Meritage Homes Corporation

Good morning and welcome to the second of our two Meritage Investor Day webcast calls. I am Emily Tadano, Vice President of Investor Relations and ESG for Meritage. Today, we will be discussing the financial components of our new business strategy, as well as resetting our long-term income statement targets, validating our off-balance sheet goals, and reaffirming our capital allocations. Please refer to the Safe Harbor slide on our website at investors.meritagehomes.com that our statements during these two calls 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 most recent filings with the Securities and Exchange Commission, specifically our 2023 Annual Report on Form 10-K and our Form 10-Q for the quarter ended March 31, 2024. With us today are Philippe Lord, CEO, and Gila Sviruza, Executive Vice President and CFO of Meritage Homes. Stephen Kim from Evercore ISI will act as our guest host for today's conversation and will lead the Q&A. We ask that attendees submit their questions as we go in the Q&A box on your screen. In addition to his own questions, Steve will also announce your name, your firm's name, and pose your question to Philippe and Gila throughout the conversation. We will try to address all questions pertaining to the Investor Day topics during this call. Please visit our IR website to find the Investor Day call presentation as well, which for today's call, we expect will last about 90 minutes. We are recording this call and a replay will be available later today. A transcript will also be available in a couple of days. I'll now turn it over to Steve to kick us off. Steve?

All right. Thank you, Emily, and welcome, everyone, for day two of Meritage's investor presentation. As Emily said, I'm Stephen Kim with Epicor ISI. I've been covering the homebuilders for a long time, sad to say, over 30 years. But over that time, I've witnessed the homebuilders generally, but Meritage very specifically, grow tremendously in terms of scale, profitability, and financial strength. And today, I'm looking forward to hearing more from Philippe and Hila about their future trajectory. In their call last month, in their first call, you'll recall that they laid out a new business strategy with a three-tier approach to compete more directly and effectively with resales. Today, we're going to discuss the company's land and capital allocation strategy, and we're going to hear them lay out some longer-term financial targets. As Emily said, there's going to be a Q&A session after their opening remarks, so feel free to type in your questions in the box below. And I'll do my best to incorporate those into the discussion with one caveat. Management is not going to answer questions related to current conditions or the commentary related to current conditions. either on a regional or a national basis, so please don't bother asking those kinds of questions. I know we're all excited to get started, so Philippe, I'm going to hand it over to you to get things rolling.

Thank you, Steve. As most of the attendees know, we conducted our first Virtual Investor Day web call a couple of weeks ago, where we laid out the evolution of our business model. It was encouraging to hear the positive feedback from both analysts and investors afterwards, and we were pleased with the overall live participation, with more than double the attendees from our historical in-person investor days. Before we lay out the financial impacts of the new strategy, I just wanted to start by quickly recapping the three pillars of our strategic evolution. Our overall goal is to focus our selling efforts on the largest pool of potential homebuyers, and that means we need to effectively compete against resale inventory. This is not just our focus today, as the market is still locked up with existing homeowners unwilling to part with their low-rate mortgages, but will be our strategy when product on the resale market becomes more abundant. We believe that if we can level set objections we typically hear in the new home space, customers will instinctively choose new versus used, as they do for other large ticket items like cars and appliances. So how do we ensure our homes compete well with resale homes? We've been refining our existing strategy of spec building in the entry level and first move of space and streamlined operations for the past several years. But now we are adding three new core tenants to our current process. A 60-day guarantee, the concept of move-in ready homes, and a focus on deepening our realtor relationships. We believe this strategic evolution will allow us to expand our market share and accelerate our growth pace while improving financial metrics long-term. So what do these three new tenants actually mean? First, a 60-day guarantee means our homes should be ready to close on the same timeline as an existing home, eliminating one of the most common differentiators between the new and used home market. In fact, not only can we close every home in 60 days, we are going to guarantee it. We are going to cover our customers' out-of-pocket expense if there are delays, offering an industry-leading financial guarantee. The concept of move-in ready home refers to our homes being turnkey, livable from day one. Our new homeowners just need to move their furniture and belongings in because we've included the extra items that usually require a material cash outlay in the new home space, such as ceiling fans, blinds, landscaping, and appliances like washer, dryers, and refrigerators. This is a financial peace of mind solution that neutralizes a concern when considering a new home purchase. And our last tenet refers to the deep value we attribute to having strong realtor relationships. We view the homebuyer as the realtor's customer and the realtor as our customer, as most potential homebuyers have engaged with their realtor before they ever connect with us. We know and embrace the fact that realtors are a trusted resource for potential customers, particularly the first-time homebuyers. We are leaning into our realtor relationships and can see a scenario where we close a 100% co-growth participation scenario paying local market rate commissions. Under the strategic evolution, we will continue to build the same affordable but upgraded merited entry level and first mover product that we have been refining for the last seven to eight years. But now we will be selling those homes to buyers who want to move into the home 60 days and typically have already engaged with a broker. So with that backdrop, let's talk about the financial impact of this shift. To meet the 60-day guarantee, we have to continue to have a four- to six-month supply of WIP inventory, but we will need to wait until later in the construction cycle to release homes for sale. This may cause incremental carry costs as we ensure these homes can close in a 60-day window. Although if homes still close when completed, the additional cost will be limited. To note, the monthly carry costs per completed home, such as property taxes, HOA dues, and utilities, have not changed nor have the target months of supply of available inventory. But we are seeing a greater percentage of unsold WIP will be completed. So there will be both an increase in our balance sheet WIP and some incremental P&L costs from the additional carry expenses. To support our 60-day commitment for our customers, if we do not close within 60 days of the sales date, Meritage will reimburse our customers out-of-pocket expenses up to a certain max threshold. These expenses include hotel stays or storage so that there is no financial burden to the buyer if the delay was due to a Meritage issue. We do anticipate to incur some incremental costs for the guarantee. Although as the release of the inventory for sale is within our control, we believe this cost will be minimal and will self-adjust if we see 60-day misses within a certain geography or floor plan. As an offset to the 60-day cost, we do expect the cost of our forward rate locks and other financing commitments to drop notably with our 60-day guarantee as the maturity of these incentives will shorten materially, improving ASP on almost every home. Next, when we look at the cost structure of the move-in ready packages, we believe the increase in direct cost to the included features will see some benefits from our scale and relationships with our national vendors, as they will be offered in 100% of our homes. However, we do not expect the cost to come in. We do expect the cost to come in at about 50 to 100 bps per home. We intend to offset those costs with corresponding ASP increases for a net neutral margin impact. And lastly, we know that when we bring up the last tenant, realtor relationships, some might assume a huge increase in commission expenses. Let's break down the math into two aspects, external and internal. Our percentage of co-broke has been in the mid-80% range for the past several quarters. So the incremental lift, even to the near 100%, isn't as material as it seems. Currently, without strategic relationships, we find ourselves having to increase external commissions to sell in slower market times or more challenging submarkets and communities. We believe that by more fully embracing the realtor relationship, we should experience a limitation on ad hoc spiffs by offering other marketing and partnership benefits to our key realtors that are at no or low cost to Meritage, such as a pocket listing, referrals, or open house opportunities. We are still exploring what benefits are most meaningful to the third-party realtor, but we are seeing strong early success with initiatives that increase long-term volume for these partners versus just commission rate increases on individual transactions. We intend to continue paying market rate for external commissions. Today, we average 2.5% to 3%. This may change based on the longer-term impacts of the NAR settlement, but we will lean into our broker partnerships and continue to pay the market rate in all of our geographies. To more than offset the increase in external commission expenses, we anticipate long-term internal commissions would decrease. As our sales associates utilize the large network of brokers as an extension of our team, we believe each internal sales associate will be able to sell and carry more homes than they currently have in their backlog. While we expect our employees will pay the same or more individually, their take-home pay will not be negatively impacted. The per-home commission rate should decline. The second benefit of higher per associate high volume is being able to leverage the same employee count we have today on much higher sales volume in the future. The savings and payroll burden for the sales team, our largest employee group, will also assist in offsetting the incremental external commission cost. From a marketing perspective, we are shifting our target from homebuyers to realtors under the new strategy. With this in mind, we have defined parameters for our market efforts versus the blanket list of all potential homebuyers in our geographies that are our current targets. Given the refined focus on B2B prospecting, we anticipate spending our marketing budgets in a more efficient manner, reducing overall cost over time. Further, we can reduce project-related marketing expenses and share local advertising with the broker community. I'm now going to turn it over to Hila, and she's going to delve a little bit deeper into our long-term financial targets. Hila?