Meritage Homes Corporation (NYSE: MTH) reported Q1 EPS of $1.83, $0.55 better than the analyst estimate of $1.28. Revenue for the quarter came in at $890.42 million versus the consensus estimate of $799.94 million.

FIRST QUARTER RESULTS

• Total orders for the first quarter of 2020 increased 23% year-over-year, driven by a 35% year-over-year increase in absorptions. Order trends during the quarter, compared to a year ago, were up 38% in January and 51% in February, but down 8% in March.
• Absorptions were up 41% in the West and Central regions, and 20% in the East region, primarily due to strong demand for our entry-level homes. Community count declined sequentially to 241 at March 31, 2020, from 244 at December 31, 2019, and 260 at March 31, 2019.
• Order cancellation rates were relatively flat at 13% for the first quarter, with an increase in March cancellations to 16% in 2020, compared to 12% in 2019. Absorptions have slowed and cancellation rates have increased as conditions have deteriorated since mid-March.
• Entry-level orders grew to 61% of total orders for the first quarter of 2020, compared to 45% in the first quarter of 2019, and represented 51% of total active communities at March 31, 2020, compared to 36% a year earlier. Orders from non-strategic communities made up just 6% of first quarter 2020 total orders, compared to 13% of first quarter 2019 orders.
• Net earnings for the first quarter of 2020 totaled $71.2 million ($1.83 per diluted share), compared to $25.4 million ($0.65 per diluted share) for the first quarter of 2019. The 182% increase in diluted EPS reflected the combination of increases in home closing revenue, gross margins and greater overhead leverage, in addition to lower interest expense and income taxes in the first quarter of 2020.
• The 27% increase in home closing revenue for the quarter reflected a 31% increase in home closing volume, which was partially offset by a 3% year-over-year reduction in ASP due to the shift in product mix toward lower-priced entry-level homes. The West region led with home closing revenue up 38% year-over-year, followed by a 34% increase in the Central region and 10% increase in the East region.
• Home closing gross margin improved 330 bps to 20.0% from 16.7% a year ago, contributing to a 53% increase in total home closing gross profit over the prior year's first quarter.
• Selling, general and administrative expenses totaled 10.7% of first quarter 2020 home closing revenue, compared to 12.3% in the first quarter of 2019. The year-over year improvement was primarily driven by greater leverage from higher home closing revenue and continuing cost controls in 2020, in addition to higher brokerage commissions and severance expenses in 2019, resulting from the tougher housing market conditions exiting 2018.
• Interest expense decreased $4.1 million year-over-year, reflecting a reduction in total interest incurred due to the December 2019 early redemption of $300 million 7.15% senior notes due in 2020. Nearly all interest incurred was capitalized to assets under development in the first quarter of 2020.
• First quarter 2020 pre-tax margin increased 500 bps to 9.6% compared to 4.6% in 2019.
• Effective income tax rates were 18.1% in the first quarter of 2020 and 21.5% in the first quarter of 2019. The tax rate in 2020 benefited from energy efficient homes credits from the enactment of the Taxpayer Certainty and Disaster Tax Relief Act on December 20, 2019, as well as a larger tax benefit from equity-based compensation for stock awards that vested in the first quarter of 2020.

MANAGEMENT COMMENTS

“We reported select preliminary operating results for the first quarter of 2020 on April 6, which reflected stronger-than anticipated market demand through early March, followed by significant declines through the end of the month, which have continued to deteriorate in April as the coronavirus pandemic spread across the U.S. and severely impacted the economy,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes.

“Though our net earnings for the first quarter more than doubled and every key operating metric showed significant year-over-year growth, we are expecting much weaker results for at least the next couple of quarters due to large parts of the economy being shut down, causing record job losses, fear and uncertainty about the future. Our hearts go out to all those impacted directly and indirectly.

“Nearly every aspect of our lives and business operations have changed in just the last couple of months. We have shifted our attention entirely to respond to the rapidly-changing conditions and plan for the challenges that lie ahead,” he continued. “Our primary concern is the health and well-being of our associates, customers, business partners and the communities we serve. We are following applicable CDC guidelines and the directions of government and public health agencies, and modifying our standards and protocols to safeguard all of our stakeholders as conditions change.

“Despite these challenges, our team members are using their experience, creativity and our leading technology to continue to serve our customers. Home buyers are utilizing our virtual capabilities to help them explore, tour, design, purchase, finance and in some cases even close on their new home without the need to ever meet in person if they so choose.”

He explained, “With shelter-in-place orders in effect across most of our markets, we are seeing customers either virtually or by appointment in our sales offices and Studio M design centers. Those we see tend to be serious buyers ready to commit to a new home purchase, so while our traffic has understandably decreased, our conversion rates on the traffic we do see have increased.

“Using our 24/7 mortgage pre-approval tools on-line, our customers are able to move through the process of purchasing a home more quickly, and we can even process earnest money deposits on debit or credit cards remotely, through a secure emailable link. All of these tools are designed to make it more convenient and safer for our home buyers to work with us.”

He added, “Because homebuilding is currently recognized as an essential service in most locations, our construction crews have been working steadily, following social distancing guidelines, to ensure that we deliver completed homes on schedule for those who are eager to move into their new home.

“Meritage Homes is well positioned to continue operating through this difficult period, though no one knows how long it will last or how it will evolve. Our strategy has been to simplify our operations and focus on the most active homebuying groups -- entry-level and first move-up -- within many of the best markets in the country. It has been a successful strategy since we implemented it several years ago, and one we believe will continue to serve our customers, employees, partners and shareholders well into the future.

“We ended the first quarter with nearly $800 million in cash and over a billion dollars of total liquidity, and a low net debt-to-capital ratio of under 27%. After the early redemption of our 2020 senior notes last December, our earliest debt maturity is in 2022. We are tightly managing cash flows by deferring the acquisition and development of most new communities and have pulled back on all discretionary expenses. Additionally, we’re managing our spec-building strategy to continue to capture efficiencies while appropriately slowing our starts of new spec homes to reflect current sales volumes.”

Mr. Hilton concluded, “I am proud of our entire team for their tenacity, innovative thinking and genuine concern for our customers and communities, as well as each other. I am also confident in our management team’s ability to successfully steer the Company through these difficult times. Due to the lack of visibility at this time, we are withdrawing our previous guidance and will plan to provide future guidance at a more appropriate time.”

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