Meritage Homes Corporation

and welcome to the second 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 Tadano, Vice President of Investor Relations and External Communications. Please go ahead.

Thank you, operator. Good morning and welcome to our analyst call to discuss our second quarter 2026 results. Thank you so much for joining us. 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 filing for the Securities and Exchange Commission, specifically our 2025 Annual Report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings relief as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, 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'll begin with a brief overview of market conditions and our second quarter results. Philippe will then discuss our strategy and operational progress, followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions, driving quarterly sales orders of 3,575 which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year with no meaningful sequential deterioration as average absorption pace of 3.5 net sales per month this quarter was in line with a 3.6 in the first quarter. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry level and first move up price points. and we believe that our strategy of having sufficient available home inventory combined with our growing community count positions us to quickly convert demand into sales this quarter for brief periods of rate relief. Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times, and working... Homes Corporation gross margin was 18.6% and adjusted diluted EPS was $1.42 in 30th, 2026. Book value per share increased 5% year-over-year. With that, I'm going to turn it over to Phillippe.

Our strategy of pre-started inventory, streamlined operations, and go-to-market tenants enables us to be agile in our reactions to current market conditions. We leverage this strategy to generate additional direct cost savings to enhance our returns, as incentives remain elevated this quarter. Our move-in ready homes and strong realtor relationships help us compete in an environment where the home buyer values a quick close through clarity and certainty in the home buying process. While marketing, we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1,100 homes year-over-year as we replaced older inventory with an increased volume of new products with lower direct costs. At the same time, we have kept our cycle time sub-110 calendar days for the fifth consecutive quarter. and even found a few more days of improvement allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improve liquidity by allowing us to respond quickly when stronger demand materializes. Our active community count of 340 as of June 30, 2026 and 1% lower than the 345 in June 1. due to timing with a few early closeouts and some delayed openings in CY. Despite the small dip, we are reiterating our expectation of a 5% to 10% full year 2026 community count growth year over year. We also achieved another quarter of lower construction cost per foot as our purchasing teams collaborated with our strategic trades to find a benefit in all parties. We believe these long-term partnerships based on pre-started homes and limited skew counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year-over-year to $357 million in the second quarter from $509 million last year, we continue to invest in our future communities, including the development needed to get our scheduled openings ended in 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases. By maintaining our operational and financial discipline, we believe we are well positioned to navigate uncertainty today while preparing for growth and increased shareholder returns as the market conditions improve. as part of that longer-term plan includes an intentional shift of the portion of our business to first-time move-out homes as we continue to serve one of our key buyer demographics, the millennial customer, as they begin to look toward their next home purchase, while still continuing to offer our entry-level product for Gen Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends Our goal is to be around one-third, two-thirds mix of first move-up and entry-level homes, consistent with the demographics of the U.S. population. We are intentionally rebalancing our portfolio to achieve that over time, starting with a heavier allocation to the acquisition of land for first move-up customers. Second quarter 2026 orders were 9% lower year-over-year, primarily for consortium days, which was partially offset by a 14% increase in average community count. cancellation rate of 13% with a little higher than the 11% in Q1, but still remain below typical industry averages as we benefit from a quick sale to close this process. Our average absorption pace was 3.5 homes per community per month during the second quarter, compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation. While a long-term objective remains an average of four net sales per month for the year, we will not sacrifice profitability or complete irreplaceable lot positions by forcing the Georgians through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385,000 was down 3% from prior year due to geographic shifts shifting from higher ASP West region into the lower ASP East region. Although our extensive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per-home incentive costs. We grew our active communities 90% year-over-year from 312 in the prior year to 340 by June 30th. Q2 was 1% lower than 345 active communities in Q1, a tiny plated factor this quarter. Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter and 67 new dates. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during CO2. Although very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in CO2. although the needed volume incentives varied notably. Parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolina were among our strongest performers, demonstrating more market strength in geographies with limited inventory. We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into an essential path for recovery longer term. In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace. Demand trends were softer in Orlando, Denver, Salt Lake City, and Northern California. Now turning to slide six. Q2 starts totaled approximately 3,900 homes, down 4% year-over-year, yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick-close strategy and within our target range of 175% to 200%. Our annual backlog is approximately 1,720 as of June 30, 2026, compared to approximately 1,750 homes as of June 30, 2025. As for the combined total of specs and backlogs, we had around 6,800 units at June 30, 2026. 22% less than the approximate 8,700 specs and backlog we had in G30 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. We ended the quarter with approximately 5,100 spec homes, down 27% from approximately 6,900 specs in the prior year, and up 7% sequentially from Q1. The 15 specs per store this quarter translated to about four months supply, intentionally near the lower end of our target four to six months supply due to today's demand firing and our improved cycle times. Comparatively, in the second quarter of 2025, we had 22 specs per store, or five months of supply. We reduced our completed specs to 1,500 units in CCU, which was 42% lower than prior year and 30% of our total specs. are lower percentage in two years and right around our target of one-third. This compared to 38% in the prior year and 46% in the first quarter. A balanced approach of reducing age inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes per store. Although we are starting Q3 with lower backlog, we believe that spec home inventory provides us the path to achieve our Q3 guidance. With that, I will now turn it over to Hilla to walk through our financial results. Hilla?

Thank you, Phillippe. Let's turn to slide 7 and cover our Q2 results in more detail. Second quarter, 2026, home closing revenue of $1.4 billion was 14% lower the entire year due to 11% lower home closing volume and a 4% decrease in ASPN closings to $373,000. While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, The decline in ASP was primarily due to geographic mix. To a lesser extent, product mix within our communities also impacted ASP, with lower-priced homes outselling higher-priced ones, and in certain markets where we had a greater amount of aged spec inventory, we used incremental incentive disorder to sell those homes. With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends. During the temporary dips in rate this quarter, we sold and closed homes with lower-cost incentives, which reduced our per-home incentive burden. Looking ahead, incentive costs and utilization will continue to be inversely correlated to interest and mortgage rates, which remain highly volatile and move on both domestic and international political developments. Home closing gross margin of 18.3% in the second quarter of 2026 was 280 bps lower than prior year's 21.1% as a result of lost leverage on lower home closing revenue and higher lot costs, both of which were partially offset by improved direct costs and faster cycle times. Second quarter 2026 home closing gross margin included $3.6 million of real estate inventory impairments and about $300,000 in terminated land deal walk-away charges compared to no impairment and $4.2 million in terminated land deal walk-away charges in the prior year. Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for the second quarters of 2026 and 2025, respectively. We are encouraged that the volume of impairments remains relatively limited, and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price. Our current land basis is primarily comprised of higher cost land vintages from the 2022 to 2025 timeframe. Although this higher basis will continue to be a margin headwind in the near term, we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged. In Q2, direct costs per square foot were down nearly 6% year-over-year, reflecting the discipline, purchasing, and vendor negotiations Phillippe already covered with savings generated by both labor and materials. As we've noted, our newer starts should benefit from the slower cost basis and will be reflected in our margins in the second half of this year. Sequentially, adjusted gross margin improved 80 bits to 18.6% from 17.8% in Q1, driven primarily by better leverage on... Thank you for joining us. As a percentage of second quarter of 2026, home closing revenue were 10.4% compared to 10.2% in the second quarter of 2025, as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the lost leverage on lower home closing revenue. Thank you for joining us today. We remain committed to growing our annual clothing volume which should drive operating leverage and support our longer term SG&A target of 9.5%. The second quarter's effective income tax rate was 24.8% this year compared to 23.9% for the second quarter of 2025 due to higher state income taxes. As a reminder, we expect only a limited impact from the June 2026 expiration of the energy tax credits for the balance of this year and into the future as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credits. Overall, lower home closing revenue and gross profit led to a 33% year-over-year decrease in second quarter 2026 diluted EPS to $1.37 from $2.04 in 2025. Adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walk-away charges. To highlight the key results for the first half of 2026, on a year-over-year basis, orders were down 7%, closings were down 12%, and our home closing revenue decreased 16% to $2.5 billion. Adjusted home closing margin of 18.2% was 350 bps lower in 2025, SG&A's percentage of home closing revenue was 11%, and net earnings decreased 46% to $146 million. The Justice Eluded EPS was $2.24 for the first six months of 2026, excluding impairments and walkaway charges. Before we turn to the balance sheet, it's worth noting that our customer credit metrics remain healthy and unchanged during the second quarter. FICO scores, DTIs, and LTDs all track closely with historical averages, continuing the trend we've seen for several years. Lack of deterioration in customer credit quality validates that in an ongoing market volatility, consumer psychology continues to play a strong role alongside affordability concerns and home buying decisions. On to slide eight. Thank you so much for joining us. Extend the maturity from 2030 to 2031 and increase the accordion feature to permit a facility size of up to $1.47 billion. We are committed to supporting our long-term growth trajectory while prudently managing our capital structure and maintaining our investment-grade credit rating. As such, our net debt-to-cap ceiling remains in the mid-20s range. Our capital allocation strategy looks to balance both growth and shareholder returns. As we have been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $357 million in Q2. With slower demand, we are focused only on the most attractive land opportunities, increasing our land spend for first-time move-up communities, and optimizing development schedules. Our forecasted land acquisition and development spend is expected to be between $1.7 and $2 billion for full year 2026. Thank you for joining us. Today, in 2026, we have spent $230 million on share buybacks, reducing our December 31, 2025 outstanding share count by nearly 5%. As of June 30, 2026, $284 million was available under the repurchase program. Thank you for joining us today. We increased our quarterly cash dividend 12% year-over-year to 48 cents per share in 2026 from 43 cents per share in 2025. Our cash dividend this quarter totaled $31 million and $63 million year-to-date. For the first half of 2026, we returned $292 million of capital to shareholders, or 201% of our total earnings to date this year. Slide 9 In the second quarter of 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of the last 300 terminated lots. These lots primarily reflect communities for 2028 and beyond, as the owner controls most of the lots we need to meet our community count targets through 2027. In the second quarter of 2025, we put nearly 1,800 net new lots under control. As of June 30, 2026, we owned or controlled a total of about 73,200 lots, equating to 5.2-year supply the last 12 months closely, slightly above our target of 4-5-year supply, but reflective of the upcoming community town growth we expect over the next 18 months. We also had approximately 15,300 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. We continue to target around a 40% option lot ratio. About 69% of our total lot inventory in June 30, 2026 was owned, and 31% was optioned. This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% optioned lot position in the prior year, reflecting our terminated lots in late 2025. We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits, We do not believe every land deal can absorb the incremental cost of an off-balance sheet structure. Finally, I'll direct you to slide 10. Based on current marking conditions and year-to-date results, we are upping our guidance for full-year 2026 home closings and revenue to around 5% below full-year 2025 results, although home closing revenue could trend a bit lower if marking conditions require higher incentives. For Q3 2026, we are projecting total home closings between 3,300 and 3,600 units, home closing revenue of $1.26 to $1.35 billion, home closing gross margin around 18%, an effective tax rate of 24.5% to 25%, and diluted EPS in the range of $1.10 to $1.30. With that, I'll turn it back over to Philippe.

Thank you, Dua. In closing, we believe our second quarter results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from the first quarter to the second quarter. Throughout this quarter, we remain focused on controlling what we can control, strategically reducing age inventory as we target the right level of inventory per store, balancing pace and price, and allocating capital thoughtfully to maximize returns. Looking ahead, with community count expected to grow in the second half of 2026, We believe we have the units to achieve our full year rents. Combined with our balanced approach to capital allocation, we believe Meritus is well positioned to navigate the current uncertain environment and deliver strong shareholder value long term. With that, I'll 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. And we'll pick our first question from Trevor Allenson with Wolf Research. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. First one is on the better-than-expected growth margin in the quarter despite rates going higher. What shows the beat in the quarter? It sounds like maybe you're getting some better cost structure come through to perhaps quantify those tailwinds in the quarter, and then should we expect incremental savings on the cost structure moving forward?

Thanks, Trevor. I'll take the gross margin question. So for us, it's a combination of a couple things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition, but we also had that 6% year-over-year improvement on direct costs, which is helpful. And then also, we mentioned this, but because... Thank you for joining us. I don't know that we're modeling continuing improvement on direct margin, or on direct cost, I should say, but the savings that we've had so far should continue to push through the financial statement. So the rest of the gross margin for the balance of the year and into next year is really a discussion of volume of incentives and overall volume of closings.

Okay, makes sense. And the second question is on your shift back for a portion of your business more towards first time move up.

I think from a demographic outlook by an age cohort, that makes a lot of sense. What's the timeline to make that shift? And is it still your expectation you're going to offer a 60-day guaranteed fully spec model in those homes or any changes to your go-to-market strategy as you serve a little bit higher end buyers? Yeah, great question. It'll take a little bit of time because we pivoted pretty neatly to entry level during the last five years. So as we pivot back to a more balanced 30% to 70%, it's really about sourcing some new land and bringing that land on the market. So more of a 2028 and beyond type of impact. and as it relates to the operating strategy, it's going to be pretty aligned with what we do as it relates to not offering choice and options but we are going to tweak the go-to-market when it comes to when we release the homes. We'll probably be releasing the homes earlier because many of those folks have homes to sell and so there will be some tweaks on sort of our focus around the closing ready guarantee as well as pieces of the realtor strategy.

Thanks for all the color and good luck moving forward.

Thank you. We'll take our next question from Steven Kim with Evercore ISI. Please go ahead. Your line is open.

Yeah, thanks a lot, guys. Just a follow-up on this shift. So I know you guys, when you first rolled out this very significant shift to the move-in-ready homes, I mean, it was something that you had spent a lot of time thinking about and preparing for. And so I just wanted to try to understand this pivot or tweak, let's say, to move a third back to the part-time move-up. Was this something that you always envisioned you would eventually do and maybe something has just precipitated or caused you to maybe advance that a little earlier? Or is there something that fundamentally has changed your thinking about maybe being 100% first time? And so this was not initially contemplated, but you are contemplating it now. And if so, what was that change or this thing that you've seen in the market?

Yeah, it really was something we already had always intended to be, even when we rolled out our strategy seven years ago and tweaked our strategy four years ago. We always believe that the second consumer segment for us was the first move up. Someone's still looking for a move-in ready home. Someone's still looking for a home that they can move in quickly, but buying their second home potentially, buying their second new home potentially. So it's always been part of our strategy. What's really changed is Fundamentally, the land market has changed, right? As land has gotten more expensive, prior, we could really underwrite a lot of entry-level land out there in the market, and we see more opportunities to source 1MU land, and that's really the change in the market. I think that's been just sort of something that's been happening over time. But this has always been part of our strategy, and now the land market is really lending itself to that opportunity.

I would add one more thing, Steven. We talked a little bit about it in the script, but the shift in the age of the population cohorts in the U.S., millennials are the largest population cohort. So we were initially targeting our efforts towards that group, and as they were buying their first home, they were obviously an entry-level buyer. Here we are 10 years later, and they're ready to buy their next home. So we're continuing to follow the same demographic groups. across their home buyer journey. So obviously as younger cohorts enter their home buying stage, they're continuing the entry-level push, but we're also following the millennial buyer and hopefully we'll be their first and second time home provider.

Gotcha. Yeah, lots of interesting things there. So I guess just following up on that question, I believe you said that the land market, I guess, has gotten the first time move up. And so you see some opportunities there. And you also indicated that this is something that you've contemplated even years in advance that you would eventually do this kind of pivot. One of those sound opportunities. and could also change back. Next year, the land markets may become, there may be less opportunity at first time move up and so forth. So I'm just trying to understand how much of this is opportunistic in terms of the land strategy and opening up and then how much of it is something that regardless of what the land market stratification looks like, you're just going to use this thing that this is the right time and many more. Yeah, I mean,

probably four questions there, but let me try to answer them all. I think, first of all, this is not opportunistic. This is something that we intentionally had as a goal of our business, but the market's been very different for the last five years, and so we've played in the market the way the land market supported. First-time land was much more available and priced correctly for the last five years, and now that bifurcation is starting to close, and 1MU land is making more sense and is more underwritable. Can that change? Certainly it can change. We're always going to balance out the business between entry-level and first move-up based on the inputs in the business. But it's long-term, our strategy is to be a third 1MU and two-thirds entry-level. Certain markets will allow us to do more of it, and other markets will allow us to do less of it. So we're glad we have our regional and national footprint to kind of play in the market the right way. As it relates to the tweaks to our operating model, I really feel like it's like a tweak. It's a modification on the margin. We're not going to start offering design studios. We're not going to start offering a bunch of personalization. We're just going to build a nicer home. Homes that are 50 foot wide versus 40 foot wide don't necessarily take longer to build. You just fill them the same way, but you might offer some nicer features. Maybe those buyers will get nicer cabinets, countertops, floor tweak to make sure we're delivering the right value to that customer because they're looking, like you said, for their second home. So I don't see a big change in our kind of core operation strategy, but maybe some things on the margin that we'll tweak to make sure we deliver the right value to that customer segment.

All right, great. Thanks so much, guys.

Thank you. We'll take our next question from Alan Ratner with Zellman. Please go ahead. Your line is open.

Hey, guys. Good morning. Thanks for all the detail here. I won't beat the drum on the move-up pivot, but I'll just ask one quick question on that front. He has accelerated a bit across the industry, and I'm curious if you would consider M&A as an avenue to maybe accelerate that Thank you for joining us today.

We look at M&A through a very strategic lens. It's not just about scale at any cost. It's about can we go out and acquire assets that will allow us to play in different markets or consumer channels. So 100%, I think if we were going to do any M&A at the local or private level, we'd be looking for some type of move-up penetration or to get into markets that we're not in that are currently performing well. There's a number of Midwest markets that seem really interesting right now. So, for us, it's about, you know, a strategic add versus just incremental scale.

Got it. Makes sense. The second question, you know, you made the comment about, you know, intra-quarter where rates briefly dipped. That gave you an opportunity to maybe... Pull back a little bit on incentives. I just wanted to clarify, did you actually reduce the incentives you were offering, or were you kind of maintaining the same mortgage rate buy-down programs that you were offering? It was just costing less to buy down to that rate, given what was going on in the market. I just wanted to clarify, is there kind of an ability, if we do see further moderation of rates, to actually pull back more significantly on incentives, or was it just a cost dynamic?

So it's tranche. So the first step in rates pull back a bit is a lower cost offering. We're not, you know, if we're offering $4.99 at the rate shop, we don't start offering $3.99. It's just costing us less to offer the same incentives. Thank you so much for joining us. started to briefly return to normal consumer behavior followed.

I would just add that from a long-term perspective, with inventory levels being down and BTO builders now pivoting back strongly to BTO and out of spec. We're just in the incentive environment. Now, I can't predict what's going to happen with the economy and some consumer psychology things out there, but at least we don't see the incentive wars happening to the level that they were happening last year and into this year.

That's great to hear. Thanks a lot.

Thank you. I'll take our next question from John Lobalo with UBS. Please go ahead. Your line is open.

Good morning, guys. Thanks for taking my questions as well. The first one is, you know, the roughly 18% gross margin outlook for the third quarter. has clearly spooked some folks out there coming off the 18.6 in the second quarter. And I don't want to get too cute here, but would you consider 18.3, 18.4, 18.5 to be around 18%? And if not, what other than the lower quarter closings would drive the gross margin down for the second quarter?

Yeah, I mean, it's primarily leverage. And Rates did increase through June. So, you know, you saw incentive utilization, rate buy down utilization increased in June, which can hit the 18% on the margin. We're kind of sitting here around 18% depending on what rates do. Is it going to be a little bit lower, a little bit higher? It just depends on what happens inter-quarter. We died it to around 18% in Q2 and ended up at 18.6 because rates were favorable. So it's just really dependent on that factor.

Yeah, I think the first part of the week's response is also very important. It's for leverage. You can look at the midpoint of our closing guidance and where we ended up Q2 versus Q3 and see that there's going to be, you know, maybe 20, 30-ish steps that are just a function of leverage. Obviously, looking at our full year guidance, you can extrapolate to what you think Q4 is going to be. There's going to be a pickup. and an improvement where the leverage will go in the other direction. So it's so tough on these intra-quarter kind of discussions, especially when so much of your sales volume is unknown for us and we're closing still 200% of our backlog. So visibility into the units and to the incentive that will be part of those closing units is not as clear, which is why we've shifted our commentary from providing that exact number to kind of staying around a number because there's still a lot of movement

Yeah, and rates again have been increasing since mid-June. They're probably the highest they've been as we roll into July, which is typically the lower seasonal kind of period.

Okay yeah and I think that the fourth quarter comment was going to be my next question and we should see the reversal of that gross margin but let me just ask you know the fourth quarter deliveries are implied to be up you know about 10% year over year and so you know that would either seem to imply that you're expecting You know, a decent ramp in orders in the third quarter here or that you're willing to work the backlog down pretty meaningfully as we move through the year. I mean, how should we sort of think about this? And I just want to make sure that, you know, the idea here is that you're not going to ramp incentives to try to drive orders to meet that full year delivery.

Yeah, again, everything we say is predicated on How this plays out economically and politically over the next six months, but the Q4 guide is mostly predicated on community town growth. So as we said, we have still some material community account growth happening into Q3 and Q4, and that's driving the incremental closings for Q4. We're not expecting the market to improve. In fact, we're probably pretty conservative about what we think the back half is going to look like from an incentive and absorption standpoint. So it's 100% tied to the community account growth that we expect in the back half of this year.

and then remember just for us the way that we count an active community as a sale and for us we don't sell until we're ready to close within 60 days so for us an active community can start producing clothing same quarter that it becomes active not just sales in the same quarter that it becomes active so we have quite a ramp of communities that's coming up if you look at where we started the year and that's five to ten percent guide on ending community count where all of those will be delivering clothing

Yeah, that's a great point. Our scars were up because we were starting homes for these communities that were getting ready to open. And you don't open up communities until we can close homes.

Yeah, that makes a lot of sense. Thank you.

Thank you. We'll take our next question from Susan McLaurie with Goldman Sachs. Please go ahead. Your line is open.

Thank you. Good morning, everyone. Thanks for taking the questions. I want to start on the cost side. The 6% savings that you've realized is impressive there. Can you talk a bit more about what is driving that and how you're thinking about the ability to realize further incremental benefits in the

So the 6% savings year-over-year, and we're down 2% sequentially, it's both labor and materials. We saw it sort of broad-based. We're seeing some savings in both categories. As Hilla noted in her prepared remarks, that our lower-cost new stocks are replacing age inventory, which is being captured in the third quarter 26-horse margin guidance. I'm not sure we're anticipating further cost savings on new starts that are going to go out in Q3. We are seeing a little bit of headwinds in lumber that may play out here over the next couple quarters. So due to that factor, we're not modeling any more improvements from here for now.

Okay. All right. That's helpful. And then maybe as we think out and you reiterated the longer-term target for the gross margin, As you think about the mix shift that will come through as you start to integrate more of the move-up product in there, what does that mean in terms of the path for profitability in the business? And how should we think about the shift that will come through and how you can hit that target?

Well, I think the long-term target of 23 1⁄2 to 23 1⁄2 is not mix-related. It's purely based on the way we underwrite land. and so right now we're not achieving our underwriting because primarily incentives are running extremely hot. We typically underwrite land at a much more normal incentive environment so the bridge between where we are and the bridge to where we want to be is 100% interest rate and incentive related. Now 1MU land should typically be higher revenue and you should get more leverage from the higher ASP, but we don't really underwrite 1MU land at a higher margin than we underwrite entry level. And again, this will take some time. We have about 10% of our business is 1MU right now. and there's probably some opportunity to pivot some of our existing land book to 1MU because they're in the right locations but most of it's going to come from new land that we're sourcing today so the impact of the mix to 1MU won't really play out in our P&L until 2029 and beyond.

Okay, thank you for the color. Good luck with the quarter.

Thank you. We'll take our next question from Rafe Cedrosic from Bank of America, please go ahead, your line is open.

Hi, good morning, thanks for taking my question. Just on the following up on John's question earlier, on the second half delivery guidance for the first half, I think it's about 1,000 more deliveries, and if I look at the backlog and completed specs, it's sort of flattish. um do starts need to pick up further from here uh on that to hit the back half delivery guidance and can you give any color on what the communities have count cadence um third quarter versus fourth quarter

Yeah, I mean, we don't give community count cadence. It's just way too difficult. I mean, if the municipality approves something, you drop below or doesn't approve something, you drop below a certain number of units, and then you can no longer count a community as active. So it's just way too refined for us to try to figure out the specific timing, you know, on a September 30 versus December 31. So we're still really comfortable with our 5% to 10% growth year over year. and obviously as you're running it through your model and trying to hit that full year units number that we are fairly comfortable with at the 5% below full year 2025. There is a ramp up in volume, but as Philippe already mentioned, it's a function of the community count. So you already started to see a little bit of that spec chart Thank you. Thank you. The prepared remarks between the inventory that we are carrying to start Q3 and into Q4 and that sub 110-day cycle time, we feel really confident that we have everything that we need to hit our full year guidance.

Okay, that's helpful. And then can you just remind us the lag time between when lumber prices move and when that starts to show up in your deliveries?

It's staggered. We don't hedge, but we have 36-year, 90-day locks at different points in time throughout the country, so we kind of create natural hedges. So it's a little bit of noise, but within 90 days, you should start to see some of it flow through into our construction, and then you should see that flow through into our numbers in about a quarter. So I think a couple of our peers said about two quarters, and I think that that's probably the right number for us as well.

That's helpful. Thank you.

And we'll take our last question from Jade Romani with KBW. Please go ahead. Your line is open.

Thank you very much. Just on the first-time move-up strategy, have you considered broadening that to beyond first-time move-up to the broader move-up market?

No. I think, again... We've had this strategy in place for a long time. We feel like with our operating model and the way we want to play in the market and where the demographics are the strongest, we want to stay in that 1MU price point. We don't want to expand beyond that into a 2MU or a luxury buyer. Those folks typically want choice and customization, which we're not going to offer based on the way we build homes. So for those reasons, it's really mostly a value-focused 1MU consumer segment.

Thank you very much. And on land banking, I was wondering what you thought the value that it provides is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone are offering in the land banking space.

Yeah, I mean, it's a good point. It's why we haven't done a lot of land banking over the last five years. That reason, we were sitting on a bunch of cash, and then the price of land banking was pretty expensive, and the optionality of land banking had really changed dramatically. But at some point, as a company of our size, we believe land banking allows us to control more land to allow us to grow our business at a better return on equity. So at some point, it makes sense when your balance sheet reaches a point where that extension creates that incremental value. So that's how we think about it. It's why we haven't done it a lot. It's why we're trying to get it to you know 40% over time because we would like to as we're trying to grow from 15 to 20,000 units we want to control more land for less of our balance sheet at play. Makes sense, thanks. Okay well thank you everybody, thank you operator. I want to thank everyone who joined the call today for your continued interest in Mary's Homes. We hope you have a wonderful rest of your day and a great weekend.

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