Meritage Homes Corporation

Greetings and welcome to the Meritage Homes third quarter 2022 analyst call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Emily Tadano, Vice President of Investor Relations and ESG. Thank you. You may begin.

Thank you so much. Good morning and welcome to our analyst call to discuss our third quarter 2022 results. We issued the earnings 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 homepage. Please refer to slide two cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2021 Annual Report on Form 10-K and subsequent quarterly reports on Forms 10-Q, which contain a more detailed discussion of those risks. We have also provided 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 Philippe Lord, CEO, and Gilles Ferruza, Executive Vice President and CFO of Meritage Homes. Steve Hilton, our Executive Chairman, is under the weather today and unable to attend, but will be back on for next quarter's earnings call. We expect today's call to last about an hour. A replay will be available on our website within approximately two hours after we conclude and will remain active through November 10th. I'll now turn it over to Mr. Lord. Felice?

Thank you, Emily. Welcome to everyone participating on our call. In Steve's absence today, I will briefly discuss current market trends as well as our quarterly operating performance. Hilo will provide a more detailed financial overview of the third quarter and forward-looking guidance for the fourth quarter of 2022. Slide 4. After Hurricane Ian hit Florida at the end of September, we are grateful to share that all of our employees and homeowners are safe. Our hearts go out to the many families who were displaced. Through Emeritus Cares Foundation, we provided financial support to the hurricane relief efforts to help those in need. None of the homes in our communities were damaged by the hurricanes or floodwaters. However, about 150 closings in Florida that were slated for late September did not close in Q3 and will push out to Q4. Given the current delays with municipalities, utilities, and supply chain post-Hurricane Eden, some late Q4 scheduled closings may also get pushed into Q1 of 2023. Our sales teams are back in their communities as soon as local municipalities allow them to return, and we do not anticipate a material impact to our Q4 quarterly sales page from Hurricane Ian. I also wanted to share that in September, we released our 2021 ESG report, which included our inaugural Task Force on Climate-Related Financial Disclosures, or TCFD report. we joined the approximately 3,900 other institutions to become an official TCST supporter this quarter and are excited to continue to make progress in our ESG journey. Expanding on another ESG milestone, in the third quarter, we were proud to be the recipient of the 2022 Environmental Protection Agency's Indoor airPLUS Leader Award for continuing to build double-certified homes in third geographies under the EPA's ENERGY STAR and Indoor airPLUS home certification programs. Now turning to our perspective on the current market environment. The weaker conditions that started last quarter continued into Q3. The rapid and steep increases in mortgage rates and the expectations of further significant rate hikes to come, coupled with inflation and uncertainty in the economy, as well as elevated cycle times, all drove the meaningful deterioration in customer demand. While favorable home buyer demographics and an undersupplied overall housing inventory still exist, We expect them to be overshadowed in the short run as a lack of consumer confidence and tightened affordability are influencing buying decisions. We anticipate weaker demand in the near term as future economic conditions remain murky and consumers take time to adjust to the new mortgage industry environment, which will include ongoing rate increases. Given the macro backdrop, our sales order volume of 2,310 homes was 33% lower than prior year. Our absorption pace was 2.7 per month compared to prior year of 5.0 per month and our target of three to four net sales per month. This quarter, our cancellation rate was 30%, which was above our historical average in the mid-teens. A majority of the cancellations during the quarter were due to elongated cycle times, overall asset density driven by consumer psychology, economic concerns, and changes in personal financial conditions of our existing buyers. Available inventory, both resale and new, continue to be a priority for buyers, and we saw cancellation spikes in our markets where there are other move-in ready alternatives. Given that about 60% of our backlog at September 30, 2022, was comprised of sales prior to Q3, with a higher all-in ASP, we have proactively offered our existing buyers price concessions where needed to narrow the spread between new and prior home prices. However, we continue to expect heightened cancellation rates in the near future until our older backlog closes out. In the third quarter of 2022, our growth sales declined 14% year-over-year, and our absorption pace on growth sales was 3.8 per month, which confirms there is underlying demand today. With only approximately 300 completed homes to sell across all of our communities this quarter, we believe our growth sales were impacted by the lack of available homes that are ready to close within the next 45 to 60 days. With move-in ready inventory drawing the highest demand, we look to capture incremental volume with more completed or near completed inventory available over the next few quarters. Even with this difficult housing market, our pre-existing backlog allowed us to achieve our highest quarterly home closing revenue of $1.6 billion this quarter, despite the persistent labor and supply chain challenges. Our elevated home closing gross margin of 28.7% and lowest quarterly SEA G&A leverage of 8.1% led to our record high quarterly dilute EPS of $7.10. While we are proud of the efforts of all of our team members in achieving the exceptional Q3 performance, We also know that these results mostly reflect closings of homes sold in a different sales environment, and that based on current trends will not be indicative of near-term quarterly operations. And now that mortgage interest rates are 7% before additional rate hikes, we anticipate further deterioration of buyer confidence, which will impact both new customers and those already in our backlog, further challenging demand in the market. Even so, we continue to execute on what we have been committed to and have refined for several years. Both our strategy of pre-starting 100% of our entry-level homes and our streamlined operations. To gain leverage and drive profitability, we plan to continue to prioritize pace over price. In the current environment, we are utilizing everything in our incentive toolkit, including mortgage rate locks, rate buy-downs, increased incentives, and true base price reductions based on the needs of each community. In many of our markets, we have supplemented these offerings by being more aggressive with increased broker commissions. We are pushing to find the optimal mix of incentives for each of our communities to get back to a goal of three to four net sales per month, normalized pace so that we can find the market clearing point. Hila will cover the details to our land portfolio later, but I wanted to speak to our land strategy. This quarter we conducted a deep dive in our land pipeline in every market to determine which deals no longer achieve our risk return profile in today's housing environment, recognizing we'll likely need less loss under control in a slowing market. We've pulled back significantly on new deals over the last two quarters as we have all the land we need for the next several years and are only considering exceptional opportunities. For recently sourced deals, we've been engaging with our land sellers to work through closing timeline extensions. Many are giving us additional times as market conditions continue to evolve. With a strong land pipeline, we can take our time to gauge demand over the next several quarters before we commit to any additional land acquisitions. In cases where we cannot work through an extension, we are comfortable terminating our land option. We are also re-underwriting all control deals scheduled to close in the balance of this year and early 2023, and are taking a much more conservative view to ensure these deals still underwrite today. If these deals are no longer feasible at the land prices in the original contracts, we will negotiate with LandCellus for a price reduction or walk away from the lot option deposits and due diligence costs. In Q3, we terminated our lowest performing land deals, which resulted in an $8.8 million in write-offs of such walk-away costs. Now turn to slide 5 to share our operational statistics. Despite elongated cycle times, our third quarter closings of 3,487 homes were 12% greater than prior year, reflecting our efforts to successfully navigate the supply chain disruptions. Entry level was 84% of closings, up from 78% in the prior year. The third quarter 2022 sales orders of 2,310 homes was comprised of 88% entry-level homes, up from 84% in the third quarter last year. As I mentioned earlier, our Q3 sales orders were down 33% due to an acceleration of cancellations, despite a 25% year-over-year increase in outage communities. A cancellation rate in Q3 of 30% increased from 10% in Q3 2021 and 13% in Q2 2022, Our third quarter 2022 average absorption pace was 2.7 per month, which was down from 5.0 per month in the prior year. Moving to regional level trends on slide 6. Consistent with the rest of the building industry, we experienced softer conditions and a year-over-year decline in order volume in all of our regions during the third quarter. However, a 2.7 net sales per month pace this quarter does not tell the whole story. Overall, our east region outperformed our other two regions with an average absorption pace of 3.8 per month during Q3. Almost all of our markets in this region maintain our target pace as a result of the relative affordability of those markets. Except for Austin and the growing pains we have experienced there, Texas also performed relatively well in light of the current market conditions. Excluding Austin, this region achieved an absorption pace of 3.2 per month during Q3. The story really changes in our West region, which represents more than a third of our total average community count. The region struggled in the third quarter, as demonstrated by the 1.5 net sales per month pace, which weighed heavily on our company's net sales per month averages. We believe market performance in this region weakened significantly as a result of home price appreciation over the last two years materially exceeding the growth of local household income and some of the most pronounced regional supply chain delays in the U.S. Let's review each region in a bit more detail. Our West region experienced the highest regional percentage of cancellations this quarter. ASPs that ran hot over the last two years, mainly in Arizona and Colorado, impacted affordability and buyer confidence. We had the largest percent of cancellations in Colorado's quarter due to the significant supply chain issues at times pushing our closings by a full quarter or two. We continue to work with municipalities and our subcontractors to manage through these issues. Arizona also experienced more acute supply chain challenge and one of the longest cycle times in all of our markets, which led to elevated cancellations. With an average absorption pace of 1.4 per month in Q3, consumers in this market were sidelined and temporarily pulled out of the market or pivoted to readily available inventory. In the short term, our Western markets proved more vulnerable to buyer hesitancy this quarter, driven by both real and perceived Titan affordability. But we remain committed to having readily available homes, adjusting prices more aggressively, and offering a full range of incentives to overcome these concerns and get us back on target pace. With sales holding up best in the eastern part of the country, our East region grew order ASP year-over-year and also had the smallest year-over-year decline in order volume. Our Florida market remains strong, representing 44% of the region's orders this quarter, despite the impact of Hurricane Ian at the end of September. Relative affordability and extreme low housing inventory in Florida resulted in strong absorption pace of 5.0 net sales per month and a 12% year-over-year increase in ASPs on orders. South Carolina was the only market to grow order volume this quarter. Its 37% year-over-year increase resulted from the significant community count ramp-up over the last four quarters and ongoing relative affordability in the market. The story in Texas was different across our markets in the region. Demand held up in Dallas and San Antonio. Meanwhile, offices struggled with persistent material delays and labor shortages, resulting in one of the longest cycle times in all of our markets, which led to greater cancellations. Houston continued to face fierce competition from other builders. We do believe there's still high demand in these markets, but we need to sharpen our pencil to find the right incentives to better manage our cancellations. In the near term, the changing conditions in many of our markets make it challenging to accurately predict order demand going forward. However, we believe that favorable fundamentals in all of our markets will enable the right combination of competitive incentives to drive demand and regain sales momentum. Now turning to slide seven. We moderate our starts this quarter, starting approximately 2700 homes in the 1st, 3rd quarter compared to over 5000 homes in 2022 to align with our slower absorption volume. We've spoken about our commitment to our strategy to maintain enough movement ready inventory that aligns with our sales, not arbitrary numbers and demonstrated that execution this quarter. We ended the period with nearly 4,700 spec homes in inventory or an average of 17 per community as compared to approximately 2,800 specs or an average of 11.7 in the third quarter of 2021. This is in line with our optimal level of four to six months supply. Although the elongated cycle time stemming from supply chain issues leaves us at a disadvantage as we have very limited available finished inventory in that count. Similar to last year, 75% of our homes closing this quarter came from previously started inventory. At September 30, 2022, we have only approximately 300 completed homes to sell. Our 6% completed homes is up a bit from prior quarter, but is still not where we want to be due to elongated production timelines and supply chain disruptions. Our goal is to get back to a typical run rate of one-third completed available inventory. Our Q3 cycle time hasn't changed since the start of the year. We recognize that things generally aren't worsening, but we are still approximately six to eight weeks of additional time from our pre-COVID construction schedules. Front-end trades like lumber and roofing are starting to find additional capacity given the industry pullback and start. Back-end trades like appliances, flooring, countertops, and cabinets are still challenged. The entire market is also struggling with the lack of transformers needed to electrify homes, and we continue to monitor this nationwide issue as we look for potential alternative solutions. However, with overall capacity loosening, we are working with our trades and partners to secure cost savings and cycle time reductions in all of our markets. We ended the third quarter with a backlog of approximately 6,100 units as our conversion rate declined from 57% last year to 48% this year. When the supply chain stabilizes, we anticipate cycle times will shorten and backlog conversion rates will improve. I will now turn it over to Hila to provide additional analysis of our financial results. You up?