Meritage Homes Corporation

Greetings and welcome to the Meridage Homes second quarter 2024 Analyst Call. At this time all participants are in a listen only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emily Tadano, Vice President of Investor Relations and ESG. Thank you. You may begin.

Thank you, Operator. Good morning and welcome to our Analyst Call to discuss our second quarter 2024 results. We issued the press 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 .meridagehomes.com or by selecting the Investor Relations link at the bottom of our home page. 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 2023 annual report on Form 10-K and subsequent 10-Qs. We have also provided a 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 Steve Hilton, Executive Chairman, Salif Lord, CEO, and Helus Ferruzza, Executive Vice President and CFO of Meridage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton.

Steve? Thank you Emily. Welcome to everyone listening in on our call. I'll start with a brief discussion covering current market conditions and some of our recent company milestones. Salif will highlight how our strategy is progressing and its impact on our quarterly performance and Hilo will provide a financial overview of the second quarter and forward-looking guidance. Q2 was another strong quarter for Meridage. Our products and price points are targeted at the largest segments of home buyer demand which drove a solid spring selling season for us leading to an average absorption pace of 4.5 sales per month this quarter and our highest second quarter sales orders of 3,799 homes. In the second quarter of 2024 our backlog conversion of 136% generated 4,118 home deliveries and home closing revenue of 1.7 billion. Home closing gross margin for the quarter was .9% which combined with SG&A leverage of .3% resulted in a diluted EPS of $6.31. As of June 30, 2024 we increased our book value per share 16% year over year to 134.41 and generated a return on equity of 18.3%. Now on to slide four for our recent milestones. We were truly honored to receive a wide range of recognition in the second quarter that reflects our corporate stewardship. We are the prestigious Avid Cup for the third consecutive year, the highest accolade presented to a builder for exceptional customer satisfaction scores. We once again celebrate our longstanding partnership with the EPA accepting the Market Leader Award for certified homes for the eleventh time. We were also one of three builders named Americans Climate Leaders by USA Today and lastly US News and World Report added us the list of the 2024-25 best companies to work for. We are proud to be recognized externally for our social sustainability initiatives. With that I'll now turn it over to Fleet. Thank you Steve.

During the second quarter we hosted two investor day calls to introduce the evolution of our business model. Over the past seven to eight years we have migrated to a lower ASP spec strategy while streamlining operations to yield efficiencies. Now we are once again continuing to refine our strategy by taking the home to a near completion stage before releasing it for sale. Basically approximating the -in-time home inventory structure that exists in the retail market. This strategy evolution is built on three new core tenants. A 60-day closing guarantee, the concept of moving ready homes and a focus on deepening our realtor relationships. These tenants allow us to target the biggest piece of the potential home buyer pool by effectively competing its resale inventory not just in today's environment that favors builders but also when the resale market returns to historical averages. Our strong second quarter 24 financial performance validated that the shift to focus on quick turn move-in ready homes is the right one for us and attractive offering for our customers. We will continue to build affordable entry-level and first move-up product but now we will be focused on buyers who want to move into the home in 60 days and typically have already engaged with a broker. Our new strategy enabled us to exceed expectations this quarter by achieving a higher absorption pace than our target and -over-year increase in home closings and gross margin. Now turning to slide six. Demand rates solid throughout the spring selling season. Our sales orders of 3,799 homes for the second quarter of 2024 grew up 14% -over-year. The cancellation rate of 10% remained below our historical average in the mid-teens. Entry-level homes comprised 92% of total orders volume. ASP on orders this quarter of 414,000 was down 6% from prior year due to a larger mix of our orders coming from both our eastern markets and entry-level homes. Sequentially we increased ASP on orders as we were able to take price increases in some of the stronger sub-markets. The strength and demand for our move-in ready product and our continued use of finance incentives generated second quarter 2024 average absorption pace of 4.5 net sales per month above our target average annual sales pace of 4 net sales per month. Aligning with seasonal patterns we expect the second part of the year to experience a slower sales pace through the summer months and into the holiday season. Although we're seeing a return to more typical sales seasonality we do believe that the demand environment will remain constructive for the rest of the year. This resiliency stems from favorable demographics, below average resale listings in many of our markets and a fundamental underbuilt supply of homes. All of which create an opportunity for us to increase our market share despite ongoing mortgage rate volatility. The second quarter 2024 ending community down of 287 was up 4% sequentially from the first quarter of 2024 and down 1% compared to prior year. 35 new communities came online this quarter similar to what we opened up in Q1. For the second half of this year we anticipate additional net community account growth and a more meaningful double digit increase in 2025. We now own and control all the locks we need for planned community openings in 2024 and 2025 and most of 2026. Moving to the regional level trends on slide six, all of our regions achieve an average absorption pace exceeding our target of 4.0 net sales per month and -over-year growth in orders volume this central region comprised of our Texas markets had the highest regional average absorption pace of 4.7 net sales per month and an average quarterly backlog conversion rate that has exceeded our targeted 125% for the last three quarters. Even as the resale home supply has increased in some Texas sub markets, our move-in ready homes effectively completed against its inventory. With nearly 30% complete specs inventory in the region, we believe we have the right available product to continue to increase our market share. The west region experienced the largest -over-year growth and average absorption pace to 4.4 net sales per month in Q2 from 3.4 net sales per month from last year. We are seeing strength in Arizona where we achieved five plus net sales per month this quarter. With strong -over-year growth in spec count in the west, we expect to be able to continue meeting the high demand in this region. The east region had an average absorption pace of 4.4 net sales per month and the largest regional -over-year increase in sales orders making the east our largest region based on sales order volume even as resale inventory more noticeably returned in some sub markets in south Florida. We are poised to continue competing aggressively for market share here as our east region exhibits the strongest regional growth -over-year in any community count and spec inventory in the second quarter of 2024. Now turning to slide seven, as we align our starts pace with our sales pace, we started about 4,300 homes this quarter. We were up about 5% both sequentially and -over-year replenishing our pipeline. With our anticipated community count growth in the next six months, we expect to start more homes to maintain our targeted four to six months supply per community across our growing footprint. As we have discussed in the past, our strategy is agile so if we do see any pullback in the markets in the coming quarters, we will adjust our spec starts accordingly. We had approximately 6,500 specs homes in inventory as of June 30, 2024, up 46% from about 4,500 specs as of June 30, 2023. This represented 23 specs per community this quarter between a four to five month supply spec based on absorptions. Over time under the new strategy, our percentage of complete whip should increase slightly to ensure we have the right inventory to meet our six-day closing guarantee. Of our home's closings this quarter, 96% came from previously started inventory, up from 87% in the prior year. 26% of total specs were completed as of June 30, 2024, closer to our goal of carrying one-third moving ready homes. With our focus on quick turning inventory, our interquarter sales to closing percentage was just about 40% this quarter. Our ending backlog continues to decline intentionally from about 3,800 as of June 30, 2023 to approximately 2,700 homes as of June 30, 2024. We expect this trend to stabilize once we are delivering 60-day moving ready homes in all of our communities. With our backlog and specs on the ground together totaling over 9,200 homes, we believe we have the optimal level inventory for the current demand environment. I will now turn it over to Hila to walk through our financial results. Hila?

Thank you, Fully. Before we get started, I'd like to share that earlier this week, Moody's upgraded us to investment grade. We're excited to now be holding IG ratings from all three of our readers. It's been humbling to see third parties recognize our efforts over the last several years to strengthen our balance sheet while producing exceptional results. We believe the benefit of these upgrades will continue to positively impact our financial performance. Now let's turn to slide eight and cover our Q2 results in more detail. Second quarter, 2024 home closing revenue was $1.7 billion, reflecting 18% higher home closing volume year over year that was partially offset by 7% lower ASP due to product and geographic mix. In addition to select price increases, the cost related to rate locks decreased slightly both year over year and sequentially from the first quarter, even as the utilization of these financing incentives increased with recent volatility and interest rates. As we look to the second half of the year, we anticipate a slower monthly absorption pace due to seasonality and corresponding lower closing volume compared to the first half of the year, reflecting the seasonality and our higher backlog conversion resulting in the delivery of the majority of our spring selling season orders during the first half of the year. Home closing gross margin increased 150 bips to .9% in the second quarter of 2024 compared to .4% in the prior year. This improvement was a combination of lower direct cost, greater leverage of fixed expenses on higher revenue, and shorter construction cycle times, which were partially offset by higher lot costs. Lower direct costs benefited from both market dynamics and our purchasing teams ongoing pursuit of cost reductions since direct cost peaked in Q1 of last year. We are also securing volume discounts from trade partners based on our increased deliveries. We expect to see continued savings in lumber and lumber related products in the coming quarter and labor capacity continues to hold steady. Further, our construction cycle times improved about 10 days from Q1 to Q2 to around 130 calendar days, which helps us turn our home inventory faster. We're closing in on our historical average of about 120 calendar day which would allow us to turn our inventory three times a year. As a reminder, although our land costs are more elevated as compared to 2023, we have already turned over the majority of our communities from pre-COVID land so the higher cost lots are not expected to have a material pullback on our margins beyond the current levels. Turning to SG&A. SG&A as a percentage of second quarter of 2023, the overall home revenue of Q2 to Q3 of 2024 home closing revenue of .3% improved 30 BIPs from .6% in the second quarter of 2023, primarily due to the better leverage achieved on higher home closing revenue. It's important to note that this quarter total commissions as a percentage of home closing revenue were flat year over year. Specifically, external commission rates were essentially the same in Q2 to 2023 despite our higher co-broke participation as our strategic relationships reduced the need for ad hoc bonuses and incentives. We continue to see the proof in our results that our new strategy of aligning with realtors is working and proving profitable. We expect commissions as a percentage of home closing revenue to remain relatively steady for the rest of the year. As we've mentioned several times today, given our strategic evolution, the first two quarters of the year will likely be the strongest revenue quarters, leading to the most leverage in our SG&A in the first half. With that in mind, we are still maintaining our full year SG&A guidance of 10% or better. Longer term, we're targeting .5% SG&A as a percentage of home closing revenue as we grow our existing markets and leverage our overhead platform to reach our goal of 20,000 units in the next three to four years. In the services profit of $4.8 million included $2 million of write-off related to rate lock unwind costs. This compared to financial services loss of $2.6 million in the second quarter of 2023 that had $7.9 million in similar write-offs. The second quarter's effective income tax rate was .1% this year, essentially flat to prior year with both periods benefiting from energy tax credits on qualifying homes under the Inflation Reduction Act. Overall, higher home closing revenue and gross profit coupled with greater SG&A leverage led to 26% -over-year increase in second quarter 2024 diluted EPS to $6.31 from $5.02 in 2023. To highlight just a few results from the first half of 2024, on a -over-year basis, orders were up 14%, closings were up 19%, and our home closing revenue increased 13% to $3.2 billion. We had a 240-bip improvement in home closing gross margin to 25.9%. SG&A as a percentage of home closing revenue was 9.8%, and net earnings increased 31% to $418 million with $11.37 in diluted EPS. Before we move on to the balance sheet, I wanted to cover our Q2 2024 customer's credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages with FICO scores in the mid-730s and DTIs around 41-42. LTVs were still in the mid-80s, and about 80% of our buyers in Q2 received some sort of financing incentive consistent with our mortgage company capture rate. Now turning to slide nine. This quarter, we successfully enhanced our capital structure. We issued $575 million in new .75% convertible debt due to 2028. Part of the proceeds from the convert went to pay down the remaining $250 million of senior notes due to 2025. The incremental cash from the convertible notes increased our available sources for land spend, dividends, and share repurchases. We also refinanced our revolving credit facility to increase the facility size to $910 million, extending its maturity date from 2028 to 2029, and reducing its pricing grade to align with our investment grade rating. We had nothing drawn on our credit facility, cash of $993 million, and net debt to cap of .2% of June 30, 2024. Our net debt to cap maximum ceiling continues to be in the mid-20s range, leveraging our improved backlog conversion and quicker cash generation. We utilized $118 million operating cash flows during the second quarter of 2024, primarily related to land acquisition and development. On to slide 10. Our capital allocation was focused on organic growth and dividends this quarter to enhance shareholder value. This quarter, we spent about $631 million on land acquisition and development, which was up 54% from prior year. On a -to-date basis, our land spend has totaled $1.1 billion as of June 30, 2024. With the exception of a small pullback in late 2022, we have been accelerating our investment in organic growth for the past several years. We expect our go-forward trend in 2024 and beyond to be $2 to $2.5 billion of land spend annually. As we nearly tripled our quarterly cash dividend on a -over-year basis to $0.75 per share in 2024 from $0.27 per share in 2023, our cash dividend totaled $27.2 million in the second quarter of the year and $54.5 million on a -to-date basis. Due to the convertible notes issuance, we were unable to repurchase any shares in the second quarter as we were bound by the customary lockout provision that will lift at the end of the day today. Share buybacks are integral to our capital allocation policy, so we plan to double up on our systematic quarterly commitment in Q2 to catch up. For the first half of 2024, the company repurchased over 362,000 shares of stock, totaling $55.9 million. $129.1 million remain available under our authorization program as of June 30, 2024. Turning to slide 11, we secured and put over 8,700 net new lots under control this quarter, representing an estimated 63 future communities. We put around 2,800 net new lots under control in the second quarter of 2023. As of June 30, 2024, we owned or controlled a total of 71,000 lots, equating to a .7-year supply in line with our target of four to five years. We continue to utilize more option financing for land deals, ranging from traditional land banking to seller tranche deals with the underlying sellers. About 66% of our total lot inventory of June 30, 2024 was owned and 34% was optioned compared to prior year. We had a 76% owned inventory and a 24% option lot position. We owned 69% and optioned 31% of our lots at March 31, 2024. We are comfortable with our off-balance sheet land ratio up to 40%. Since off-balance sheet transactions come with a financing cost, we are going to use them as needed while balancing our other capital commitments. Finally, I'll direct you to slide 12 for our guidance. Given current market conditions, we have revised our foliar projections higher to the following. Total closings between 14,750 and 15,500 units, home closing revenue of $6.1 to $6.3 billion, home closing gross margin around 24.5 to 25%, and effective tax rate of about 22.5%, and diluted EPS in the range of $19.80 to $21 flat. As of Q3 2024, as for Q3 2024, we are projecting total closings between 3,650 to 3,850 units, home closing revenue of $1.5 to $1.6 billion, home closing gross margin of 23.5 to 24%, an effective tax rate of about 22.5%, and diluted EPS in the range of $4.60 to $5.05. Both Q3 and foliar guidance assume current market conditions and interest rates. With that, I'll turn it over to Felipe.

Thank you, Hila. To summarize on slide 13, our second quarter 2024 results demonstrate that our new focus on quick turning, -in-ready inventory is needing to strengthen our absorption pace, home closing volume, and home closing gross margin. With our strong balance sheet, we can continue to execute our strategic evolution and create long-term value by investing in our growth on the path to 20,000 units while also returning cash to shareholders. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Thank you. And at this time, we'll conduct our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we

pull for questions. Our first question comes from Alan Ratner.

Hey, guys. Good morning. Congrats on the great performance and what seems like a lot of success so far in the strategy pivot or evolution here. I was hoping to drill in a little bit, though, to the gross margin guide. I know you walked through in a lot of detail back in your investor meetings a month or two ago, kind of your outlook there longer term, and I think your expectation for some normalization makes a lot of sense and generally is in line with our expectations. But I'm a bit curious if you could drill in a little bit what's driving the sequential pressure specifically in the back half of this year. I think we've heard from some other builders that expect more of a flattish margin environment and it seems like your incentives right now are fairly stable. So why the significant leg lower in the second half following a much stronger than expected second quarter?

Thanks, Alan. This is Hila. I'll take it and then Salib can jump in with any additional commentary. So I think that the sequential decline, I know there's been a lot of questions and thoughts about it kind of pre-earnings this morning. It's mostly a function of two things, maybe a function of three things. The first is geographic mix, right? We have some diversity in margin performance across our market, so it's a little bit of geographic mix. A second part of it is volume, right? There's some leveraging in the six components of overhead with the heavy closing volume now shifting to Q1 and Q2 for us from Q3 and Q4. We're going to see some slightly reduced leveraging in the sixth component of gross margin and then incentives continue to be utilized. There's been a lot of volatility in the market over the last six weeks. Those closings are the ones that we're really going to see in Q3 and we're continuing to see as we sell homes in July. So it's really the function of those three things. There's nothing different structurally or fundamentally in the market. The market strength is holding in there. It's pretty much the same. It's really just mixed and leveraging in the overhead components.

Yeah and this is Salib, I'll just add, you know, from the beginning when we budgeted our business, we expected seasonality return to the market this year. So we still expect that. We're here in July and so, you know, we think we will probably have to use more incentives in the back half of the year to acquire those sales. Those were in our original budget. We've had to use less in the first half of this year, but we're still expecting to use more in the back half of the year.

Got it. Okay, so that is very helpful and I guess, you know, circling that back to the upside in Q2 then, I think you kind of touched on that just now in your answer fully, but the upside that you saw this quarter was that that was just a function of you kind of came into the quarter expecting to maybe incentivize a bit more heavily than you actually did on some of those homes that you sold and delivered in the intra quarter.

Yeah, exactly and back to Hilo's answer on how we're guiding to the back half, we also picked up volume and leverage which was significant. So along with the leverage and volume we picked up because now we're closing, selling and closing more homes just in time and then lower incentive utilization because the market was stronger in Q2 allowed us to produce the beat in Q2.

Got it. Okay, that's really helpful. Second question on community count growth, you know, really impressive acceleration there in the quarter and I know that was an area that you were maybe a little bit more cautious on in the near terms just given the pace of absorptions and kind of the flow through of some of your more recent land buys. What's contributing, I guess, to the, I don't want to call it a pull over but the better than expected growth here in the near term and which sounds like you expect to continue in the back half of the year.

Yeah, I don't know if it's better than expected. I feel like it's been kind of coming sort of within one or two of what has been expected. That's why we sort of suggested growth was going to be somewhat choppy over the next, over this year and then next year we're expecting meaningful growth and that's essentially what it's been. We opened up a few more extra, a few extra communities this year and maybe closed out a few, few less, not more than expected but just what we were expecting and that will continue. I think the next three quarters will continue to be choppy and then we'll see meaningful growth but as we said from the very beginning, we expect community count growth this year which we will be achieving.

I think we share every quarter the new lots that we put under control on how many new communities that's going to generate. For the last several quarters, the number of communities that the land that we put under control will generate is more than the number of communities that we're closing. So as we start to lapse and those communities become active, you're going to see that our pipeline of the lots that we have on book and under control are going to come on at a faster pace in the communities that are closing out which again we had a pretty material growth this quarter to 71,000 lots under control. So I think that you're going to see that acceleration really take off in 2025.

Yeah but we fully expect to go into next year spring selling season with more communities than we went into this spring selling season. So that's

the expectation. Great, thanks a lot guys, appreciate it. Our next question comes from Michael Rehout

with JP Morgan. Please see your question.

Hi, good morning everyone. Thanks for taking my questions. Wanted to start off with focusing on the sales pace and particularly I think you kind of referenced the strategy that you have broadly speaking in terms of more effectively or more aggressively competing with the broader resale market as inventories normalize and obviously there's been a lot of talk around the increase in inventory levels in Florida and Texas. I was wondering if you could share as those inventory levels have increased year to date, how your various communities in those markets have performed. If you've seen the broader market maybe soften slightly or require slightly higher incentives and how your communities have kind of navigated if any challenges or modest softening let's say in either demand or price as a result of the change in inventory in those markets.

Sure, I mean at this point we're pretty optimistic about how we're doing there because as you can look at our Q2 numbers we produced really strong order growth across all of our markets including some of the markets that have been highlighted as softening. I don't think we're going to be immune to the market as resale market starts to return and becomes more competitive and therefore brings the marketing to balance. We'll have to navigate that just like every other but we believe having move-in ready inventory will allow us to compete directly with that resale inventory and no longer will buyers have to make the compromise of new versus used is the idea. There are markets in Texas, there are markets in Florida that people have highlighted where existing home inventory is starting to return to something a little bit more normal. I think when we look at it collectively right now across new homes and existing home it's still far from being normal and therefore we're still able to achieve the market share we did but because we can meet people on their move-in time with our move-in ready inventory we saw strength all the way through Q2. April was good, May was good and June was good so and we saw that across all of the markets certainly we have communities that were utilizing more incentives to acquire sales. They're not all in those locations there's other reasons why we're using incentives maybe it's qualification issues etc etc but as we sit here today Michael I can't tell you that the existing inventory is becoming a problem for us just yet.

I would add this is part of the reason why when Philippe mentioned on the gross margin components in the back half of the year we're anticipating having to potentially offer some incremental incentives in some markets as we've mentioned we're a pace company we're very very focused on maintaining our four net sales per store on an annual basis. If we need to do more we're prepared to do more currently we're not seeing the need to do something materially greater than where we have been for the first half of the year but if we need to in markets with higher inventory we're prepared to do so.

Yeah and I think you know our margin guide has an element of conservatism in it you know we're we're expecting seasonality we're going into the quarter with less backlog and we're going into an election cycle so we're being a little conservative right now and we'll see how it goes.

Great and I appreciate those comments and actually kind of bled in your comments right at the end of my second question. Just around just trying to clarify and make sure we're crystal on incentive trends currently and what you're baking into the back half and you kind of just said we are being conservative to some extent so just want to make sure you know it's kind of clear that number one you know the incentive trends during 2Q I believe you just said Hila but you know again want to make sure we're fully on top of this that incentive trends I believe you just said have remained have been consistent throughout 2Q and in other words you haven't seen an increase in incentives as you kind of exited the quarter let's say and I'm you know and if that's the case you're kind of just building in an extra cushion in the back half and that's why you said there's an element of conservatism there any way to kind of ring fence you know what that if you're talking about a 200 basis points decline back half versus first half how much of that might be related to being a little more conservative from the incentive front.

So I think we've been on record many times in the past there's about 100 dip leverage component on volume typically from our best quarter to our to our our you know least least strong quarter so I think that a piece of that is just that right when we're talking about the margin margin guidance a piece is just a volume based leveraging component the second part is exactly what you alluded to so during the quarter our actual cost per home was less we're able to obtain rate locks through a slightly different structure in the last couple of last couple of months that have really helped our cost per home to come down but we are seeing folks ask for them more frequently so our utilization is up a little bit while our cost per loan or cost per home is actually coming down so back half of the year again we're in a really wacky election cycle very unclear what's going to happen I think some of our our peer companies previous previously on its earning cycle has said it's not so much that the buyer doesn't qualify if they're just real nervous right now it's a nervous time to buy so we're committed and ready we have the the firepower to offer incremental incentives and to a wider group of of home buyers if they need them we don't know if they will or they won't but we're ready to offer it if they do to maintain our sales pace

okay and just to be clear again you haven't seen that the level of incentives increase throughout the second quarter and then if you're talking about 100 bips from you know volume d leveraging you also mentioned geographic mix so maybe the incentive is a 50 to 75 bit type of is that fair to say

yeah we're not going to give specific numbers but I don't think your mountain's

too far off great thank you our next question comes

from Stephen Kim with evercore ISI please do your question

yeah thanks very much guys appreciate all the color so far and the heavy lifting on the gross margins that mike just did I think my question I wanted to shift here to the backlog turnover ratio and overall just your your rate of velocity from your backlog into your actual revenues you're moving to a 60 day kind of you know between sale and delivery kind of a structure across the board that that that would imply about 150 percent backlog turnover ratio you know you're you've sort of been running high 130s I just want to make sure that we understand is if you you know fully implement your strategy and it's humming along at some point let's say next year is that is it right to think that you know we should be incorporating in our modeling you know a backlog turnover ratio about 150 or are there going to be markets which are deliberately kind of permanently going to be not doing that 60 day kind of strategy yeah

I know you're spot on I think over time as we get all of our communities and markets and operations pivoted to a 60 day move-in ready inventory model and cycle times remain where they are 150 is within reach on a quarter by quarter basis that's how the math works

yeah I don't know if I'd model that for January 1 2025 but that's definitely an evolution we expect over the next four five six quarters to have more clarity on how quickly we can get to that number but that is the target

yeah I appreciate that that's that's really helpful and I also appreciated your comment about the normalization of the resale inventory that that we're not there yet I mean nationally we're still at 3.8 months normal it seems to be you know like five to six so is it fair to say that as you look across your markets that there are one or two markets maybe where you're you're above that normal level you know it's like six months but by and large you know the vast majority of your markets are still nowhere near that is that a fair is that a fair assessment

yeah that's fair and and again we don't really operate at the MSA level we operate at sub market levels we buy land in sub markets where you know housing dynamics are stable so when you look at it across an MSA I think it can be misleading there are certain tertiary sub markets that are more impacted maybe in field sub markets different price points so on a sub market by sub market level you know it's a very small percentage sub markets where we're seeing existing home inventory become become relevant in any way

yeah that's what I would have thought um yeah last one from I just forgot to ask about uh build to rent um I know that this is something that uh we're starting to hear uh people talk a little bit more about can you just share again your thoughts regarding the build to rent market and uh you know any interest what their level of interest is and getting involved there

yeah you know it's a choppy market although I agree with you there has been some more interest we're seeing our uh engagement with the VFR operators shift to more community levels versus one-off homes here and there to to kind of close out a subdivision so we are seeing them engage a couple folks that we hadn't heard from in a while are jumping back in so there is you know kind of that that mid single digit total um volume that we're targeting and we're pretty much dead on right now

okay perfect

thanks so much guys

thank you

our next question comes from john levallo with ubs please fit your question

uh good morning guys thanks for taking my questions so you know it sounds like everything is is pretty good out there and and fairly positive but your implied second half EPS is actually coming down you know by about a dollar from call it you know 10 bucks to nine bucks so i'm curious what's driving that i mean it seems like there's nothing that's worse today than than it was in may so maybe you could help us understand that

it's just the timing of closings we haven't made any assumption changes in the back half of the all we've done is the timing of closings have been pulled into q1 and q2

i'm gonna i'm gonna deep dive that just a tiny bit john so basically when we came into q4 we guided to 14 000 to 15 000 units then we brought up our guidance 14 5 to 15 5 and then we brought up our guidance again this quarter so we actually see the year developing better than we expected every time we talk to you which is really great news the kind of benefit that we're seeing from our strategic evolution is that we're just able to close more of those sales faster so we've just moved the timing of some of those closing there is no degradation in what we're expecting for sales volumes we actually increased our expectation for total full year sales so it's really just the fact that we were able to execute on exactly what steven talked about our backlog conversion those benefits came in a little bit earlier than we had initially expected so we're able to close our backlog in earlier quarters but the total sales volume for the year is actually improving in the last two quarters not not not deteriorating so we were able to harvest some of those profits earlier in the year

yeah okay understood and then you know you guys have talked about starting the number of homes in a particular quarter that you believe you can sell in the following quarter starts in the second quarter ramped to i think 4319 from 4142 in the first quarter so i mean is it fair to assume that you're expecting a sequential improvement in orders in the third quarter

no i think that we're there's a couple things right we have community count growth so we're ramping up starts to marry our community count growth and usually in new communities we tend to ramp up specs more so we can get started and then we're carrying more specs to finish because we want to have moving ready inventory so that's really driving the increase in the starts versus our expectation that q3 and q4 are going to be stronger than q1 and q2 that would be that would be unusual it's it's a combination of community count growth and it's the combination of trying to get all of our communities to a point where we have moving ready inventory

also we're not this good 4300 and a little over 4100 feel like kind of the same to be honest you know we make starts decisions um uh you know months in advance so so we actually thought that was a pretty good notch you know over time we'll probably get closer but that didn't feel that far apart

okay that's helpful guys thank you

you're welcome our next question comes from carl reichart with btig please state

thanks morning everybody i wanted to ask about operating cashflow helo do you have some expectations you could share with us about 2024 and then in addition you know you're given the model you're operating your your ocf has been much more consistent quarter to quarter less seasonal than a lot of the folks that we cover i'm curious if you've got a target in mind in terms of converting conversion of net income to cash flow or vice versa either way where more as you as you continue to run your inventory faster more of your net income converts to to operating cash flow or free cash flow

yeah i think that's a good way to look at it i think we try to introduce this concept on our last call we kind of look at our inventory in two different categories our whip our sticks and bricks is turning much much faster so it's from the improved cycle time and the way that we're we're shifting in our strategy so you're seeing that cash conversion happen very very the same time we're also growing so our land investment is increasing which obviously as you know it takes about two years to come to market so that piece of our balance sheet is growing we're improving that with the off balance sheet piece we haven't really talked about it yet on q a but it's pretty material growth and off balance sheet utilization this quarter so we're getting that cash benefit on our balance sheet so overall i think we're comfortable holding and we'll want to continue to hold a very large cash balance consistent with the other builders i think we were all a little gun shy during rough times in the cycle over the last 15 years we're going to have you know a big a big war chest of cash same as everybody else so you're not going to see us materially pulling back back on the cash balance that we have today which pretty much means we're redeploying what what we're generating back into the business and to dividends and share repurchases probably not going something materially beyond that which means that we're going to have to utilize off balancing financing to get to the numbers that we need to on our land spend okay

i just wanted to see if you could give us a sense as to what ocf might be for 24 so i'll leave that but i i did want to add one one other element here so the the land that you're looking at now my sense is you want to continue to invest in the markets where you've already got a deep presence you want to build your share there but as you're starting to look out a couple of years on the on the acquisitions you're making in the land market now can we think about the potential that you begin to expand into some new areas or should we expect that you're going to continue to focus on on the key markets that you're you're operating in now thanks

yeah appreciate it uh the question as we think about going from where we are to 20 000 units it really works this way i think we can grow first and foremost market share in the markets we're already in our goal is now to be a top three builder in every market that we're in um we also have entered four new markets in the last i guess four years or so charleston myrtle beach jacksonville and salt lake city so we're getting those up to scale so that that's a big uh big focus of ours and then there are a handful of secondary markets in the south texas and florida that we're looking at um that are also part of that plan so that's kind of the hierarchy of our priorities uh as we work to 20 000 units

okay thanks philly thanks ceilidh

our next question comes from susan mcclary with goldman sax please state your question

thank you good morning everyone your cancellation rate has been running um kind of that high single low double digit range which you know as you mentioned is really below that mid-teens historical norm as you think about the new strategy that you're putting in place should we expect that that can continue to come down does this feel like a more normalized level going forward just any commentary on on how that's coming together and how we should think about the trajectory there as the full implementation of the strategy comes through

yeah thanks for the question it's definitely something that we're studying very carefully we obviously believe hypothetically that if we're selling 60-day moving homes buyers are pretty committed at that point you know they're they're picking out their furniture at that point so we feel like our cancellation rate should run lower than folks that aren't selling 60-day moving ready homes so long-term structurally we believe our cancellation rate could could move down meaningfully from where it has historically but we still need to study that carefully certainly in q2 we saw a really strong metric and believe that that could be sustainable

okay and then you saw some nice leverage on the sgna line this quarter as you think about the back half and the seasonality in the business does any thoughts on where that can go over the next couple of quarters and how should we think about some of the investments that will be required around the strategy relative to the leverage that you can achieve

yeah great question thank you so most of our committed capital to execute on the strategy is already in place so you shouldn't see a big increase in sgna commitments related to the strategy rollout we've been we've been rolling it out behind the scenes for about 12 to 18 months as far as leveraging as we said if we're going to have a lower revenue and lower units in the back half of the year there'll be some pullback in in leveraging although we continue to refine our cost structure and we expect to be able to be under for the full year this year versus last year and we have a target of 9.5 percent sgna leverage longer term so maybe a little bit of an increase in the back half of the year but we're still going to come in under our prior guidance which is 10 or better

okay thanks for the color good luck with everything

our next question comes from alex barron

with housing research center please see your question

thank

you good morning um i wanted to ask um you know assuming the fed starts to cut rates later this year how are you guys in assuming rates start to move toward six percent or lower over the course of next year how do you guys envision your approach to incentives do you feel like you would reduce the incentives to boost margins or you would maintain high incentives to boost the sales pace you know by offering even lower interest rates

i think lower rates can only be good for our business um and for the housing sector in general i know people are concerned about lower rates um and the impact they'll have on existing home inventory but i think it's only a good thing it'll help inventory turnover and those folks need to find a home etc etc and i also think it should help with incentives clearly right now we're utilizing incentives to basically need a payment for our buyers that's what the dollars are being used for and i think as rates go lower we'll use less of those and because we are a moving ready builder there's not a lot of other incentives we need to offer um we don't do options or design centers or lot premiums the price of the home is the price of the home and so i think lower rates will have nothing but a positive impact on our incentives for for merida jones

alec if we wanted to pull that trigger we can use it in any way that we can as we've said it's only going to be a benefit if we choose to continue to press on the gas and increase the sales pace the cost of the incentive will be less right buying someone down into something with a floor in front of it from almost seven is much more expensive than buying them down something with a four in it from a six it's still a material improvement over what they can get from you know in the retail market or or from their local bank but the cost to us would be a lot less um obviously for that hundred bit spread so i think that there's opportunities every home buyer has it has their own story and we we have an arsenal of tools that we can use to make sure that we're getting them into the home but optimizing our margins at the same time

yeah because it would seem you know if you were to offer lower rates say in the fours or even in the threes as as time goes by um that you could get a a big edge over over others who who would probably not do that um my my other question had to do with you mentioned maybe your next target is to go to 20 000 units um over what time frame would that happen or do you guys have like an annual growth rate that you're trying to hit over the you know over the next few years

yeah um some of that will just be dictated by sort of reading the market the markets and our ability to secure land at the right price that underwrites but even with those those factors in mind we believe we can grow 10 year over year so that's the that's the minimum right if we can do more than that we will and so when you think about that i think you're looking at a three to four year timeline

got it all right well best of luck thank you thank you

our next question comes from ken zener with seaport research partners please state your question

good morning everybody morning

um just a two-part question first um when do you think given your planning you're going to see starts match the order pace given uh your rollout

well they're they're pretty close um

we have a little room to go but we're pretty close but we're also going to see meaningful community account growth over the next six quarters so um for new for new communities it won't match uh exactly quarter by quarter until we get those right but other than that should be the only delta um so like like he was saying i don't know if january 1 is the cutoff date we still have some communities and divisions that were getting situated here as we roll out the strategy but as we move into next year uh that should be what they they should match other than community coverage

okay and um so just so we can understand the progression of your uh increased land banking given your growth can you talk to the mix of um finished acquired lots um this quarter so you know if you bought 100 lots worth 30 percent of them finished given they owned the lot could be either raw or finished and then as well what's that been kind of as a percent of sales so closings from lots you acquired finished just trying to understand that dynamic as you uh change your approach

to yeah we can follow up with you on this uh later i don't think we have those metrics in front of us but i think okay what you're asking us is as we start to land bank uh more are we going to be buying just in time finished lots from that land bank is that the spirit of your question

it is a piece of it um and i think that's actually maybe you could clarify when you're doing the land banking are you having the bank the are you buying raw land from them or i assumed you were implying you'd be buying finished lots maybe just that clarification yeah

so there's lots of different land banking structures out there um we've been running closer to 30 percent for a while because most of the land banking that we've done is with land sellers and that type of land and you buy lots when you're ready to put a shovel in the ground and start developing and it helps us keep some of the land off balance sheet and land bank there are also traditional land banking structures out there that are true land bankers who come in and buy the land pay for the development and then roll you finish lots we haven't done a lot of those but are starting to ramp that up over time that piece of it will provide finished lots as it relates to the market um there aren't a lot of finished lots out there so we're not finding a lot of finished lot deals i think over 98 percent of our land is self-developed

thank you very much appreciate it

thank you and our next question comes from jay mccandless with web bush securities please see question

hey thanks for my questions the first question i had with this new strategy and and trying to sell within that 60-day window is there going to be a lag as you're opening these new communities until you can actually start selling homes just based on on that 120-day cycle time you're talking about seems like there's you're going to have to get some of these homes built before you can actually open the communities is that the right way to think about it

the right way to think about it if we were pivoting i mean every land and community growth schedule we have now built that into our plan already we've been layering that in for over a year we've been 100 spec builder for a while so all we're doing now is carrying those specs 30 more days or so so we're building those into our community schedules we're building those into our land that we know when we open up our communities we need to open up with with moving ready inventory yeah

to say another way most people don't open up communities without any inventory kind of ready to go because it's a new community and people want to see it right so typically when you open up a new community at least if you're a spec builder whether you're a 60-day move in or not you have inventory ready so as we mentioned you're already in the construction cycle so maybe you're just a little bit further along in our 60-day commitment but it's not too different than how we've been operating okay

and then in terms of the gross margin impact from some of the extras you guys talked about in the end i'll say the blinds garage code etc do you have an average so far of what gross margin impact those those extras are going to put on the house

you know we we were conservative and we thought that they would be break even we didn't know that we had the opportunity to increase prices we thought we were going to put this stuff in the house because we in align with our strategy and we were going to kind of charge cost for it but we've actually been able to earn a nice margin on it so i would say worst case it's neutral best case maybe it's adding like five bits but we are actually seeing a profit component on that move-in ready package we probably underestimated the desirability of that package in the marketplace

okay and then the last one for me any could you benchmark where you are in terms of rolling this out is it 60 percent of the count 70 percent of the count any type of frame of reference for where you are in the rollout yeah

i just there's

different tenants right where when it comes to moving ready we're you know 80 percent when it comes to you know having turnkey homes it's a little bit further and then when the realtor relationship piece we're still figuring out so we expected to have this fully implemented implemented next year that's the timeline we're on as you see here today

okay great thanks for taking my questions thank you thank

you no further questions at this time i'll hand the floor back to philip lord for closed remarks

thank you operator i'd like to thank everyone who joined this call today for your continued interest in maris homes we hope you have a great rest of the day and a great weekend thank you

this concludes today's call all parties may disconnect have a great day