Meritage Homes Corporation

Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press star zero, and a member of our team will be happy to help you.

¶¶ ¶¶ ¶¶ ¦ ¦ ¦ ¶¶ ¶¶ Thank you for your continued patience.

Your meeting will begin shortly.

If you need assistance at any time, please contact Dorothy Rose and a member of our team will be happy to help you. ¶¶ um um ¶¶ ¶¶ ¶¶ Thank you. Please stand by.

Your meeting is about to begin. Greetings and welcome to the first quarter 2026 Meritage Homes Analyst Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Emily Togano, VP of Investor Relations and External Communications. Please go ahead.

Thank you, operator. Good morning and welcome to our analyst call to discuss our first quarter 2026 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 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 2025 Annual Report on Form 10-K. 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, Philippe Lord, CEO, and Gilles Ferruzza, Executive Vice President and CFO of Meritage 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 joining today's call. Today I begin with a brief overview of market trends and highlight our first quarter results. Philippe will then discuss our strategy and provide an operational update. Finally, Aguila will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we were cautiously optimistic that lower interest rates and pent-up demand would translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks into the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost days of sales, military operations in Iran commenced at the end of February, increasing interest rates, gas prices, and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled 3,664, 5% below last year's first quarter, as our slower absorption pace was almost fully offset by our increasing community count. While we still believe that long-term fundamentals for the homeowner industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher than anticipated use of incentives. Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and the increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share, As of March 31st, 2026, our book value per share increased 6% year-over-year. And with that, I'll now turn it over to Philippe.

Thank you, Steve. Given the current uncertainty in the macroclimate, I am proud of the Mayor's team for navigating these choppy waters. We started the year with 336 active communities, which we then grew to 345 by March 31st, another company record. In the near term, we expect total volume and top-line results will largely be driven by increased community count, not higher per-store absorptions. Our first quarter of 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31, 2025, and up 3% sequentially compared to 336 at December 31, 2025. During the quarter, we brought on 40 new communities throughout all of our regions, We reiterate our expectations of 5% to 10% full-year community account growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes, and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that Steve mentioned, we believe that long-term demand remains supported by favorable demographics and an undersupply of affordable homes in the U.S. And when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks, repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.48 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to slide four. First quarter 2026 orders were 5% lower year over year, primarily due to an 18% decline in average absorption pace, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid to high teens as we benefit from a quick sale to close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue four net sales per month where community-level market dynamics would not support it. While over the long term, we strive to be a four net sales per month in all markets, as we believe we best leverage our fixed costs at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive tensions, we've moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts, as well as geographical mix shifting from the higher ASP West region into lower ASP East region. We saw a nice uptick in March, even though it wasn't quite as strong as typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on slide five. As always, sales performance was driven by local market conditions in the first quarter. while all markets required additional incentives in some markets such as dallas houston and phoenix consumer demand was comparatively more elastic where incremental volume was achievable with only small incremental incentives meanwhile other markets such as austin parts of florida and charlotte continue to be tougher selling environments turning to slide six we've been right sizing our starts pace and whip inventory to align with our faster cycle times We maintained a sub-110 calendar day construction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated start to approximately 2,500 homes, 30% less than last year's Q1 and 6% lower than Q4. We traditionally align our start space with our sales space. But due to faster cycle times and the need to work through some inventory in certain locations, we reduced our start space this quarter. We expect our go-forward start space to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 700% year-over-year from approximately 2,000 as of March 31, 2025, to approximately 1,900 homes as of March 31, 2026. We reiterate our long-term backlog conversion target of 175% to 200% as we expect to carry fewer fair specs in the future. Internally, we look at our inventory as the combined total of specs and backlogs. because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy six quarters ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year, and down 19% sequentially from Q4. The 14 specs per store this quarter was our lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under four months supply, intentionally at the low end of target of four to six months supply specs due to the slower demand expectations and improved cycle times. Comparatively, in the first quarter of 2025, we had 23 specs per store, or five months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the fourth quarter of 2025, still above our target of approximately one-third of completed specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hila to walk through our financial results.

Thank you, Philippe. Let's turn to slide seven and cover our Q1 results in more detail. First quarter, 2026, home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting the tougher demand environment this quarter. As Philippe noted, with nearly 70% closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L. While our closings and revenue reflect our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASPN closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the east region. Home closing gross margin of 17.5% for the quarter was 400 bits lower than prior year's 22% as a result of increased use of incentives, higher lot costs, and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense, and faster cycle times. First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairments and $1.4 million in terminated land deal walkaway charges compared to no impairments and $1.4 million in terminated land deal walkaway charges in the prior year. Coupled with about 20 BIPs from lost leverage on anticipated higher closing revenue, these impairments also impacted margins by about 30 BIPs. Our current land basis is primarily comprised of higher-cost land vintages from 2022 through 2024 and will continue to negatively impact margin in 2026. Based on what we're seeing in the market today, we expect some margin relief will start at the tail end of 2027 due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per square foot on a year-over-year basis, as we were able to flow to the income statement the lower costs from our extensive vendor negotiations. However, lumber costs have started to trend higher this quarter, and as a result of the Iran conflict, we are monitoring any potential long-term inflationary impact on oil prices. Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in the first quarter of 2026 was 11.8% compared to 11.3% for the first quarter of 2025, despite curtailing discretionary spend. Although SG&A dollars declined year over year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. specifically at external commission costs. We believe our strategic focus on partnering with the external broker is a key driver to our success. Our broker relationships remain strong with co-broker percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year over year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year compared to 23.3% for the first quarter of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credits was significantly reduced starting in 2025 when the higher construction thresholds went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before we move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs, and LTVs remain consistent with our historical averages. Despite market volatility, we haven't seen much movement in these metrics over the last year or two, validating our belief that hesitation in the market is at least partially a psychological decision versus a purely financial one. On to slide eight. Our balance sheet remains healthy at March 31st, 2026, with cash of $767 million, nothing drawn under our credit facility, and a net debt-to-cap of 17.4%. As a reminder, the ceiling for our net debt-to-cap ratio remains in the mid-20% range. As we've been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter, or 2.7% of shares outstanding at the beginning of the year, for $130 million, nearing three times more than Q1 of 2025, as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value. With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buying back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shift. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For the first quarter of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide nine. In the first quarter of 2026, we secured almost 400 net new lots under control, which included an impact at about 850 terminated locks. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31st, 2026, we owned or controlled a total of about 75,500 lots, equating to 5.2-year supply of the last 12 months' closings. In today's market conditions, we believe that this is the right amount of the needed year supply of lots to meet our growth targets. We also had approximately 14,600 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31st, 2026 was owned and 30% options compared to prior year where we had a 62% owned inventory and a 38% option lot position. As we shift more land to off-balance sheets, we are doing so very slowly and cautiously, remaining hyper-focused on margin and IRR, and only considering land deals with sufficient margin to absorb the additional cost, as we do not believe that all or most land today belongs off-book. While we have set 40% as our initial off-book target, our actual percentage will be solely driven higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I'll direct you to slide 10. Based on current market conditions, we are updating our guidance for full year 2026 home closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3650 and 3900 units, home closing revenue of $1.37 to $1.47 billion, home closing gross margin around 18%, an effective tax rate of 24.5% to 25%, and diluted EPS in the range of $1.18 to $1.46. With that, I'll turn it back over to Salik.

Thank you, Hila. In closing, please turn to slide 11. Before we conclude, it's worth reinforcing what sets marriage apart. We are a top-five home builder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differentiates us from peers and is anchored on three tenets, our 60-day closing guarantee, move-in-ready inventory, and strong realtor engagement. Together, who we are and how we operate give us a competitive advantage in the entry-level space to provide homebuyers certainty and consistency. Amid today's market backdrop, our priorities are central on balance sheet strength and disciplined capital allocation. We are maintaining a low net to cap and structuring land deals off balance sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. We'll impair our strategy with our growing community count, faster cycle times, and disciplined cash commitment framework, we believe Meredith is well positioned to capture incremental market share as demand conditions improve and normalize, and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Thank you. To ask a question, you will need to press star 1 on your telephone keypad. If you want to remove yourself from the queue, please press star 2. In the interest of time, we ask that you limit yourself to one question and one follow-up. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Trevor Allenson with Wolf Research. Your line is now open.

Hi, good morning. Thank you for taking my questions. First one's on your spec count, which you noted is the lowest it's been in several years. other builders talk about a reduction in specs across the industry helping take some pressure off of margins here so appreciating you guys operate a spec model are you seeing uh both your lower spec count and also kind of industry lower spec counts ease the margin pressure here and is that something you expect to be supportive of margins moving forward even if demand makes shopping yeah thanks trevor i think that's absolutely The condition we're seeing, a lot of builders are either pivoting away from carrying as much inventory, finished inventory, as they did before during COVID and supply chain environment. And they're moving to reduce finished inventory, selling homes earlier in cycle. And then some folks are pivoting more to a BTO model. which is clearing out a lot of inventory in the market. So I think we saw across all of our markets less finished inventory that we were competing with, and we're optimistic as we move throughout the year that that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build SPACs and carry them to a later stage. Okay, thanks, Ashley. Very helpful. And then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures? And then any detail on how those agreements are structured with an eye on your ability to walk away?

And then just generally your view on use of land banks moving forward for your off-balance sheet needs. Thanks.

Yeah, I can take that one. So about 38% of our total inventory control is off books. Of that, about a third is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don't cross-collateralize. So we always have the ability, if any deal goes sideways, to walk away from that deal without maybe some other hooks and implications that would make us stay in a transaction that doesn't structurally work or financially work any longer. So we're very cautious about from that perspective. So the only thing at risk for us would be the deposit and any other ancillary costs.

And the only thing I would add is, as Hila said, it's a very small percentage with true lot financing. But because it's not cross-collateralized, I think working through those deals on a one-by-one basis is much easier. We have had some scenarios where we've gone back to our land bank financiers and asked for some more time to stabilize the market, stabilize our inventory levels. And, again, working on one deal, it creates more of an opportunity to do so.

Yeah, and I think we addressed this in our prepared remarks. Because we're very selective at the get-go as to what deals even go off book, they typically have a little bit of breathing room on the margin versus having arbitrary targets where we're forcing deals off book to hit a percentage. the ability to work with our partners, our off-book partners, is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them.

Very helpful. Thanks for all the color and good luck moving forward. Thank you.

Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Yeah, thanks very much, guys. I appreciate it. If I could follow up on the land bank question, can you give us a sense for roughly what percent of your land bank deals you've extended your takedown schedules? And am I right in thinking that in a typical land bank deal, any individual land bank deal, if you extend, let's say, six months, that that might drive roughly 100 basis point lower gross margin on the remaining lots versus the initial expected lot price?

Thanks, Stephen. So first part, again, we have such a small percentage of our land book is land bank with lot financing. So even as you look at what percent of our deals required us to restructure. And when I say restructure, maybe we needed a quarter delay in the next take to buy some time to get through some inventory or stabilize kind of margins or whatnot. For the most part, that was very small as well. Most of our deals are performing fine. We're continuing to take lots down and we're moving through the inventory as we planned. As far as your other question, I think it's a little bit of an oversimplification. It really depends on the deal, how many lots you're buying per quarter, the structure of the deal. In some cases, I think some land bankers are willing to actually give you a take for no carry, just to keep you in the deal, rather than taking back the loss and owning the loss. I think we're sort of in that environment today, at least with our folks. So it's hard to answer. It really depends on your relationship and it depends on the deal. I guess if all things being equal, they were going to charge you for those delays. Your math might be close. I don't know, Hila, if you want to add anything to it.

Yeah, I mean, it depends what part of the cycle and how many assets you still have on book, part of that math, and, of course, what your interest rate is. But for us, when we look at it, bad things don't get better with age. So if we're asking for a hold, it's typically for us to rework a product lineup or to value engineer something. We're not just holding and crossing our fingers and thinking something arbitrary. It's going to get better in three to six months. So, again, that's kind of the beauty of being very selective as to what deals you're putting into an off-book structure in the first place. But, yeah, I mean, there's definitely – if you can't work a freebie, it's typically going to cost you whatever your interest burden is for that six-month hold. So, yeah, there's going to be an implication, but 100 bps may be a little heavy. Okay. Okay.

Appreciate that. Yeah, and I also appreciate your comments about how there is a human component to this. It's not all just simply math. I think that's an important point to make. If I could also talk about your long-term gross margin target at 22.5 to 23.5, which obviously is where you were not that long ago, but something that's quite above where you are currently. You've talked in the past, Hila, about the importance of volume. in achieving your level of gross margin. And so am I right to assume that that long-term target is consistent with at least a four per community absorption rate? Or do you think there's an opportunity to hit that gross margin level long-term with a lower level of absorptions than you had envisioned in the past?

Thanks, Steve. I'll take part of that question. So I think it's a lot easier to get to our long-term goal around 22 and a half at four net sales per month. We're just way more efficient at that level. We leverage our fixed and variable overhead much more meaningfully. We're able to navigate the vertical cost environment more effectively. So the path at four net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in margin, direct margin, which you might be able to hold on to your margins at a slower pace and try to drive it. So there is a path at three and a half, if you will, versus four. but I think long-term, four is the way to get there.

Yeah, I think Luis is exactly right. There's two components. The first is just absolute value, absolute volume, and the second is volume per store. We're much more efficient at four plus, so we definitely want that because the costs at the local store level, the superintendent and the cost of running that location are leveraged better, but there's also costs at the division level that get better leverage, period, with volume. So we think that there is an opportunity for both. Right now, the opportunity for us is at a higher store count. So hopefully, you'll see that improvement just between Q1 and Q2, right? The volume that we are guiding to on closings on Q2 is nicer than where we are today. And we guide it to a higher margin than where we ended the quarter. And part of that's going to be the incremental leverage. But once we get back So that four net sales per store average, there's another bump for us on incremental leveraging above that.

And we see our path from where we are to where we want to go both this year and the future years is really driven by the following things. The volume, we have the higher store count, so we think we can get incremental volume. Less inventory in the market to compete with, so a stronger pricing backdrop. And then reducing our incentives over time. A lot of the incentives that are currently in the market are psychological. We're trying to convince folks that it's a good time to buy. It's part affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, you know, we can see a path there.

Great. Appreciate it, guys. Thanks.

Thank you. Our next question comes from Alan Ratner with Selman. Your line is now open.

Hey, guys. Good morning. Thanks, as always, for the details so far. You know, first question on the margin guide, and I think you kind of touched on it in Steve's question, but I just want to dig a little deeper. So, you know, newly I was pleasantly surprised to see that you expected to hold margins roughly steady quarter over quarter. I would have thought just given kind of what we're hearing from other builders, what we're seeing in the macro environment, that there might have been some additional pressure there at least. flowing through in 2Q. So it sounds like some of that is top line leverage, but I'm curious if you feel like now that you've reset some of the absorption goals, at least for the near term, whether this kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today.

yeah a lot of questions in there that i'll answer all of them for you because they're all very good um i do think that uh there's a couple things we see that feel like it's forming sort of a potential floor now this is again i don't know what's going to happen geopolitically i don't know what's going to happen you know with a lot of things that outside my control that can impact this but in the industry we see a couple of things number one We see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there's less inventory out there, I think consumers feel a little bit more urgency than when there's a lot out there. So I think that is helpful. I think the volume is critical. We have the highest community count we've ever had. We're projecting more community count growth through the rest of this year. And even at these slower absorption paces, we think we can get there and not have to give up more margin to get there. So we're optimistic about that. And then look, in the beginning of Q1, we actually started feeling better about things. The weather kind of threw us off. February was okay. We had the war in Iran and people took a step back in certain markets. But March was pretty good. So we started feeling like we had some stability and some predictability in the market. It's just really hard to tell every week, whether that's going to be something that's maintained and sustainable or there's going to be something else that throws the consumer off their game. But I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we've opened and the opportunity those give us to gain volume throughout the year.

Two other points on margin, Alan. The first, and we talked about it a little bit on our last earnings call, that as we continue to improve on our direct costs, as we work through our finished spec inventory, you're going to start to see even better direct costs coming through. So that's a benefit that you'll see in starting in Q2 and continuing through the latter part of the year. Obviously, all new communities are all with a new cost. So uh the more the more volume we have from those the better that that piece is and then just kind of you know doing math if you look at our closings uh this quarter and what we're guiding to for next quarter the back half of the year is going to be higher volume at our current projections uh even at the low point of of the full year guidance to be provided so again that leveraging component that we're talking about is going to have an even more material impact for us through the back half of the year

Great. All right. Perfect. I appreciate all the detail there. Second question, I don't give specific cash flow guidance, but the last couple of years, cash has been a drag as you've been ramping the spec supply, as you've been gearing up for this very significant community count growth. It feels like both of those are kind of hitting an inflection point here where spec inventory is coming down a little bit, community count still going up, but not at the same rate it was. you know, pretty strong cash flow in the first quarter, at least seasonally speaking. So can you give any, you know, guidance or color in where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn periods and maybe cash should start to improve even if, you know, earnings are under pressure on a year-over-year basis?

Yeah, I mean, we don't have specific cash flow guidance, as you noted, the discipline to get down to 14 uh specs per store is an incredible effort by the team especially if you think that just a year ago we were at 23 specs per store that's that's relieved a lot of cash that was kind of a more you know measured approach on land development uh while definitely increasing shareholder returns but not by an equal offset is letting us kind of hold steady so if you think about the fact that we have these faster cycle times and we're trying to time starts with sales pace, you really shouldn't see something too detrimental occurring on the cash flows and cash position. We think where we are is probably a good place for us with the size of the balance sheet that we have. So I think that you're going to see this kind of maintenance of cash flows, the outsized return to shareholders for the balance of this year, as we've already articulated in our programmatic repurchase plan. But I think that you should see a more measured situation cash utilization as we're bringing stores online, but a lot of that spend has already been incurred, and we're definitely monitoring the WIP units and the sticks and bricks costs that we're expending before we close the home.

Thanks very much. Appreciate it.

Thank you. Our next question comes from Michael Rehat with JPMorgan. Your line is now open.

Thanks. Good morning, everyone. Thanks for taking my questions. Wanted to start off with just kind of broader thoughts around the demand backdrop. You know, so far this earnings season, we've heard slightly different narratives across the spectrum. You know, some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. You know, Also, incentives and levels maybe also kind of stabilizing. You kind of noted also a little bit about maybe inventory coming down somewhat, which has been helpful. At the same time, you've kind of highlighted some choppiness across your footprint, notwithstanding perhaps March coming back a little bit stronger. But I was hoping to get a sense of, You know, with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I'm interpreting that correctly, you know, is it certain markets that you're exposed to? You know, you highlighted parts of Florida, Charlotte, Austin. Is it maybe the price point that, you know, you're offering or the fact that you're maybe still in kind of that spec area, which, you know, I think by definition might, cause a little bit more competition. Just trying to reconcile kind of where you are within the industry and, you know, how to better understand your positioning and how that relates to your commentary.

Yeah, I think – I feel like you kind of answered your own question, but I'll try to add some more to it. I think we're more cautious than – maybe the opposite of being cautious. I think a part of it is our buyer profile seems to be lacking the confidence that maybe other buyer profiles have. They're stretched more from an affordability standpoint, cost of living. So it does feel like the procurement of those sales is very high. which makes us very cautious. I think the other thing is our footprint. We're in the Sunbelt states primarily. Those were the states where prices got the most stretch during the last five years. Affordability got the most stretch. There's probably higher levels of inventory that we're competing with. We're going head to head with a lot of other entry-level builders that do similar things to us. So for all those reasons, I think when we look at our buyer profile and our geographical footprint,

we feel cautious right now right right now understood um you know secondly uh you know there's a question earlier about cash flow and community count um and obviously uh if you reiterated your outlook for this year and and you still have very strong growth kind of flowing through in 2026 how should we think about 27 28 given your current land position, you know, particularly since, you know, with volumes being such a big driver of leverage and maybe you're a little less confident, at least in the near term, around getting significant improvements in absorption, how should we think about community count growth, you know, over the, you know, near to medium term, you know, two to three years out?

Yeah, great question. I feel really good about 2027. I mean, as I indicated in the script, we will have 5% to 10% community count growth this year over last year. So we'll go into 2027 with that. I feel like we'll be able to hold or grow that incrementally in 2027. Really hard to pin that down just yet until schedules are dialed in and whatnot. So don't want to commit to anything in 2027, but we have the ability to grow our community county in 2027 if it makes sense. We're obviously rationalizing all new land. We're, as Hila said, we're phasing developments a lot more slowly these days. So we'll have to see how that all plays out in the back half of this year. 2028 is pretty far out there. We have 75,000 lots. So we have the ability to grow in 2028 as well. We're being very conservative on new land deals. Although land prices have stabilized and some places come down, terms are better. They're still somewhat difficult to underwrite in the term incentive environment. So we've been very slow to ramp up new land, and I think we'll continue to do so. We have enough land to get where we need to go. And I think if we need to do some things to plus up 2028, I think the opportunities will be there. So I don't have a lot of visibility in 2028 right now, but I feel good about 2027.

The goal is not to shrink, right? We have the ability to maintain or grow, and we'll take our cues from the market.

Great. Thanks so much.

Thank you. Our next question comes from Susan McCleary with Goldman Sachs. Your line is now open.

Thank you. Good morning, everyone. My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers, even though you are seeing a lot more caution in there, and how that came through in that cancellation rate this quarter?

I mean, it's really low. until it rises, we're not paying a ton of attention to it. I think a lot of the cancellations that are happening have a lot more to do with the buyer stepping away and just thinking it's not a good time. But again, it's a very low amount because we have such a quick sale to close. We've got a closing ready guaranteed. Our homes are ready to go. As soon as you buy it, you're picking out your furniture immediately. Our can rate is extremely low and we expect it to remain that way given our strategy. I think when people can start to imagine moving into the house 60 days, they start planning their lives. And so it's extremely low. We expect it to remain very low. I'm not sure I'm answering your question. If there's another question, let me know.

Just, Susan, I think everything Glee said is dead on. Pretty much the amount of time that it takes them from the time we enter into the sales contract until the time they close the house, they spend getting documents to the mortgage company. There's not a lot of time to rethink and tour other homes and maybe get convinced a way. from from the the commitment that they already made so they're so hyper focused on just getting everything to the finish line that uh that that's really helpful for us in a cancellation rate perspective and even though our commitment is 60 days if you look at our backlog conversion rate you can see it's actually happening much faster than that uh at 254 percent backlog conversion we're getting folks from sale to to uh moving in less than 60 days so they they literally don't have um Any time the second guess decision, the fallout is typically an event outside of not wanting the home that's causing them to have a cancellation. It's something that occurred either in their financial position or in their personal life that's causing the cancellation rate. It's very rarely that they still continue to tour homes thinking they're moving into a house in 40 days and, you know, they fell in love with something else and walked away from the deposit. Hopefully that's helpful.

Yes, no, that gets to my question of you're not seeing any change there. Obviously the strategy of that quick close is helping to keep those people engaged and get them through that process, which is great to hear. So that's good. My second question is on the SG&A. You mentioned that obviously there was some impact of less leverage, overhead leverage that you saw this quarter. I guess as you think about the back half of this year, How are you expecting that to come through to or what will that mean for SG&A? And then as we think over time, can you talk a bit more about the back office automation and other savings that you're implementing?

Yeah, so we definitely, typically Q1 is our high watermark for SG&A. We have some certain retirement compensation triggers that disproportionately skew expenses into the first quarter anyway. And, you know, based on our full year guidance for closings, it's going to be our lowest level quarter on closings. So definitely some lower leverage opportunities for us on SG&A costs in Q1. So you should definitely see an improvement. uh in that target uh for for the balance of the year um in every one of the of the upcoming quarters as far as the back office automation um there's a tremendous amount that's that's still done in home building um you know taking taking one piece of paper and typing it into another system whether it's a closing document something from title escrow mortgage um a lot of uh uh people doing things that are not their job description, right? If your job is an analyst, it's not a typist. So we're finding ways for AI and technology to interpret documents and auto-feed a lot of data into our systems, which should help us gain efficiencies and is part of the path for us on getting to that 9.5% SG&A target in the future. Obviously, those numbers become even more meaningful at higher volumes, it would have required more man hours to do some of those tasks. So it helps you not just with cost but also with accuracy and rework. So we're pretty excited about some of the initiatives. There's also a lot of customer-facing initiatives, whether it's something that we'll be rolling out. I don't want to steal the thunder from our sales and marketing piece, so stay tuned for some fun announcements about some of our customer-facing solutions that we have both back office and customer-facing tools that should both drive SGMA leverage benefits in the very near term.

Okay. That all sounds great. Thank you. Good luck with the quarter.

Thanks.

Thank you. Our next question comes from John Lovallo with UBS. Your line is now open.

Hey, guys, thank you for taking my questions as well. So you opened 40 new communities in the quarter, which which I think is a pretty solid result. You know, we typically would think of these newer communities having, you know, a higher absorption just given, you know, higher levels of interest and wait lists and things of that nature. So the question is, I mean, did you experience higher absorption in these new communities? And then how many more communities should we expect as we move through the year?

Thanks, John. I think most of the communities we opened up in Q1, a lot of them opened up the last month of the quarter. They kind of hit what we thought. They met our expectations. I wouldn't say they exceeded our expectations. I wouldn't say they underperformed. They kind of did what we thought they were going to do. Probably Q2 will tell us more about whether they're hitting their stride, but they seem they're all very good locations. strong positions strong margins strong pricing so i think we feel pretty good about them and then as we said on the script we expect five to ten percent range of growth year over year so i think you can expect a little bit more here in the back half of this year to get us to that number um we'll see how everything goes around opening those up but um we're committed to a five to ten percent year-over-year growth in our community account this year

Okay, that's helpful. And then in the prepared remarks, and then I think in the press release, you guys called out some storm impact in the first quarter, which makes sense. Curious if those deliveries were actually captured in the quarter, or do you expect those to be captured in the second quarter, and if there's any way to quantify the number of units?

Yeah, I mean, January was softer than we thought. And I think the primary reason for that, given what we saw in February and March, was the storm. There were multiple markets that were impacted by that storm. In some cases, mobility was impacted. And so we just didn't see the traffic that we would have thought we would have saw towards the end of January. And as you can see from our guidance, we missed our guidance, and we think that was why. I think that incremental volume that we thought we were going to see in January materialized and if we would have closed an extra 200 to 300 homes, we probably would have been a lot closer to what we thought we were going to do. Those buyers, we probably captured them in February or March, depending. And so they'll probably close into Q2. But our business doesn't really work that way. And we sell a home and we close it 60 days later. So whether we got that buyer or not, it's going to happen next month or the month after that. And we're really just a just in time business at this point. So hopefully that's helpful and answers your question.

Yeah, I mean, it's lost days of sale. You know, you don't double up when the stores open back up and you capture two days of sale in one. So there are basically three, four, five lost days of sale in a large portion of our markets in January. And those are sales that were not somehow recaptured in the next month. So we were trying to press on the gas and figure out a way to accelerate that. And then, as we mentioned, the kind of consumer confidence maybe put a little bit of a damper when inflation and interest rates and gas prices increase. So we view those as true lost days. Now we're working to catch up. You see our projections for Q2 are a lot healthier than Q1, but I don't know that they were, like, somehow recaptured in February.

Got it. Thank you, guys.

Thank you. Our next question comes from Jay McCandless with Citizens. Your line is now open.

Hey, good morning, everyone. First question I had, Hila, in the script, I think you talked about land vintages mostly being 2022 to 24, but I missed some of your other comments around that. I guess how much of either total lots now or owned lots are running at that vintage or in that vintage area?

Yeah, that's pretty granular. So, I mean, we always have, like, some long-term communities that were in phase six, and we have some new communities that we probably bought in 25 that we're selling at right now. So, we're not getting that level of breakout, but for the most part, it was mostly just commentary as to why the lot cost. is running a little bit hotter. We tend to have community sizes between 100 and 150. And at about, you know, three and a half, four and a half net sales per store, you can do the math as to how quickly we've burned through those. So for the most part for us, everything's live, I think, was the intent of that call. What we're experiencing and what we have been experiencing at the elevated land development cost burden, that's running through our numbers currently, but hopefully we should be a tail end of that by the end of 27.

Okay, that's great. Thank you for explaining that. And then the second question I had, on the west segment, fifth quarter in a row where orders are down year over year and kind of stuck at this mid-80s community count, Maybe what's the strategy near term? Are there some older dated communities you have to sell through there before you can start to grow that again? Just maybe a quick take on what you're doing in the West segments.

Yeah, I think you're talking about the West region, which is California, Arizona, and Colorado, and Utah. Those are certainly some of the more challenged markets. I think the narrative on Denver is pretty clear. The narrative on what's been happening in Northern California is pretty clear. Arizona is kind of what it is. SoCal has been okay, and Utah is a pretty strong market. But just in general, the West region has been a tougher place to do business. um the affordability has been a lot of pressure on the buyers there's a lot of competition land prices are super sticky regulatory environment is really high so we've been intentionally trying to reallocate a significant part of our business uh to the east of the west region it doesn't mean we're not in those markets we don't believe in those markets but we're being much more strategic uh the value of your land book is high and it's very irreplaceable so we're willing to run that region at a slower pace and try to maximize the margin of that land book because it took a long time to put it together and so you'll continue to i think see the west region be a smaller part of our business long term

Great. And if I could sneak one more in, Philippe, I was encouraged to hear what you're saying about external inventories. I mean, if we think about time, whether it's 12, 18 months, any commentary you have on when you think external spec inventories will be down to a level that will give you guys some better pricing power?

Yeah, great question. I think the builder group in general did a great job these last quarters navigating some of their aged inventory. I think there's still a little bit of overhang out there. Even our numbers were still a little high on the finished specs that we're carrying. We'd like to carry a little bit less. I think there's still some other folks that are navigating as well, but the effort was significant. So I already feel better in general as we go into Q2 that the environment is less competitive, but I do think there's still some more to go. But I think if we work through that the rest of this year, I can see going into 2027 with a much different sort of competitive inventory environment. I think the other thing I mentioned, it's important is just there's a pivot away from specs in general in our industry for a lot of reasons, depending on who your consumer segment is and the markets you're in. So I think that's helpful for us because we're not pivoting away from specs. That's our business. And so less competition in the SPAC entry-level business, move-in ready business, it creates a better and competitive environment for our products specifically.

Okay. That's great. Thank you.

Thank you. And our final question comes from Jade Ramani with KBW. Your line is now open.

Hi, thanks for taking my question. This is Jason Satchin on for Jade. I wanted to ask you about AI. Across various surveys, the construction industry ranks quite low in terms of the expected AI impact. And you commented on deployment opportunities in back office automation, potentially customer acquisition. But are you seeing any other areas of the business where it could potentially make a difference, be that supply chain management or construction management? Thank you.

I mean, AI is going to have a place in every sector of every business. I think it's just deployment and low-hanging fruit. So I think we're starting off with the very easy pieces and hopefully making the mistakes and things that are easily fixable as we grow a new muscle in our skill set. But, yeah, eventually it's going to be a component of everything that we do. The more that we – manage our data and are able to use AI in a holistic way in all of our data. We try not to look at things as limited by a system. So if you think about your data in a data warehouse and then you can query everything in AI from that perspective, then there is no limit as to what functional area is benefiting from your AI initiative. So, yeah, it's definitely something that we're hyper-focused on. The opportunities for savings on a cost side are massive when you're thinking about it from that perspective. But we're going to crawl, walk, run, right? So we've got to take the easy steps first and then advance on to beyond that.

Got it. Thank you. And then just as a final question, is there a certain level of mortgage rates or the tenure that you'd expect to drive an inflection in buyer activity?

Good question. You know, as things – it feels like as things sort of move to six or slightly below six, we really see buyer psychology change below that level. And I think anything below that on your way to five will just be really unleashed demand because of the affordability piece. So that's kind of how we feel about it. Six or lower is good for our business. It's stable. Our rate buy-downs are more efficient. Anything below that just provides more tailwind for our industry. Great. Thanks. Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you.

This concludes today's Meritage Homes first quarter 2026 analyst call. Please disconnect your line at this time and have a wonderful day.