear margin impact and reliance on incentives. Despite potential tailwinds, the lack of clear guidance and the cautious stance on share repurchases suggest a neutral outlook, indicating a potential stock price movement within the range of -2% to 2%.
Meritage Homes Corporation (MTH) Q3 2025 Earnings Call Transcript
Positive10-29
The earnings call summary reveals strong community count growth and strategic inventory management, with a focus on shareholder returns through increased buybacks and dividends. Although margins are slightly declining, management's optimistic guidance and strategic initiatives indicate a positive outlook. The Q&A section supports this with plans for cost optimization and market share gains. Despite some uncertainties, the overall sentiment is positive, suggesting a stock price increase of 2% to 8% in the coming weeks.
Meritage Homes Corporation (MTH) Q2 2025 Earnings Call Transcript
Unknown7-25
The earnings call presents a mixed picture. While there are positive indicators such as an increase in community count and lower cancellation rates, there are concerns about declining ASP and gross margins due to financing incentives. The Q&A section reveals management's cautious stance due to market uncertainties, with pulled full-year guidance and no specific Q4 margin guidance. The increase in stock buybacks is a positive factor, but the lack of clarity on future performance tempers enthusiasm. Overall, these factors suggest a neutral sentiment, with no strong catalysts for significant stock price movement.
Meritage Homes Corporation (MTH) Q1 2025 Earnings Call Transcript
Unknown4-24
The earnings call reveals several concerns: a significant decrease in home closing revenue and EPS, declining gross margins, and increased SG&A as a percentage of revenue. Despite a 15% dividend increase and share buybacks, market uncertainties, tariff risks, and deteriorating consumer sentiment pose challenges. The Q&A section highlights management's uncertainty about pricing power and incentive levels, further contributing to a negative outlook. Overall, the financial performance and market conditions suggest a negative impact on the stock price in the short term.
MTH Slides
MTH Report
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