Meritage Homes Corporation Aktie

Hello, and welcome to the Annual Meeting of Stockholders of Meritage Homes Corporation. Please note that today's meeting is being recorded. [Operator Instructions]

It is now my pleasure to turn today's meeting over to Phillippe Lord, the CEO of Meritage Homes Corporation. Mr. Lord, the floor is yours.

Good morning. My name is Phillippe Lord, the CEO of Meritage Homes Corporation. On behalf of Meritage, I would like to welcome you to our 2026 Annual Meeting of Stockholders. As is our practice, this year's meeting is being held virtually via live webcast. Joining me today via webcast are Steve Hilton, the company's Executive Chairman, who will act as Chairman of this meeting; as well as Malissia Clinton, the company's General Counsel and Secretary, will act as Secretary of this meeting; Jennifer Lippoldt of Computershare will serve as our inspector of elections today.

I would now like to ask Steve to lead us through the rest of this meeting. Steve?

Thank you, Phillippe. Good morning, everyone. As chairman of this meeting, at this time, I will call a meeting to order. Each of you should be able to access our agenda and rules of procedure via the web portal. We'll conduct the meeting according to that agenda and those rules. As is our custom, we will conduct the business portion of our meeting first, upholders can submit questions related to the election of directors or any other proposals on the ballot through the web portal, and we will address them during the meeting.

Please note that list of registered stockholders is available on the web portal for inspection from this meeting by any stockholder.

Before proceeding, let me introduce my fellow directors who have joined this meeting. Peter Ax, Dana Bradford, Louis Caldera, Deb Henretta, Erin Lantz, Joe Kio, Kelly Mooney, Mike Odell, Geisha Williams and Phillippe Lord, also our Chief Executive Officer. Our Corporate Officer also present; Hilla Sferruzza, Chief Financial Officer; Malissia Clinton, General Counsel and Secretary; Austin Woffinden, Executive Vice President of Corporate Operations and Strategy; and Javier Feliciano, Chief People Officer. And we have the following representatives are independent auditor and legal counsel Travis Chiles from Deloitte & Touche; Jeff Beck from Snell & Wilmer.

As noted in our annual -- as noted in our notice of annual meeting and proxy statement, the record date for voting at this meeting March 26, 2026. The Secretary has presented an affidavit of mailing stating that the notice of the annual meeting and accompanying proxy materials were distributed on or about April 7, 2026. Based upon the proxies received prior to this meeting, I've been informed by the inspector of the elections that we have a quorum, this meeting is duly convened. We may now proceed with the business of the meeting.

Minutes of last year's Annual Meeting of the stockholders have been approved by the Board of Directors and are on file with the company. As Chairman, I will entertain a motion to proceed with the election of directors and voting on the other proposals set forth. I so move. And second?

And second.

Thank you. The polls are now open. At this time, any stockholder who hasn't yet voted or wishes to change his or her vote may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or Internet do not want to change their vote, do not need to take any further action.

There are 4 company proposals and 1 stockholder proposal to be considered by the stockholders on today's agenda. Each of the proposals will be presented in order in which they appear in the company's notice of Annual Meeting of Stockholders and proxy materials.

Please note that only properly submitted proposals, which are listed in the proxy materials previously distributed to you, will be considered at this meeting. In the interest of time, please save your questions and comments until after all proposals are introduced.

Now I'll present the 4 company items of business on today's agenda as specified in the proxy materials. Number one, the election of 6 directors for a 1-year term; number two, ratification of Deloitte & Touche as our independent registered public accounting firm for the 2026 fiscal year; number three, the advisory vote to approve the compensation of our named executive officers; and number four, the advisory vote to approve the reduction in ownership threshold to call a special meeting of the stockholders to 25%.

As I mentioned, we will be considering voting on one stockholder proposal, which is submitted by stockholder, John Chevedden. This proposal and the company's opposition statement are set forth in the company's proxy materials. At this time, I'd like to introduce Mr. Chevedden, who is in attendance at our virtual meeting today. He will have up to 3 minutes to present this proposal. Web hosting moderator will alert you when there is 1 minute left. Mr. Chevedden, please proceed with your proposal.

This is John Chevedden. Proposal 5, improve shareholder ability to call for a special shareholder meeting. Shareholders ask our Board of Directors to take the steps necessary to amend the governing documents to give the owners a combined 10% of our outstanding common stock to power to call a special shareholder meeting.

Such a special shareholder meeting can be an online shareholder meeting. There shall be no discriminatory rule to mandate ownership of Meritage Homes shares for a specific period of time or for shares to participate in calling for a special shareholder meeting or that must such shareholders be record holders. Proposal 4, preceding proposal is a sneaky proposal in that it's only an advisory proposal. Proposal 4 was drafted after this Proposal 5 was submitted to Meritage.

Meritage thus had 4 months to draft its Proposal 4. This Proposal 5 is upfront in stating two principal elements for a genuine right for Meritage shareholders to call for a special shareholder meeting, giving 10% of Meritage shares and attainable right to call for a special shareholder meeting and no disqualification clause that could, for instance, disqualify a substantial block of Meritage shares from participating in calling for a special shareholder meeting.

Meritage has 4 months to draft its Proposal 4 that would seek Meritage shareholder input on these two principal elements of genuine shareholder right to call for a special shareholder meeting and suspiciously chose only to include one, a 25% provision.

Perhaps Meritage risk litigation if Meritage asks its shareholders to approve a binding 2027 special meeting proposal that disqualifies a substantial block of Meritage shares because Meritage clearly had an opportunity to seek shareholder input on that key detraction element and chose not to do so. Please vote for a genuine shareholder ability to call for a special shareholder meeting, Proposal 5 against the sneaky Proposal 4.

Okay. Thank you. We will now conduct any other business that may properly come before the meeting. We have received no questions relating to the election of directors or any of the proposals on the ballot, I declare the polls closed. On behalf of Meritage, I want to express our appreciation to all stockholders who returned their proxies or voted at this meeting.

Preliminary votes have been tabulated and the preliminary results are as follows: Number one, 6 directors were elected for a 1-year term. Number two, the selection of Deloitte & Touche as our independent registered public accounting firm for the 2026 fiscal year was ratified. Number three, the compensation of our named executive officers was approved on an advisory basis. Number four, the advisory vote to approve the reduction in ownership threshold to call a special meeting of stockholders to 25% was approved. Number five, the shareholder proposal to improve shareholder ability to call for a special shareholder meeting was not approved.

We'll announce the final results of today's meeting within 4 business days from today. I believe there are no questions from the stockholders today. We will conclude our Q&A session. As there is no other business to be addressed at this meeting, I will entertain a motion to adjourn the meeting.

I so move.

I second the motion.

All in favor, say aye. Aye. All opposed, say no. The ayes have it. Motion carried. That concludes the business of the meeting. Thank you for attending.

This concludes the meeting. You may now disconnect.

Greetings, and welcome to the First Quarter 2026 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now turn the call over to Emily Tadano, 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 home page.

Please refer to Slide 2, 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; 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, and welcome to everyone joining today's call. Today, I'll begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance.

Entering 2026, we are cautiously optimistic that lower interest rates and tenant demand will translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks in 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 phase of sales, military operations in Iran commenced at the end of February, increasing interest rates, price -- 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 the long-term fundamentals for the home 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 increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31, 2026, our book value per share increased 6% year-over-year.

And with that, I'll now turn it over to Phillippe.

Thank you, Steve. Given the current under in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities which we then grew to 345 by March 31, 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 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 count 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 you've mentioned, we believe that long-term demand remains supported by favorable demographics and 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 $0.40 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop.

Now turning to Slide 4. First quarter 2026 orders were 5% lower year-over-year, primarily due to an 18% decline in average resort space, 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 4 net sales per month where community level market dynamics would not support it. While other long-term -- while over the long term, we strive to be a 4 net sales per month in all markets as we believe we best leverage our fixed cost at that volume.

In geographies where demand is meaningfully inelastic due to affordability or competitive attention, we 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 each region. We saw a nice uptick in March. [indiscernible] 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 5. As always, sales performance was driven by local market conditions in the first quarter. All markets require additional incentives in some markets such as Dallas, Houston and Phoenix, consumer demand is comparatively more elastic where incremental volume is achievable with only small incremental incentives. New other markets such as Austin, parts of Florida and Charlotte continue to be tougher selling environment.

Turning to Slide 6. We've been rightsizing our start pace, and we have inventory to align with our faster cycle times. We maintained a sub-110 calendar day instruction 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 starts pace with our sales pace, but due to faster cycle times and you need to work through from inventory in certain locations, we reduced our start pace this quarter. We expect our go-forward start pace 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 7% 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 respect to carry fewer fair specs in the future. Internally, we look at our inventory as a combined total specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy 6 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 90% sequentially from Q4. The 14 specs per store this quarter was a huge level -- lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under 4 months of intentionally at the low end of target of 4 to 6 months supply specs due to the slower demand expectations and improved cycle comps. Comparatively, in the first quarter of 2025, we had 23 specs per store or 5 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 1/3 complete specs. We will continue to focus on bringing this ratio down in Q2.

With that, I will now turn it over to Hilla to walk through our financial results.

Thank you, Phillippe. Let's turn to Slide 7 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 a tougher demand environment this quarter. As Phillippe 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 reflects our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP and closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the East region.

For closing gross margin of 17.5% for the quarter was 400 bps lower than prior year's 22% as a result of the 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 impairment and $1.4 million in terminated land a walkaway charges compared to no impairment and $1.4 million in terminated land deal walkaway charges in the prior year, coupled with about 20 bps from lost leverage unanticipated higher closing revenue. These impairments also impacted margins by about 30 bps. Our current land basis is primarily from 2022 through 2024 and will continue to negatively impact margins 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, and 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 Iron 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. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key digger to our success. Our broker relationships remain strong with co-broke 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 credit was significantly reduced starting in 2025 when the higher construction threshold 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 I 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 2, validating our belief the hesitation in the market is at least partially a psychological decision versus a purely financial one.

On to Slide 8. Our balance sheet remains healthy at March 31, 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 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, nearly 3x 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 shifts. 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 9. In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31, 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, though we're still undergoing diligence at the end of the quarter, which is another potential 1-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 31, 2026 was owned and 30% options compared to prior year, where we had a 62% owned inventory and then 38% option lot position.

As we shift more land to off balance sheet, we are doing so very slowly and cautiously remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional costs as we do not believe that all or most land today belongs off book. While we have set 40% of our initial off-book target, our actual percentage will be solely turned 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 on closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, pump 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 Phillippe.

Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it's worth reinforcing what sets Meritage apart. We are a top 5 homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differences from peers and is anchored on 3 tenants, our 60-day closing guarantee, moving ready inventory and strong realtor engagement together, who we are and how we operate, give us a competitive advantage in the intel 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 to cap construction 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 incur our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage 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?

[Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research.

First one is on your spec count, which you noted a little lost it's been in several years. I think we've heard 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 both your lower spec count and also kind of industry lower spec count is the market pressure here? And is that something you expect the support of the margins moving forward even if demand makes choppy?

Yes. 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 loans earlier in cycle. And then some folks are pivoting more to a BPO 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 creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage.

Okay. That's really 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 bankers moving forward for your off-balance sheet needs.

Yes, I can take that one. So about 38% of our total inventory control is off book. Of that, about 1/3 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 cost collateralize. So we always have the ability, if any deal go sideways to walkaway from that deal without maybe some other hooks and implications that would make us state in a transaction that doesn't structurally work or financially work any longer. So we're very cautious 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 Hilla 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 that have gone back to our land bank finances and asked for some more time to stabilize the market, stabilize our inventory levels. And again, working on one deal creates more of an opportunity to do so.

Yes. 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. So for us, 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.

Our next question comes from Stephen Kim with Evercore ISI.

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 been -- you've extended your takedown schedules. And am I right in thinking that in a typical land bank deal, any individual land bank dealers to extend, let's say, 6 months that, that might drive roughly 100 basis point lower gross margin on the remaining loss versus the initial expected lot price?

Thanks, Stephen. So first part, again, we have such a -- such a small percentage of our land book is land banker lot financing. So even as you look at what percent of our deals required us to restructure. And when I see restructure, maybe we needed a quarter delay in the next take to buy sometimes to get to do some inventory or stabilize kind of margins or what not, for the most part, that was very small as well. Most of our deals are performing fine. We're continuing to take back 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 are 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 lots and owning the loss. I think we're sort of in that environment today, at least with our folks. So it's just -- 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 closed. I don't know, Hilla, if you want to add anything to it?

Yes. 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 you look at it, good thing -- bad things don't get better with age. So if we're asking for sold, 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 is going to get better in 3 to 6 months. So again, that's kind of the [indiscernible] of being very selective as to what deals you're putting in an off-book structure in the first place. But yes, I mean, there's definitely -- if you can't work a free be, it's typically in to cost you whatever your interest burden is for that 6 months hold. So yes, there needs to be an implication, but 100 bps a little heavy.

Okay. Appreciate that. Yes. And I also appreciate your comments about how there's 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 of 22.5% to 23.5%, which obviously is where you weren't that long ago and is but something that's quite above where you are currently. You've talked in the past, Hilla, 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 4 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?

Steve, I'll take part of that question. This is Phillippe. So I think it's a lot easier to get to our long-term goal around 22.5% at 4 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 cost, the cost -- the vertical cost environment more effectively. So the path at 4 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 [ 3.5 ], if you will, versus 4. But I think long term is the way to get there.

Yes. I think, Phillippe is exactly right. There's 2 components. The first is just absolute value -- absolute volume and the second is volume per store. We're much more efficient at 4-plus. So we definitely want that because 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. 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 closing on Q2 is nicer than where we are today, and we guide to a higher margin than where we ended the quarter and part of that is going to be the incremental leverage. But once we get back to that for net sales per store average, there is 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, but 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 of affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, we can see a path there.

Our next question comes from Alan Ratner with Selman.

First question on the margin guide, and I think you, Phillippe, kind of touched on it in Steve's question, but I just want to dig a little deeper. So immutably I was pleasantly surprised to see that you expect 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 the 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.

Yes. A lot of questions in there that I'll answer all of them for you because they're all very good. I do think that -- there's a couple of 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 with a lot of things that are outside of 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 this -- of Q1, we actually started feeling better about things, the weather kind of [indiscernible] 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 drove 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 starting in Q2 and continuing through the latter part of the year, obviously, all new communities are all with the new cost. So the more volume we have from those, the better that piece is. And then just kind of doing math, if you look at our closings 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. Even at the low point of the full year guidance that we 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 know you 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 is still going up, but not at the same rate it was. Pretty strong cash flow in the first quarter, at least seasonally speaking. So can you give any guidance or color on where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn period and maybe cash should start to improve even if earnings are under pressure on a year-over-year basis?

Yes. I mean we don't have specific cash flow guidance, as you noted, but the discipline to get down to $14 million 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 relieved a lot of cash. That was kind of a more measured approach on land development 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 start with sales pace, you really shouldn't see something too detrimental occurring on the cash flows and any cash position 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 flow. 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 cash utilization as we're bringing stores online, but a lot of the spend has already been incurred, and we're definitely monitoring the WIP units and the stick some brick costs that were spending before we close the home.

Our next question comes from Michael Rehaut with JPMorgan.

I wanted to start off with just kind of broader thoughts around the demand backdrop. So far, this earnings season, we've heard slightly different narratives across the spectrum. Some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. Also incentives and levels maybe also kind of stabilize and 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 with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I'm interpreting that correctly. Is it certain markets that you're exposed to? You highlighted parts of Florida, Charlotte, Austin, is it maybe the price point that you're offering or the fact that you're maybe still in kind of that spec area, which I think, by definition might cause a little bit more competition. Just trying to reconcile kind of where you are within the industry and how to better understand your positioning and how that relates to your commentary?

Yes. Thanks. 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 may other buyer profiles have. They're stressed more from an affordability standpoint, cost of living. So it does feel like the procurement of those sales is very high, which makes us there 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 stretched during the last 5 years. Affordability got the most stretched. There's probably higher levels of inventory that we compete with. We're going to head-to-head with a line of other entry-level builders that do similar things to us. So for all those reasons, I think when you look at our buyer profile and our geographical footprint, we feel cautious right now.

Right, right. No, understood. Secondly, there was a question earlier about cash flow and community count. And obviously, we reiterated your outlook for this year 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, particularly since 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 over the near to medium term, 2 to 3 years out?

Yes. 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're going to 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 I don't want to commit to anything in 2027, but we have the ability to grow our community count in 2027, if it makes sense. We're obviously rationalizing all new land or as Hilla 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 2020 as well. We're being very conservative on new land deals, although land prices have stabilized in some places come down, terms are better, they're still somewhat difficult to underwrite in the turn 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 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 on 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.

Our next question comes from Susan Maklari with Goldman Sachs.

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 they are seeing -- 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. So until it rises, we're not getting to kind of tension 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 [indiscernible] a good time. But again, it's a very low amount because we have such a quick sale to close. We got a closing ready guarantee because homes are ready to go. So as you buy it, you're picking up your furniture 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 we said is dead on pretty much the amount of time that it takes them to the time we enter into the sales contracts until the time they close the house, they spend getting documents to the mortgage company. There's not a lot of time rethink and tour other homes that maybe get convinced away from the commitment that they already made. So they're so hyper focused on just getting everything to the finish line that that's really helpful for us and a cancellation rate perspective. And even though our commitment is 60 days, it actually happening much faster than that at 254% backlog conversion, we're getting folks from sales to movement in less than 60 days. So they literally don't have any time to second guess decision to fall out is typically an event outside of not watching 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 at that house in 40 days. And they fall along with something else and walks away from the deposit. Hopefully, that's helpful.

Yes. No, that is helpful. That gets to my question. You're not seeing any change there. Obviously, the strategy of that quick close is helping you 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 address 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?

Yes. 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 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 in that target for the balance of the year in every one of the upcoming quarters. As far as the back-office automation, there's a tremendous amount that that's still done in homebuilding, taking one piece of paper and typing it into another system, whether it's a closing document, something for title, escrow, mortgage, a lot of people doing things that are not their job decryption, right, their 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 being more meaningful at higher volumes, it would require -- would have required more manhours to do some of those tasks. It helps you not just with cost, but also with accuracy and rework. So we're pretty excited about [indiscernible] 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 teams 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 SG&A leverage benefits in the very near term.

Our next question comes from John Lovallo with UBS.

So you opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption just given 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 bought and met our expectations, that would 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've seen -- they're all very good locations, strong position, strong margins, strong pricing. So I think we feel really good about them. And then as we said on the script, we expect 5% to 10% 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. We'll see how everything goes around opening those up. But we're committed to a 5% to 10% year-over-year growth in our community count this year.

Okay. That's helpful. And then in the prepared remarks and 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?

Yes. 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 didn't materialize 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 are March depending. And so they'll probably close in into Q2, but our business doesn't really work that way. And we later -- so whether we got that buyer or not, it can either 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.

Yes. I mean it's lost days of sale. You don't double up when the stores open back up and you capture 2 days of sale in 1. So there are basically 3, 4, 5 lost days of sale in a large portion of our markets in January. And that -- those are sales that are -- we're 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.

Our next question comes from Jay McCanless with Citizens.

First question I had, Hilla, in 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 running at that vintage or in that vintage area?

That's pretty granular. So I mean we always have like some long-term communities that we're in Phase 6, and we have some new communities and we're probably buying 25 that we're selling at right now. So we're not giving that level of breakout, but for the most part, it was only 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 [ 3.5 ], [ 4.5 ] net sales per store, you can do the math as to how quickly we burn through those. So for the most part for us, everything is live. I think was the intensive that comment, 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. And then the second question I had on the West segment, a fifth quarter in a row were orders 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 segment.

Yes. I think you talked about the Western region, which is California, in 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, Sokol's been okay and you take a pretty strong market. But just in general, the West region has been in a tougher place to do business. 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 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. 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 together. And so you'll continue to see the West region be a smaller part of our business long term.

Okay. Great. And if I could sneak one more in. Phillippe, 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 expect inventories to be down to a level that will give you guys some better pricing power?

Yes. 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 spec that we're carrying 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 as we work to got the rest of this year, I can see going into 2027, but a much different sort of competitive inventory environment. I think the other thing I mentioned is 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 hitting away from stacks. That's our business. And so less competition in the spec entry-level business, move-in ready business, it creates a better and competitive environment for our products specifically.

And our final question comes from Jade Rahmani with KBW.

This is Jason Sabshon 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?

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 some very easy pieces and hopefully making the mistakes and things that are easily -- easily fixable as we grow a new muscle in our skill set. But yes, eventually, it's going to be a component of everything, everything that we do, the more that we manage our data and are able to use AI on -- in a holistic way in all of our data. We try to also look at things as limited by a system. So if you think about your data and a data warehouse and then you can clearly everything in AI from that perspective, then there is no limit as to what functional area is benefiting for your AI initiatives. So yes, it's definitely something that we're hyper focused on the opportunities for savings on the cost side are massive when you're thinking about it from that perspective. But we're going to walk -- or crawl walk run, right? So we got to take the easy steps first and then advance on to beyond that.

Got it. 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. It feels like as being sort of moved that to [ 6 ] or slightly below [ 6 ]. We really see buyer psychology change below that level. And I think anything below that on your way to [ 5 ] will just be really unleashed demand because of the affordability piece. So that's kind of how we yield about it [ 6 ]. It's sort of lower is good for our business. Below that just provides more tailwind for our industry.

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.

Greetings, and welcome to the Fourth Quarter 2025 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference being recorded. [Operator Instructions]

I would now like to turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth quarter 2025 results. We issued the press release yesterday after the market closed. You can find it along with the slides in 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 2, caution 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 2024 Annual Report on Form 10-K and Form 10-Q for subsequent quarters.

We've also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025 stock split for all prior periods.

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 listening in on our call. Today, I'll begin with a brief overview of market trends and highlight our fourth quarter results. Philippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance.

The fourth quarter of 2025 ended the year marked by much softer than anticipated market condition as affordability challenges persisted and buyer confidence deteriorated. Our fourth quarter 2025 sales orders totaled 3,224 and our average absorption pace was 3.2 net sales per month, reflecting Q4 sales seasonality, a pullback in buyer urgency and a strategic decision to hold the line on incentives.

Despite the tougher conditions, our 60-day closing guarantee and healthy supply of nearly completed spec inventory contributed to another quarter with exceptional backlog conversion rate of 221%. We delivered 3,755 homes and home closing revenue of $1.4 billion this quarter, which led to an adjusted home closing gross margin of 19.3% and adjusted diluted EPS of $1.67, both in line with our guidance range. We also increased our book value per share of 7% year-over-year and completed $150 million of share buybacks, returning nearly $180 million in total capital to shareholders this quarter via repurchases and dividends.

Our full year 2025 sales volume of 14,650 homes was essentially flat compared to prior year as we grew in community count of 15% year-over-year to 336 communities, offsetting slower demand. On a full year basis, we achieved an average absorption pace of 3.9, which we believe was better than the broader market trends, demonstrating the benefit of our strategic focus, including our strong realtor engagement. We anticipate that in the near term, market conditions will continue to be impacted by elevated mortgage interest rates, job security concerns and greater macroeconomic, geopolitical uncertainties.

However, long-term housing demand remains supported by favorable demographics and undersupply of affordable homes in the United States. We believe our strategy allows us to effectively compete with existing home sales, which will continue to create a market differentiator for us.

With now, I'll turn it over to Philippe.

Thank you, Steve. First, I want to thank our Meritage team for their hard work and dedication this year. Through challenging conditions, they never wavered from our vision to positively impact the lives of our customers, as evidenced by our industry-leading customer satisfaction scores for 2025, while still focused on generating value for our shareholders.

I would like to emphasize our balanced approach to capital allocation. We strategically terminated certain land deals to redeploy our capital towards repurchasing additional shares and acquiring new land that will enhance our long-term portfolio. These decisions were influenced by several factors: our market outlook, the land market, growth targets, our current stock valuation and the evolving macroeconomic landscape.

The resulting changes stem from a thorough review of our controlled asset pool, allowing us to make informed decisions about which deals to exit to better position ourselves for the future. While we always encounter a few deals that don't meet our criteria after due diligence, we do not anticipate this level of deal termination to reoccur, assuming the current economic environment remains stable.

The recent slowing demand environment has presented opportunities to enhance our land portfolio in specific submarkets. We observed land deals returning to the market, sometimes in more strategic locations and with more favorable structures. Although land prices have not significantly declined, we believe these alternatives will positively impact our long-term profitability in the coming years. Consequently, we have unwound some existing land contracts to reallocate capital towards additional share repurchases and new and future land deals.

Based on our current view of the market, we took action to rightsize our overhead this quarter. Building on a multiyear technology initiative focused on automation and process efficiencies, we are now able to achieve improved back office productivity aligned with our move-in ready, all-spec strategy. Our goal is to remain highly efficient and drive increased operating leverage as we scale our business regardless of near-term macroeconomic conditions.

Finally, as announced in Q4, we are committed to redeploying $400 million towards share buybacks in 2026, highlighting our view that the stock remains significantly undervalued. We repurchased approximately 2.2 million shares this quarter at an average discount of 12% to 2025 year-end book value per share. For full year 2025, we repurchased 6% of our outstanding shares. Our decisions have been thoughtful and intentional considering the current environment and we believe the actions we are taking today position Meritage to generate continued long-term value creation.

Now turning to Slide 4. Fourth quarter 2025 orders were 2% lower year-over-year, primarily due to an 18% decline in average absorbed pace, which was mostly offset by an 18% increase in average [ community count ]. The cancellation rate ticked up to 14% this quarter but remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process.

Our fourth quarter 2025 ending community count of 336 was an all-time high, up 15% year-over-year compared to 292 at December 31, 2024 and up 1% sequentially compared to 334 at September 30, 2025. During the quarter, we brought 35 new communities online throughout all of our regions. For full year 2025, we opened over 160 communities. In addition, we are expecting another 5% to 10% community count growth in 2026.

Given our robust growth in 2025 and further expansion in 2026, we believe Meritage is well positioned to gain market share both near term and as macro conditions improve.

Our fourth quarter 2025 average absorption pace was 3.2 compared to 3.9 in the prior year as we intentionally elected to not further lean into incentives where we experienced market elasticity from weakened demand in order to balance margin and velocity. We remain committed to maximizing the value of every asset in our land book. Long term, we continue to target 4 net sales per month on average, the pace at which we are able to operate most efficiently and leverage our fixed cost. However, we are to temporarily moderate slightly from this target to optimize our business in the current demand environment.

ASP on orders this quarter of $374,000 was down 6% from prior year due to an increased use of incentives and discounts as well as geographic mix. We don't yet know how the spring selling season will evolve, but we are encouraged by improved selling conditions in January when compared to the more difficult demand dynamics we experienced in December. We are also hopeful that lower mortgage rates will unwind some of the lock-in fact for existing homeowners who are looking to move up.

Now moving to the regional level trends. In Q4, demand patterns were highly localized by Meritage with a generally tougher selling environment nationwide. Across all regions, incentive utilization increased to get buyers off the [ bets ]. In our most favorable markets, Dallas, Houston, North and South Carolina, we obtained a strong absorption pace supported by resilient local economic conditions. Conversely, our teams faced lower demand and aggressive local competition in Austin, San Antonio, parts of Florida, Northern California and Colorado. We deliberately chose to hold our ground in these markets and accept lower sales volumes as we look to the spring selling season to work through our excess home inventory.

Now turning to Slide 6. In Q4, to align with our current sales pace, we moderated starts, which totaled approximately 2,700 homes, 24% less than last year's Q4 and 12% lower than Q3. As a spec targets by a function of expected demand, our reduced cycle times allow us to quickly flex and ramp up starts case if demand picks up in the spring selling season or slow it down if conditions were to erode further.

With 62% of Q4 closings also sold during the quarter, our backlog conversion rate was yet another all-time high for the company of 221%, reflecting the benefit of our 60-day closing rate guarantee. As a result, our ending backlog declined 24% year-over-year from approximately 1,500 as of December 31, 2024 to approximately 1,200 homes as of December 31, 2025. With our improved cycle times, we were able to maintain lower inventory levels without compromising our 60-day closing commitment as labor availability and supply chains are stable and predictable.

We reiterate our long-term backlog conversion target of 175% to 200%. We believe the most meaningful view of our inventory is to [indiscernible] our spec and backlog as more than 50% of our deliveries consistently come from inter-quarter sales for the last 5 quarters. We had approximately 7,000 specs and backlog units at December 31, 2025 compared to about 8,600 units at December 31, 2024.

We ended the quarter with approximately 5,800 spec homes, down 17% from approximately 7,000 specs in the prior year and down 8% sequentially from Q3. The spec count reduction was deliberate and intentional as it is not a constraint on our closing potential for 2026 given our faster construction cycle times and ample available spec inventory. The 70 spec per store this quarter was our lowest level since mid-2023. This translated to 5-month supply, in line with our target of 4 to 6-month supply of specs on the ground and intentionally skewed slightly higher as we prepare for the spring selling season.

In the fourth quarter of 2024, we had 24 specs per store or 6 months of supply. Our completed specs comprised 50% of our total spec count at December 31, 2025. This level is slightly above our target of approximately 1/3 completed specs, and we intend to bring this ratio down during the spring selling season.

With that, I will now turn it over to Hilla to walk through our financial results.

Thank you, Phillippe. Let's turn to Slide 7 and cover our Q4 results in more detail. Fourth quarter 2025 has closing revenue of $1.4 billion was 12% lower than prior year as a result of both 7% lower home closing volume and a 5% decrease in ASP on closings to $375,000 per home. Our affordability focus is evident as our ASP was notably below the $411,000 median ASP on 2025 closings in the U.S.

Our closing and revenue were slightly below our guidance range as we intentionally slowed our pace by limiting the layering of multiple incentives and preserving margins in markets with inelastic demand. Despite an increased focus on price and margin, overall ASP on closings was impacted by the increased take rate of incentives as compared to prior year and geographic mix shift as the West region as our highest ASPs comprised a smaller portion of closings this quarter. We anticipate elevated incentive levels will continue near term, although the cost of financing incentives is starting to moderate.

Home closing gross margin was 16.5% for the quarter and adjusted gross margin was 19.3% excluding $27.9 million in terminated land deal walkaway charges, $7.8 million of real estate inventory impairments and $3.2 million in severance costs in the fourth quarter of 2025. This compared to fourth quarter 2024 home closing gross margin of 23.2% and adjusted gross margin of 23.3% excluding $2.8 million in comparable terminated land deal walkaway charges.

As Phillippe mentioned, we elected to terminate certain optional land positions to release capital and top-grade our land portfolio as better opportunities become available. We exited land deals across all regions with approximately 2/3 of the $27.9 million in walkaway charges coming from the East region.

Our impairment assessments are conducted minimally on an annual basis or quarterly during declining market conditions as we're currently experiencing. We evaluate the recoverability of all of our real estate assets both owned and controlled as part of this review. In addition to terminating over 3,400 lots resulting in the walkaway charges, we also recorded $7.8 million in impairments this quarter on owned inventory as we adjusted pricing to local market conditions.

Adjusted home closing gross margin was 400 bps lower in Q4 as compared to prior year due to greater utilization of incentives and discounts, higher lot costs and lost leverage, all of which were partially offset by improved direct costs and shorter cycle times.

Our land basis in 2025 included elevated land development costs from work completed over the past several years, which will continue to impact our margins in 2026. However, we are hopeful starting in late 2027, our lot cost as a percentage of ASP should start to return to historical averages and will reflect renegotiated land development costs and the lower land basis we expect to be able to acquire over the next several quarters.

During the quarter, we had direct cost savings of nearly 4% per square foot on a year-over-year basis. More recent starts have lower direct costs, although the benefits will not be visible until later in 2026 as we continue to work through our existing spec inventory that was built earlier in the year. Our cycle time held to a sub-110 day calendar schedule, in line with Q3, but an improvement compared to prior year.

Our long-term gross margin target remains at 22.5% to 23.5%. we expect to reach the target of once incentive levels return to historical averages and market conditions normalize.

SG&A as a percentage of home closing revenue in the fourth quarter of 2025 was 10.6% compared to 10.8% in the fourth quarter of 2024, primarily due to lower performance-based compensation, which was partially offset by lost leverage as well as higher external commissions and technology costs.

Q4 external commission costs were higher year-over-year to help secure volume in a tougher selling environment. Our [ copro ] percentage remained similar to the first 9 months of this year in the low 90s percentage capture rate, which we believe is at or near the top of our peer group. We also continue to see an increase in repeat business from realtors underscoring the strength of our broker relationships.

Fourth quarter 2025 SG&A included $2.4 million of severance costs with no similar charges in the prior year. We maintain our long-term SG&A target of 9.5%, which we expect to achieve at higher closing volumes.

The fourth quarter's effective income tax rate was 18.5% this year compared to 22.1% for the fourth quarter of 2024. The 2025 tax rate reflected our purchase of below-market [ 45 ] transferable clean fuel production tax credits that reduced income tax expense this quarter. This was partially offset by fewer homes qualifying for energy tax credits under the Inflation Reduction Act given the new higher construction thresholds required to earn tax credits this year. We expect a minimal impact in 2026 from the complete elimination of the energy tax credit by June 30 as we were not eligible for such credits in most of our markets throughout 2025.

Overall, lower home closing revenue and gross profit led to a 30% year-over-year decrease in fourth quarter 2025 adjusted diluted EPS to $1.67 from $2.39 in 2024. There were $42.9 million in nonrecurring charges this quarter and $2.8 million in the prior year.

As for full year 2025 results compared to prior year, orders were flat, closings were down 4% and our home closing revenue decreased 9% to $5.8 billion. Excluding $60.2 million in nonrecurring charges compared to $6.7 million in 2024, our full year adjusted gross margin of 20.8% was 400% last year, primarily due to greater use of incentives, higher lot costs and loss leverage.

SG&A as a percentage of home closing revenue was 10.7% in 2025 versus 10.1% in 2024 as a result of lost leverage as well as higher external commissions, spec maintenance cost and spend on technology. Excluding $66.4 million in nonrecurring charges compared to $6.7 million in 2024, adjusted diluted EPS for 2025 was $7.05 compared to $10.79 in 2024.

Before we move on to the balance sheet, I wanted to quickly cover our customers' fourth quarter credit metrics. As expected, FICO scores, DTIs and [ LTVs ] remain relatively consistent with our historical averages. While the financial strength of our customers has not materially changed, buyer psychology is driving the demand for higher incentives and discounts.

On to Slide 8. Our balance sheet remained healthy at December 31, 2025, with cash of $775 million, nothing drawn on our credit facility and net debt to cap of 16.9%. As a reminder, our net debt to cap ceiling remains in the mid-20% range. Based on market opportunities to top grade our land book that we already covered, we walked away from certain land positions this quarter.

Further, in response to slower demand, we experienced fewer community closeouts, allowing us to phase land development into smaller parcels and conserve cash. These combined efforts translated to $416 million in land spend this quarter, 40% less than last year. Given current market conditions, we are forecasting land acquisition and development spend of up to $2 billion in 2026.

We returned $179 million of capital to shareholders via buybacks and dividends this quarter, up from $67 million in the same period last year. In Q4, we accelerated share repurchases to over 2.2 million shares, spending almost 4x more than prior year in the same quarter. For full year 2025, we bought back a company record of $295 million worth of shares, reducing our outstanding share count by 6%.

We ended the year with $514 million still available under the repurchase program. We have now repurchased nearly $836 million or 22% of our outstanding common stock since implementing our share buyback program in mid-2018. And as we shared in our November press release, we plan to programmatically buy back $100 million of shares in each quarter in 2026, assuming no material additional market shifts.

We increased our quarterly dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividend totaled $29 million in the fourth quarter of 2025 and $121 million for the full year. We have returned nearly $270 million to shareholders in the form of dividends since we initiated this program 3 years ago. We will be evaluating the 2026 quarterly cash dividend amount next month and will show the update publicly when available.

In 2025, we returned a total of $416 million of capital to shareholders or 92% of this year's total earnings. On a cumulative basis, since mid-2018, we have returned over $1.1 billion in total capital to shareholders through both buybacks and dividends.

Turning to Slide 9. Our net lot activity was a decrease of about 500 lots this quarter as our approximate 3,400 lot terminations have exceeded new lots put under control. In the fourth quarter of 2024, we put nearly 14,400 net new lots under control. As of December 31, 2025, we owned or controlled a total of about 77,600 lots equating to [ 5.2 years ] supply of the last 12 months closings. We also had nearly 14,600 lots that were still undergoing diligence at the end of the quarter.

We remain focused on utilizing more off-balance sheet financing vehicles and target a mix of about 60% owned and 40% option lots, although we look to balance margin and IRR from such initiatives. About 72% of our total lot inventory at December 31, 2025 was owned and 28% was auctioned compared to prior year, where we had a 62% owned inventory and a 38% auction lot position. Since our 3,400 lot terminations this quarter were all controlled lots, our ratios are temporarily disproportionately skewed to owned at year-end.

Finally, I'll direct you to Slide 10. I want to emphasize that our guidance is based on current market conditions. We're guiding to full year 2026 closings in line with our 2025 performance in both units and home closing revenue, assuming no changes in market conditions. For Q1 20126, we are projecting total home closings between 3,000 and 3,300 units, home closing revenue of $1.13 billion to $1.24 billion, home closing gross margin of 18% to 19%, an effective tax rate of about 24% and diluted EPS in the range of $0.87 to $1.13.

With that, I'll turn it back over to Philippe.

Thank you, Hilla. In closing, please turn to Slide 11. As we look to 2026 and beyond, I want to remind everyone about who Meritage has chosen to be, a top 5 builder focused on spec building with move-in ready inventory, streamlined operations, a diverse geographic footprint and a differentiated ability to compete against retail given our 60-day closing ready guarantee and realtor engagement. All of these attributes give us a clear competitive advantage to operate efficiently under all market environments.

When combined with our community count growth and improved cycle times, I believe Meritage is well positioned to continue to capture market share when demand dynamics improve.

With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

[Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research.

First one is on your 2026 outlook. You mentioned historically, you saw poor absorption pace per month near term. You're going to dip a bit below that level. I think the incentive environment has been challenging for a while now. So what drove the change in your approach here? And then what is the temporary new level of absorption we should expect you to operate in the current environment?

Thanks, Trevor. So let me just talk about what drove the temporary refocus on margin and not chasing incentives. As we roll in Q4, we saw a lot of builders clearing the decks with aged inventory. And so we knew that incentives were going to be elevated in Q4 and intentionally chose at least for that quarter to not chase additional sales and operate at a slightly slower volume.

As we look into Q1, I think there's still some noise in the system. There's still some builders out there, including ourselves, who are clearing inventory. So we'll see how it goes. But we do expect the spring selling season to be better. So we see an opportunity for improved returns both in the form of absorptions and margins in Q1 and Q2. So our goal is to try to do 4 a month throughout the year. But right now, we're hedging a little bit based on what the builder competition is doing and waiting to see exactly how the spring selling season will materialize.

Yes, we've not reset a different target. It's a community by community week by week. The goal is still an average of 4 net sales per store, which we achieved in 2025. We were just a hair shy of it at 3.9.

For the full year, yes.

Okay. Okay. That's a really helpful clarification and I think also a very smart approach in the current environment. The second question is related to specs. You've done a real job of working down your specs per community. I think you mentioned they were down to 17 versus 24 a year ago. With that in mind, do you have those where you want them now? Do you expect a further reduction here moving forward? And then I think you may have mentioned it, but can you remind us what portion of those specs are finished? And where do you target finished spec for community in the coming quarters?

Yes. Thanks for the question. I think we're not quite where we wanted to be. We still have about 50% of our specs are nearing finished or finished. We like that to be more around 1/3. We like to have about 1/3 that can move in, in 30 days, about 1/3 that can move in 60 days and then the other 1/3 we're just starting. So we're getting close to that, but we still have some areas where we're whittling down our finished inventory.

As far as the 17 specs per community, that's pretty close to our target. It might go down a little bit if the market doesn't cooperate in certain places. But that's pretty reasonable. And we always like to carry a little bit more specs right now because we expect the spring selling season to be the strongest part of the year. And then we carry a little bit less specs in the back half of the year when seasonality would occur.

We'll take our next question from Alan Ratner with Zelman.

First question, I just want to clarify. The community count guidance of 5% to 10%. Your community count ramps pretty meaningfully throughout '25. So is that growth off of your year-end count? Or is that on an average for the year, which I think if it's the latter, I guess, would imply more like a flatlining from here. Can you just clarify that?

It's the growth of our current year-end. So it's not a flat line. We'll have 5% to 10% incremental community count growth this year.

Got you. Okay. Great. And then on the margin guidance, I think if I'm looking at this correctly, adjusting for the kind of charges this quarter, it implies about maybe 70 basis points of sequential pressure on an apples-to-apples basis in 1Q. And I think that's pretty in line with like your typical seasonal pull back in 1Q. Maybe, Hilla, you could just refresh my memory. I believe there is some seasonality in your margins. So should I interpret that guide as kind of a flattish guide adjusting for seasonality?

Yes, you're exactly right. So when you look at the midpoint of our closing units versus where we were in Q4 for closings, we've typically said there's up to 100 bps of lost leverage in margins. So you're seeing that in the guidance for Q1. Maybe a little bit of an incentive environment in Q4, still closings in Q1, maybe some of the December noise. But for the most part, what we're seeing right now is holding steady with some hopeful [ reassurance ] in the spring selling season.

Got you. So that seems pretty encouraging, I guess, just given the trends that we saw through '25. It feels like maybe things are firming up a little bit. And I'm sure a lot of that has to do with the gentle pivot you guys are making, maybe a bit more balanced between pace and price. But as we think about the remainder of '26, recognize you don't give guidance, can you just kind of talk through what the potential headwinds and tailwinds could be assuming you do solve that flattish volume outlook, which feels more conservative than certainly the expectations you had coming into this year?

Yes, absolutely. I think the biggest tailwind is our starting backlog. As we said, we intentionally chose not to chase the incentives in Q4 during a time of seasonality consumer confidence got weak. We saw a lot of builders trying to clear out old inventory, and we felt like we'd have a better return on our inventory in Q1 than we did in Q4. So that starting backlog is really what we're trying to overcome even though we have higher community count growth. And we still expect to, on average, sell around 4 a month, Trying to overcome that starting backlog is going to be the big goal.

So if the spring selling season is better than we think and the incentive environment moderates and some of the competition stabilizes, I think that's the tailwind. The headwind is the higher rates that are still out there. Obviously, that's pressuring the entry-level buyer more than the move-up buyer. And then certain regional nuances as we look for a better performance in Florida, better performance out West. So it's just a lot of still unknowns right now. And then the #1 headwind that everyone knows about is consumer confidence, which is ultimately, I think, a bigger deal than affordability right now. And hopefully, the consumer starts to feel better about as we move throughout the year.

So I'll add two other points. And Alan, as you know, we don't guide full year margin at this point so we can't give any specifics. But two things to consider. We've mentioned that we're already seeing some moderating in the cost, how expensive it is for us to buy rate lock. So assuming that trend continues, there's a potential improvement during the year. We can't sit here on the 29th of January and predict what rates are going to do. But if the trend holds or improve, I think that's an opportunity for margin.

And then the other item we mentioned in our prepared remarks, we've seen some pretty fantastic savings on direct costs, 4% year-over-year as we close out the year. So as you guys know we have quite a nice volume of existing inventory that we're going to go ahead and sell through Q1 and part of Q2. But as you see some of those newer homes coming through their direct costs should be at the lower basis. So even holding everything else even, there should be some savings coming through on the lower direct.

So again, there's no specific numbers that we're providing at this time. But directionally, those are two things that we can look to as we look to the rest of 2026.

And we'll take our next question from Michael Rehaut with JPMorgan

I wanted to first delve in a little bit to your statement earlier, Philippe, where you said you were encouraged in January maybe around demand trends. You also kind of said that you hope or expect the spring selling season to be better. When you say better, I guess, I was just wondering if that's better than the fourth quarter, so in line with normal seasonality, or better versus the spring selling season from a year ago. And also what signs or data points are out there that give you that encouragement in terms of what's happened so far in January?

Sure. I think better than Q4. I'm not sure if it's going to be better than last spring selling season. Last spring selling season wasn't too bad. We were selling well over 4 a month in Q1 and Q2 of last year. So I'm optimistic that we can get back to 4 a month here in Q1 and Q2.

Why am I optimistic? I think Q4 was really bad. I would say that to start out with. But generally, as the year flipped, we started to see better prospects throughout our funnel. The realtor community indicated to us that more buyers were out. They had more people that they were working with. The first couple of weeks of January were much better than the first couple of weeks of November and December. And so for all those reasons, we felt pretty good.

The incentive utilization out there seems to start moderating. We saw less discounting by builders. So there was a lot of good things that we saw there that give us hope and optimism about the spring selling season. But it's just a little too early to tell if that's structural or temporary because people pull out of the market so hard in Q4 and they're reentering in Q1. And obviously, the storm has really shut down a big part of the country as well. So it's hard to exactly see what's happening with that as well.

Okay. No, I appreciate that. I guess secondly, I'd love your thoughts around some of the administration's comments with regards to share repurchase. I'm sure you've obviously seen the comments by Bill Pulte around share repurchase versus core investment. And if you have any additional color, if you have any contact with administration officials or any thoughts around those comments specifically as it relates to your intention for a higher level of share repurchase in '26.

Yes. We obviously take the federal government very seriously. We want to partner and collaborate with them. Our whole strategy as a company is around affordability. We have one of the lowest ASPs in the industry. 90% of our product is below FHA. We carry a bunch of specs to solve the lack of affordable housing.

So we are all in on whatever we can do with the federal government to continue to unlock the buyers that are basically priced out of the market. But we also believe that buybacks are a big part of our balanced approach to investing in operational growth and returning capital to our shareholders. So we balance those things out. We're still growing our business. We're still carrying specs. But we also have the ability to return more capital to our shareholders, which is the responsible thing to do.

When our stock is trading at a significant discount to intrinsic value, the best investment I can make for our shareholders is to buy our existing enterprise at a discount. And we're going to do that as long as the support is there and there's no unintended consequences, which currently I don't see. So that's what I know today. We're learning more each and every day. We're working with the federal government when they ask for our input and our perspective, and we'll continue to navigate it as best we can.

And we'll take our next question from John Lovallo with UBS.

So the delivery outlook for the full year is essentially flat year-over-year. The first quarter is down about 8%, which seems to imply that we returned to year-over-year growth in the second quarter through the fourth quarter. So I guess the question is, is it fair to assume that sort of the newer strategy of driving the highest volume in margins in the first quarter and the second quarter maybe pushed out a bit maybe into 2027 rather than this year?

We'll see, right? I think we're going to see how the incentive environment evolves here over the next 5 quarters. If it stabilizes and we're able to go and get 4 months in a profitable way and not compromise our land book, we're going to go do that as quickly as we can. So we'll just see how things go. The real challenge with our 2026 outlook versus 2025 is just how we're starting out the year. The backlog is down. We just came off a pretty slow Q4 and we're intentionally thinking about Q1 a little bit more conservatively until we understand that incentive environment. But at the end of the day, we're looking to optimize our business at 4 a month in almost every scenario, except where it becomes so inelastic that the cost of that incremental demand on a community-by-community basis is too material.

I just want to clarify. There's a difference between sales and closings, obviously. So the spring selling season, that doesn't change. That's going to be the healthiest volume of sales per community. Again, community count is distorting the discussion a little bit. But per community, we should see the kickoff of the spring selling season in February kind of winding down in May. So you're going to see a healthy volume of sales in Q1 and Q2.

Now when those sales convert into closings, that's typically Q2, Q3, right? So our sales in April and May are going to close partially in Q2 but also in Q3. So I think that you're going to see some of the volume from the spring selling season closing out in Q1, but more materially so in Q2 and Q3. Although the sales volume should be coming through in the first quarter. So hopefully, that helps.

Okay. Great. And then I guess the next question is that I just wanted to talk about the community count growth, which has been very strong here for some time. And I'm curious if you're seeing what we would typically expect to be stronger kind of conversions within those new communities than you are in kind of the existing communities? Is the absorption pace better as we would expect?

Modestly and probably not what we would see in a traditional housing environment with stable consumer confidence, reasonable affordability. I think we always expect to sell more houses when we first open our community. There's a certain fresh and new opportunity for people to own a home. People like to be the first in their community. But I would say over the last couple of quarters, it has been much more modest than we would traditionally see out of our new stores. So as we look at the new community openings in 2026, we're not modeling them with elevated absorptions to start out at the inception of the community.

And we'll take our next question from Rafe Jadrosich with Bank of America.

I wanted to ask on the SG&A. Can you talk a little bit about the potential cost savings from the cuts you made in the fourth quarter? What's the annualized? How do we think about like the annualized benefit from those cost reductions?

Yes. So we're not providing a full annualized benefit yet as part of it is a function of the performance in 2026. You can see that we mentioned that we had severance as a component of both SG&A and in margin depending on what type of employee was impacted. So we have a fairly material impact on a go-forward basis from those savings, although a lot of those savings are also just going to be coming from other opportunities.

You've heard us talk about increased technology spend for the last several quarters, and we're starting to see the benefit of technology spend on a go-forward basis as well, not just in lower spend but in improved efficiencies in our back office operations. So on top of all the regular things that most folks are also doing, we've cut any excess events or any SG&A that was more discretionary.

The overhead count saves should definitely translate into some year-over-year SG&A leverage lift. Even though we're guiding to the same-ish revenue we are looking to see a saving in our SG&A leverage for full year 2026, but we're not providing specific guidance.

Okay. That's very helpful. And then just how do you think about the -- it's obviously good to see the step-up in share repurchase that you announced during the quarter. How do you think longer term about the right level of debt to cap? And is there an opportunity to increase off balance sheet from where we are today?

Yes. So we're pretty comfortable with the low 20% net debt to cap as a long-term target. We've said if there's anything unique or unusual that temporarily takes us above that and we can see a very clear path to coming back below in a quick timeline, we would consider it. Although we're not all that close to it right now so we're not contemplating going above that threshold. We definitely are looking at more off-balance sheet vehicles. We appreciate that there's an ability to continue to both reinvest back in Meritage and in shareholder returns with an increased utilization of off-balance sheet vehicles.

So it's something that we're very, very focused on and are looking to dig into deeper. Unfortunately, the ratio got a little bit off balance this quarter because of our intentional 3,400 unit lot termination. So our relative ratio at the end of the year looks a little bit skewed, but it's definitely our intent to double down on off-balance sheet partnerships and relationships, and you should see that percentage increase throughout 2026.

We will take our next question from Stephen Kim with Evercore ISI.

First question, I'm curious about the margin impact we might be able to expect purely from volume deleverage if your closings per community move below 4 per community per month this year, which I think you said earlier in the call that you would do that on a temporary basis.

So like if we assume that there's no change in incentives, is there a decremental margin on a per community basis or some other kind of rule of thumb that would help us quantify what the margin impact from sales per community moving below 4. Let's say, they moved at like 3.5 from 4 or something. Is there some rule of thumb that we can think about that would quantify some margin impact from that deleverage?

Unfortunately, it's not that easy. Many of our communities share superintendents and there's some leveraging that can be picked up, especially with our cross-selling initiatives that we have some multiple folks working across several communities. I wouldn't expect a small pullback to have an impact. But if it was a larger pullback, in your example, from 4 to 3.5, there would be some impact. I don't think it would be more than 20, 30, 40 bps if that was consistent for the entire year. But I don't know that there's a rule for the leveraging between the first and the fourth quarters.

Got you. Okay. That's a helpful framework. I guess the second question is sort of a broader one. It relates to the move-in ready strategy, the 60-day guarantee close and the reliance on realtors. I sort of think about that as a strategy which was born out of an environment when there was an extreme scarcity of existing homes for sale. But if we were to see existing home inventory rise and, let's say, return to sort of historically normal levels, in your view, would that diminish the attractiveness of the move-in ready strategy? And would you be open to changing it?

Well, we're open to changing anything if it makes sense. But I think it was less about what was happening over the last 5 years with the existing home market being locked in. and more about the fact that other than location, why do people ever buy a used home versus a new home.

And ultimately, when new homes are such a great value to existing homes even more so today than they've ever been before, you can get homeowners insurance, your warranty cost is lower, they live better, there are more energy efficiency. The idea that anyone could convey someone to buy a used home versus a new home just doesn't make any sense to the folks over at Meritage Homes.

So our strategy is built around when that existing home market comes back, you have a compelling option to buy a new home with no compromise other than whether it's not in the school district you want to live. And so that is what the strategy is based on. It's not based on the lock-in effect.

Yes. I mean, Philippe said it better, But it was designed for when the resale market returns, not from when it was not in place.

Got you. Yes. It's more like saying that you can compete better against resales, so why not accentuate that. That's really the emphasis, right, basically?

That's correct. And that's the whole realtor piece because the realtor really influences that buying decision, and they are a big influence sort of why people buy used homes instead of new homes. And we're trying to partner with them in a way where they would consider buying a new home than buying a used home. And it's in the best interest of everybody.

And we'll take our next question from Jade Rahmani with KBW.

This is Jason Sabshon on for Jade. When mortgage rates have dipped in the last few months, have you seen builders maintain mortgage buydown levels or reduce them in concert with rate? And do you think builders will pass along savings to customers or try to get better margins?

So as rates have ticked down a little bit, the cost of rate buydowns have definitely shrunk moderately. Some builders have chosen to buy rates down further when that happened while other builders have maintained the rate buydown where it was. And therefore, that cost has shrunk. I think some builders have reallocated those incentive dollars to other incentives to continue to try to overcome consumer confidence.

I believe if consumer confidence were to come back, I believe that builders would pull that back into either margin or additional savings for their customers depending on their particular community and their particular market. So I'm not sure I answered your question because the answer is probably all of the above depending on who you are or what your strategy is and where your community is.

I would say if you look at margin guidance from the peer group for everyone that's already released, I don't think most folks are taking it back to margin, right? Most folks have guided to lower margins in Q1 with a moderating interest rate environment. So I think the expectation is to continue the status quo until we see a stabilization in demand, and then you can make decisions.

Got it. That's helpful. And then separately, what drove higher other income during the quarter? Because we were expecting a dip due to lower rates.

Yes. It was actually a little bit of a combination of a higher-than-expected cash balance and we were actually earning interest a little bit longer. And then we had some pickups in legal settlements. There's always ups and downs. That's a tough to model line item, which is why we kind of usually stay silent on it.

And we'll take our last question from Alex Barron with Housing Research Center.

I think I heard you say that the percentage of homes that are bringing in or using a broker is like 90%. If that's accurate, are you guys like paying just a standard like commission? Or do you guys use some type of incentive structure, bonuses or anything like that?

Yes. We pay market rate commissions. So depending on which market we're in, whatever everyone else is paying, we pay the same. We do have some incremental loyalty programs, if you sold more than 1 home or 2 home or 3 homes like that. But those are pretty small dollars. So generally, the increase in our cost is just the fact that we're at 90% versus whatever other builders are at. Otherwise, it's pretty much market.

Interesting data point we can share, 40% of our volume is repeat volume. So it's not a one and done. So I think that the benefit of our loyalty program and our intentional pivot towards a stronger relationship with the realtor community is definitely paying off since we're seeing very high volume of those realtors come back with customers more than one time.

So what's the feedback they're providing to you as to why it's that high? Is it mainly the 60-day guarantee and the fact they get paid faster than build to order or something like that?

No, I don't want to give out all of our speakers over here. But I think, obviously, the #1 factor is that we're able to meet their customer on their timeline right? So when they commit to their customer being able to move, they're able to move at that point. And there's no negotiation there. That home is going to be done, done, done. You're going to move in. I think that realtors generally feel that, that's the same with existing homes.

But the second is also just the transparency. The price is the price and you're getting a good deal. And you can work with us in a way that feels like working with the existing home market. But yes, I mean, you nailed it. A big part of it is just delivering the home on time and guaranteeing that.

That's great. If I could also ask on incentives that you guys gave this quarter versus the previous quarter? Like what percentage of ASP do they comprise?

Yes. Since we're 100% spec builders, we don't provide incentive detail. There is no base price and then you have some incentive off of that price. We just have an all-in price because our homes are soon to complete. So we don't provide that. Although we'll share the same commentary that we've shared the last couple of quarters, we're running with a couple of hundred bps above historical averages, which is why we have a good level of confidence that once things return to normal, our target gross margin of 22.5% to 23.5% is very realistic because that reflects -- the current numbers reflect the elevated incentive market.

Thank you, operator. I'd like to thank everyone who joined the call today for your continued interest in Meritage Homes. We hope you have a wonderful day and a wonderful weekend.

Thank you. This concludes today's Meritage Homes Fourth Quarter 2025 Analyst Call. Please disconnect your line at this time, and have a wonderful day.

Greetings. Welcome to the Meritage Homes Third Quarter 2025 Analyst Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Emily Tadano, VP of Investor Relations and External Communications. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our third quarter 2025 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 home page.

Please refer to Slide 2, 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 2024 annual report on Form 10-K and Form 10-Q for subsequent quarters.

We've also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025, stock split for all prior periods.

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 listening in our call. Today, I'll start by highlighting our third quarter results and current market trends. Philippe will cover how our -- will cover how our strategy is creating a differentiation for us in the context of the evolving market conditions will also cover our quarterly performance.

Hilla will provide a financial overview of the quarter and forward-looking guidance. Market conditions were softer than initially expected in Q3 as consumer confidence continued to decline amid a tough economic backdrop and ongoing affordability concerns. Even with these headwinds, we grew our orders 4% year-over-year to 3,636 units.

On a greater community count, we achieved an average absorption pace of 3.8. We leaned in on our strategy focused on affordable move-in ready homes and a 60-day closing ready guarantee to provide homebuyers certainty in the changing environment. Our quick sale to close process contributed to another quarter with exceptional backlog conversions with more than 60% of our orders in Q3 closing this quarter, generating a 211% backlog conversion rate this quarter on 3,685 home deliveries and home closing revenue of $1.4 billion.

Excluding $14.5 million in combined real estate inventory impairments and terminated land deal charges, our adjusted gross margin and adjusted diluted EPS in the third quarter were in line with our guidance at 20.1% and $1.55, respectively. We also increased our book value per share 8% year-over-year. Q3 was the fifth consecutive quarter where we achieved year-over-year community count growth.

We are starting to see the benefit of the high volume of land acquisition and development spend over the last few years, ending the quarter with 334 communities, which was a 20% increase year-over-year. We continue to focus on balancing volume, profitability and a solid balance sheet, and we are satisfied with our results this quarter, considering the current economic environment.

And with that, I'll now turn it over to Philippe.

Thank you, Steve. Starting at the macro level, we were encouraged by the Fed's rate cut in Q3. However, the recent trend in lower mortgage rates has not translated to a notable improvement in demand or a reduction in the use of incentives thus far due to the lack of consumer confidence. Throughout the quarter, our customers were feeling less optimistic about the economy, the cost of living and employment, which increased hesitancy around a home purchase decision.

We believe the biggest impediment to an improved housing market relates to bio psychology. So this quarter, we continue to lean into our full range of possible incentives on a customer-by-customer basis. Even though we anticipate the incentive burden to continue running far north of where we typically are as an industry for the near future, we do expect the cost and utilization of incentives to begin to taper off as market conditions stabilize.

We remain optimistic about the long-term outlook for the housing market, given favorable demographic trends in home buying and a long-standing undersupply of affordable homes in our price range. As we analyze our performance this period, we believe that our strategy differentiates us from our peers in a few ways.

First, our spec strategy, combined with a 60-day closing ready guarantee move-in-ready homes and a focus on external realtor engagement enabled us to both compete for customers in a different way by providing them certainty and secure incremental sales orders and closings. Second, our 100% spec strategy and the significant improvements we have made in our cycle times over the past 6 quarters gives us the flexibility to ramp up or slow down or starts pace based on real-time local demand.

In the third quarter, we intentionally slowed our starts by 19% year-over-year to remain within our target range of 4 to 6-month supply specs on the ground while not impacting our sales velocity. Additionally, our scale and land pipeline enables us to reassess our land spend routinely based on market conditions, while still maintaining our targeted level of lot supply.

Through our ability to control land, we constantly review our controlled lots to determine if there are any future lots that we should renegotiate or walk away from. As such, we reduced the number of lots we acquired this quarter by about 5,800 lots or 70% year-over-year without sacrificing near-term community count growth.

With the current economic backdrop, we are evaluating these constant real-time adjustments as we look to maximize our assets by choosing a balanced pace and price. In an effort to optimize our portfolio community by community, we determine where we'll keep pushing for our 4 net sales per month pace, which is where we operate the most efficiently and where we choose to temporarily moderate the sales pace due to the elasticity of demand.

While we are primarily focused on pace as an ent level spec builder, we are not willing to sell our homes at any clearing price just to chase incremental sales where we know it's compromising the integrity of our land values. Said another way, we are not going to compromise the quality land, but we have worked so hard to acquire just to hit an enterprise order number.

For us, it is about optimizing every community in our land book. By pulling these levers, we are intently focused on optimizing our returns. At the end of the third quarter, we have yet again achieved our highest community count in company history at 334. The team also found ways to improve our cycle times even further to approximately 105 calendar days from about 110 calendar days in Q2.

By slowing land spend, we maintain a strong balance sheet with a focus on liquidity and returned $85 million to shareholders in the third quarter. Now turning to Slide 4. Third quarter 2025 orders were 4% higher year-over-year due to a 14% increase in average community count that was partially offset by a 7% decrease in average absorption pace. Cancellation rate of 11% this quarter remain lower than historical average, reflecting the limited time between a sale and closing with our 60-day closing ready commitment.

At third quarter 2025 ending community count of 334 was up 20% year-over-year compared to 278 at September 3, 2024 and also up 7% sequentially compared to 312 at June 30, 2025. During the quarter, we brought over 45 new communities online throughout all of our regions. To date this year, we have nearly -- we have opened nearly 130 community openings with today's efficient supply chain and available labor capacity, we were even able to pull forward some of our openings that were slated for October.

So now we anticipate holding our community count fairly steady from Q3 to Q4 to end the year with a mid-double-digit year-over-year growth. Based on our current land pipeline, we expect another additional double-digit year-over-year growth for 2026 year-end community count. ASPs on order this quarter of $389,000 was down 4% from prior year due to increased use of incentives and discounts.

We offered a wide range of possible incentives and tailored solutions to each customer's need. As we are in the final days of October, I wanted to provide some high-level commentary on what we are seeing so far in Q4. Demand this fund feels very similar to September, taking into account some additional seasonality. Lower mortgage interest rates have not spotted outsized demand, but we believe we can achieve our internal sales order targets to our incentive offerings and by leaning into our broker relationships.

Now moving on to the regional level trends on Slide 5. The local demand environment in each of our regions continue to vary market by market in Q3. Some of our most favorable markets, Dallas, Houston, Southern California as well as North and South Carolina, achieved a strong absorption pace as market conditions continue to hold steady in those geographies. Conversely, our teams continue to work through challenges in Austin, San Antonio, certain parts of Florida, Northern California amid softer market conditions this quarter.

And Colorado remained tough given the impact of stressed affordability. These headwinds were primarily an affordability concern and the lack of buyer urgency and not directly impacted by the increase in existing home inventory, especially when considering Florida and Texas, as most of the resale inventory is not directly comparable to our entry-level product nor does it offer our incentives.

Regardless of the geography, we saw an uptick in the use of incentives in all of our markets, as consumer sentiment and affordability concerns remain challenged. Now turning to Slide 6. In Q3, we moderated starts, which totaled approximately 3,000 homes in the third quarter of 2025, 19% less than last year's Q3 to align with softer demand environment and expected Q4 seasonality.

The 60-day closing ready guarantee element of our strategy enables us to quickly convert sales to closing. With a 211% backlog conversion rate, our ending backlog declined from approximately 2,300 units as of September 30, 2024, to 1,700 units as of September 30, 2025.

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labor in our markets, potentially stemming from slower multifamily construction and reduced starts in the industry, which was a factor in our improved cycle times that Philippe mentioned earlier. As we look at our margins this quarter, the lower revenue due to the timing of closings under our new strategy, also resulted in about 50 bps in lost gross margin leverage compared to the prior quarter.

Our long-term gross margin target remains at 22.5% to 23.5%. For this target to occur, we believe economic conditions need to stabilize, which will allow us to pull back on the incentive burden, and we can again begin to benefit from the scale and efficiency of our SPAC strategy and streamlined operations.

SG&A as a percentage of home closing revenue in the third quarter of 2025 was 10.8% compared to 9.9% for the third quarter of 2024, primarily as a result of higher commission rates and technology costs as well as lost leverage on lower home closing revenue, all of which were partially offset by lower compensation costs. Q3 external commission rates were higher year-over-year as they helped to secure volume in a tougher selling environment.

Our co-book percentage was in the low 90s and remained similar to the first half of this year. Our newer divisions continued to temporarily negatively impact our overall SG&A as they ramp up to be able to contribute a mature division's revenue profile while they are already incurring a full overhead expense structure. We continue to assess all aspects of SG&A to find ways to reduce overhead dollars and leverage and explore ways to mean in with technology to improve back office efficiencies.

We maintain our long-term SG&A target of 9.5% once we achieve higher closing volumes. The third quarter's effective income tax rate was 22.6% this year compared to 21.6% for the third quarter of 2024. The higher tax rate in '25 reflects fewer homes qualifying for energy tax credits under the inflation Reduction Act, given the new higher construction thresholds required to earn the tax credits this year.

Overall, lower home closing revenue and gross profit as well as higher SG&A and tax rates led to a 48% year-over-year decrease in third quarter 2025 diluted EPS to $1.39 from $2.67 in 2024. Excluding the $14.5 million in combined real estate inventory impairments and terminated land charges, our adjusted diluted EPS for the third quarter of 2025 was $1.55.

To highlight a few of the results for the first 9 months of 2025. On a year-over-year basis, orders were up 1%, closings were down 3% and our home closing revenue decreased 8% to $4.4 billion. Excluding $20.1 million in combined real estate inventory impairments and terminated land charges this year as compared to $3.9 million in 2024, our year-to-date adjusted gross margin of 21.2% was 440 bps lower than adjusted gross margin of 25.6% last year.

SG&A as a percentage of home closing revenue was 90 bps higher at 10.7%, and net earnings decreased 40% to $369 million. Excluding the inventory-related charges, adjusted diluted EPS for the first 9 months of 2025 was $5.35 compared to $8.40 in 2024.

Before we move on to the balance sheet. I wanted to share our customers third quarter credit metrics. As expected, FICO scores, DTIs and LTVs remained relatively consistent with our historical averages. While most of our customers can't qualify for a mortgage without financing incentives, many are nonetheless asking for them to help address their affordability concerns.

On to Slide 8. Our balance sheet remains healthy at September 30, 2025, with cash of $729 million, not being drawn on our credit facility and a net debt to cap of 17.2%. As a reminder, our net debt to cap ceiling remains in the mid-20% range. Given current economic conditions, we intentionally reduced land spend by 14% year-over-year and redeployed some of that excess cash by returning capital to shareholders.

Our spend on land acquisition and development, net of reimbursements totaled $528 million for the third quarter of 2025. The decision to slow land spend isn't expected to have a material impact on our near or midterm growth plans. Our full year 2025 land spend target remains around $2 billion.

To maximize shareholder value creation, we returned $85 million of cash to shareholders this quarter compared to $57 million in the third quarter of 2024. We recognize the current undervaluation of our stock. So we bought back over 772,000 shares for $55 million this quarter. This spend was 83% more than prior year and 22% greater sequentially.

To date in 2025, we have spent $145 million on share repurchases, reducing our 2024 year-end outstanding share count by almost 3%. During the third quarter, our Board approved an additional $500 million in authorized share repurchases. And as of September 30, 2025, $664 million remain available under the program. Although we do not anticipate buying back the entire $500 million in a very short period of time, we do anticipate accelerating our quarterly repurchases notably and incrementally, we can and will also repurchase shares opportunistically based on market conditions.

We increased our quarterly cash dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividends totaled $30 million in the third quarter of 2025 and $92 million year-to-date. For the first 9 months of the year, we returned a total of $237 million of capital to shareholders or 64% of our total earnings so far this year.

Slide 9. In the third quarter of 2025, we secured nearly 2,000 net new lots under control, which included the impact of 400 terminated lots. These terminations were in connection with our routine quarterly reviews where we identify certain land deals that no longer meet our underwriting standards or are in locations where we think there are better opportunities to upgrade our existing pipeline. In the third quarter of 2024, we put nearly 7,800 net new lots under control. As of September 30, 2025, we owned or controlled a total of about 80,800 lots equating to 5.3 years supply lots of the last 12 months of closings. We also had nearly 21,000 lots that were undergoing diligence at the end of the quarter.

When it comes to financing land purchases, we remain focused on utilizing more off-balance sheet financing opportunities, and we analyze every deal for land banking consideration as we look to balance margin and IRR. About 69% of our total lot inventory at September 30, 2025, was owned and 31% optioned compared to prior year, where we had a 64% owned inventory and a 34% optioned lot position. Finally, I'll direct you to Slide 10 for our guidance.

For Q4 2025, we are projecting total home closings between 3,800 and 4,000 units, home closing revenue of $1.46 billion to $1.54 billion, home closing gross margin of 19% to 20%, an effective tax rate of about 24.5% and diluted EPS in the range of $1.51 to $1.70.

The expected home closing gross margin decline from Q3 to the midpoint of Q4 guidance, is a function of the anticipated higher incentive environment that historically coincides with most builders year-end and the closing of some of our completed specs that do not reflect all of the cost savings we've achieved in the last quarter or so. With that, I'll turn it back over to Philippe.

Thank you, Hilla. In closing, please turn to Slide 11. Q3 was characterized by softer home buying demand, which we navigated by continuing to offer affordability and certainty to our customers. We also focused on maximizing each asset by pushing certain communities and geographies to a higher sales pace and pulling back on other communities in weaker markets where we slowed our pace to preserve gross margin.

We also intentionally reduced our start pace and land spend to align with current market conditions while we improve cycle times and increase our community count to set us up for near-term future growth. We believe our flexible strategy is our competitive advantage that allows us to maximize our financial performance and redeploy capital to return to shareholders. all while maintaining a healthy liquidity position. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

[Operator Instructions] Our first questions come from the line of Alan Ratner with Zelman.

So my question relates to kind of the strategy pivot that you guys have been embarking on and kind of the impact that, that's had on your overall return profile. And I know there's a lot of moving pieces here and a lot of the ROE compression we've seen is just a function of the market and the margin compression which is kind of independent of that. But if I look at your inventory turnover right now over the last 12 months, you're down to about 0.7x. And before the pivot, that was north of 1.

And I know you mentioned the kind of accumulation of completed specs and that number trending higher than kind of your long-term plans there. I'm just curious, should we think about this as like a trough and as you move toward recalibrating that completed spec number, is there an opportunity to see more meaningful cash generation and improvement on that turns? Or is this something that you would say is still kind of in the early innings and might take a little bit longer to materialize?

Thanks, Alan. Yes, I would say -- I don't know about the early innings, but we're still optimizing everything within our current strategy. you highlighted the specs as our cycle times have been reduced and we've put a finer point on the move-in ready strategy and the closing ready guarantee where we can actually release homes for sale to fit inside the window, I think there's an opportunity to optimize our spec strategy.

I think when things are working really well and everything is fully optimized, we can get closer to a 4-month supply of specs versus the current 5 to 6. So as we look into 2026, we think there's a real opportunity to do that. So that would be number one.

The other thing I would say is, obviously, we've been in significant growth mode. And so we've been building up our land pipeline. It's taken quite a bit longer than it used to, to bring lots to the market due to the regulatory environment. But I think we're getting better at that as well. The environment is getting better, and I think there's some opportunity for us to get more efficient with our land book as well in our existing strategy.

Now that we know exactly what type of deals we're looking for, for our new strategy, I think the deal sizes can get smaller and more efficient as well. So between those 2 things, we feel like those are the biggest opportunities for us to drive a higher ROE and generate more free cash flow.

I think also this quarter, Alan, was a unique opportunity. This is the first quarter that we picked kind of above our target of the third of completed specs, and that was intentional, right, part of it was an accelerated cycle time, but part of it was intentional. We weren't willing to sell inventory at below a certain margin.

So you're seeing that reset. So we mentioned the reduction in spec starts. So you're seeing that reset start this quarter. And as we sell those specs into Q1, you should see a more efficient with balance for us going forward.

Got it. Okay. That's helpful. And second question, just on the community count growth outlook in '26 sounds like it's going to be another very strong year there. How should we think about the interplay there with margin? And I guess what I mean by that is this year, you guys have posted double-digit community count growth.

We know the market is not up double digits in terms of demand, which is partly why your margins are lower and your absorptions are lower. If we kind of just assume demand stays where it is, does that necessarily mean that your margins are going to take another step lower as you try to push through more supply? Or are there kind of puts and takes that we need to consider independent of that?

Yes. I think there's puts and takes. I don't think the new communities that we're opening up as we look at what we opened up this year and then what we are opening up next year are going to be a tailwind to margins. I also don't think there are going to be a headwind, even though we're bringing them on at a higher land basis, they were under at a higher land basis at a different revenue and absorption profile.

So as we underwrite those new deals and look at those new deals, I think they're coming on at margins similar to where we're at today. I wish I could tell you that they were coming on at our long-term targeted but given the current incentive load that we're experiencing in the market, I think they're coming on more in line with where we are today than where our long-term goals are as a company.

Yes. [indiscernible] in bricks and land are aligned. Although I think we've mentioned this repeatedly in the last couple of years of calls, the higher volume that we'll be getting from the incremental community should help leverage the fixed components better. So while the margin profile before overheads is the same, that extra volume should really help us leverage the entire structure.

And I would just tell you that as we think about next year, although we're not prepared to give out anything, we're not expecting currently the market to get better, but the significant and meaningful community go group that we're going to start the year out with and then the additional communities that we'll bring on through the year. If the market were to stay where it is today, that will provide the growth that we need as a company.

Our next questions come from the line of Trevor Allinson with Wolf Research.

I wanted to follow up on the spec commentary. Your total specs and your spec per community are the lowest they've been in a while. You're talking about potentially over time moving back down to the lower end of your 4- to 6-month range. Is that something you expect to achieve here more near term? And then how should we think about over the next couple of quarters, your starts relative to your sales?

Yes. So the answer is yes. I think as we look at our current cycle times and we look at sort of fine-tuning our strategy and the amount of finished inventory we need to meet the closing ready guarantee and provide the realtors that the inventory they're looking for.

We see an opportunity to bring our spec count on a per store basis further down. It's about 19%. I would love to see that closer to 16 based on current market conditions. So we'll work to accomplish that throughout next year. But as far as starts, the starts are going to align with our sales pace, but you should see an increase in starts because of our community count growth.

So as we roll through Q4 and work through some of the older inventory we have and then we start to start more homes at the lower cost that we're seeing in our sticks and then we ramp up our community count from where we are today, you'll see an increase in starts for those reasons. But we're going to align our starts cadence with our sales goals for next year, which we will provide in Q1.

Okay. Makes a lot of sense. And then a question on your expectation for orders 4Q. I know you don't guide directly to that, but just given so many of your closings are intra-quarter sales. It seems like you're perhaps expecting orders to be higher in 4Q than 3Q.

I guess, one, is that the case? And then two, if so, is that a decision to lean into volumes here, again, to work down inventory is driving what seems to be a little bit better than normal seasonal expectation on orders.

Yes. I don't think we're expecting Q4 absorptions per store to be greater than kind of what Q3 was. We have a lot of new communities. So certainly, that's providing some tailwind to our closing guidance. Really, you just look at our closing guidance and assume a 200% backlog conversion you can kind of back into our sales pace.

As far as your question about leaning into volume, I would say no, other than trying to clear out some older specs at some older direct costs that we want to get rid of so we can redeploy that capital and start new homes at much lower cost. We're going to be really focused on optimizing the profitability of each community.

And as we said in our prepared comments, we feel like chasing incremental volume right now is not in the best interest of our business. That doesn't mean we feel like we're going to get much lower than where we are today, but I'm not sure we're going to try to push absorptions per store much harder than we're pushing today.

Our next questions come from the line of Stephen Kim with Evercore ISI.

Just had a couple of just clarifying questions here. First, I guess, when you talk about margins from new communities coming on at levels that are pretty similar to today, margins typically rise as you progress through a community kind of opens up with conservative pricing, et cetera, and then you sort of grow into a higher margin.

So when you mean these communities are coming on at a similar margin. Do you mean over the life of the community? Or do you actually mean that even when they first open up, they're going to come on at margins that are very similar to your company average right now?

Yes. I mean I think to your point, in a normal market environment, we typically open up our communities, really try to find the market, and then we build up our backlog and grow our margins through the life stage of the community, but we're not in a typical market right now.

And unfortunately, with discounts and incentives and the competitive environment and affordability, I'm not sure we currently feel like there's a ton of upside through the life span of a community right now. So as we're modeling our future projections, the new communities are coming on similar to the margin profile we have today, and we're not necessarily predicting them to get better.

Now obviously, incentives moderate, affordability gets stronger, people start feeling more confident, the opportunity across our entire land book to improve margins exist not only in the new communities that we're bringing on.

Yes. Okay. That's encouraging. It sounds like you're being pretty conservative there, which is good. I wanted to follow up on the incentives. You've used the phrase quite a few times about how you had to increase incentives and obviously, we understand why.

But I wanted to clarify how much of the increase in incentives that we've seen over the last couple of quarters is due to greater spend on forward purchase commitments versus other incentives?

So I think a couple of our peers, Stephen, have mentioned it's about 1/3, 2/3 of the total composition of the incentive pool, 1/3 being financing related and 2/3 being not financing related we're maybe closer to 40-60, but kind of very, very similar.

I think all incentives have increased a bit. There's -- the cost of incentive -- the financing incentives is obviously lower, but we're seeing a higher participation pool of folks that are looking for that financing incentives, but just incentives overall have increased by kind of a proportional amount.

There's just a belief that in today's environment, the customer has a negotiating power, which they may or may not have, but looking at the competitive landscape they're trying to negotiate every deal and the desirability for the affordability push both through financing incentives and just general discounting is consistent in the pace as compared to the last couple of years.

And that 40%, how much of that is forward purchase commitment specifically though? .

It's primarily forward purchase commitments. There's some additional layering or maybe like 3Q1s or 21, there's some early signs that arms are gaining some traction, but it's a low percentage of the total volume.

Our next questions come from the line of Michael Rehaut with JPMorgan.

Great.First question on -- also just wanted more of a clarification on incentives. When we think about the decline that you had in sequentially. It was solidly higher than a lot of your peers that have reported so far. By contrast, your outlook for 4Q being flat to up 100 is a little better.

And I'm just wondering if that's mostly a function of more of the real-time elements of how you sell and close intra-quarter? I'm also thinking, and I think you referred to the fact that you've had this more intense perhaps focus on reducing some of the finished spec. And I don't know if that just had an outsized impact on 3Q that will not repeat in 4Q? Just trying to get my arms around some of those dynamics of having a stronger decline in 3Q and so far flat to up in 4Q.

I'll let Hilla jump in here. But -- and I want to make sure I'm getting your question right, because we're not guiding to better margins in Q4. I think what you're looking at is prior to impairments. So when you back out our impairments and walk away from this quarter, we're actually guiding to a sequential decline in margins, although modest.

We're guiding to something closer to 19.5% versus the 20% that we said we were going to get in Q3. And the reason we're not guiding to flat or up margins in Q4 after you back out impairments and block away is we believe that we actually have some older specs that we're going to be clearing in Q4, which will modestly bring our margin profile down. So I just want to make sure you agree with what I just said there, Michael, and we're answering your question, but we're not guiding to better margins in Q4.

Yes. No, I think that's right -- yes, go ahead, Hilla.

No, perfect. I think I was just going to agree with everything that Phillippe just said. So our margins last quarter without impairments were 21.4% our margins this quarter without impairments were 20.1%. So there was a pullback. Now we said about 50 bps was lost leverage. The rest is just market conditions.

So there was a decline from Q2 to Q3, although maybe not as material as it seems if you're taking it inclusive of the impairment and then kind of that incremental tick down into the Q4 guidance is both a function of clearing some of that older spec inventory that has a different cost basis.

And then again, just echoing our peers, Q4 seems to be a period of time where folks try to hit certain targets and maybe the incentive environment runs a little frothier than it typically does in our sector. We're actually modeling some increased incentives, just an acknowledgment of that trend. If we can come in better than that. Obviously, we're going to try to get it we know that the last couple of months of the year tend to be a little bit higher in incentive usage in our sector as a whole.

Yes. No, no. I was looking at the wrong line in the model. So that was my fault, but I appreciate the clarification there. I guess, secondly, I just wanted to shift to share repurchase, your comments around, I believe, just kind of directionally saying perhaps you're looking at a higher level going forward.

And I think starting out the year or earlier this year, you talked about maybe a $15 million per quarter cadence. If I remember that right, and you've exceeded that somewhat regularly since then. Should we be thinking more of, I don't know, something you're in a $50 million to $100 million ZIP code going forward? I'm just trying to get my arms around kind of how you're thinking about share repurchase currently relative to maybe what you laid out earlier in the year?

Yes. So I think we definitely think $15 million is too low. We think that our current cadence is probably the floor right? So I think what we've done this quarter is probably a fair number to model opportunistically. We're definitely comfortable going deeper than that. But I think that our current cadence is a fair amount to kind of consider on a go-forward basis for us.

Our next questions come from the line of John Lovallo with UBS.

The first one is certainly recognizing that soft consumer confidence has held back demand despite the drop in rates so far. I mean it sounds to us like the desire to own is still very strong. Traffic is reasonably good. And rates as early as today, could start tweaking down even lower.

I mean I guess the question is, how quickly in your opinion, could the sales environment change with improved consumer confidence. And along those same lines, how quickly can you guys react to that change?

Yes. Thanks, John. Very quickly. I think if you look back over time and you look at consumer confidence, it really works both ways. When it goes bad, like it has here in the last 2 quarters, it moves really quickly to your business.

You can see how much incentives are part of the game. -- every customer is coming in and looking for a deal to give them confidence that they're buying at the right time. Right now, buyers don't feel like they're buying at the right time. So we have to offer incentives to get them over the fence. That can change very quickly as people get more optimistic about their prospects, about their employment opportunities, about their wage growth opportunities about just general, the cost of living and the overall economy, Sychology can change much quicker than affordability can change.

And so if that happens, we're -- we think we're in a very good position to capture that with our move-in ready inventory. We have plentiful specs. We have a lot of lots that we can build on. So if the buyer psychology changes, I think we can capture market share really, really quickly.

And frankly, I think we can pull back on incentives pretty quickly as well as long as the industry works in concert there. So it can move really quickly, John, and we'll see how the spring springs because that's the opportunity.

That's the beauty of our strategy, right? Having the specs in the ground allows you to capitalize on that improvement today. About 60% of our closings happening the same period as our sales, we can see results same quarter versus having a 2-, 3-quarter lag between when there's still in the closing. And conversely, our rate locks are also short term, right? They're in sync with our cycle. So there's a very, very quick opportunity to reset all of the components.

And as we stated, we have the highest community count we've had in the history of the company. We feel like we have another solid double-digit growth projected for next year that we feel very good about those positions, those markets, the land, so we can really increase our market share in a better macro backdrop?

Okay. No, that's helpful. And then kind of working off of that question, let's talk about the 22.5% to 23.5% sort of longer-term target margin. I mean in our view, and maybe for lack of a better term, it seems like the building blocks are there. I mean you guys have size, you have the leverage with suppliers, your streamlined portfolio, the amortization expense is lower.

And it really feels like the only missing piece is the incentive level. And so to the extent that, that consumer confidence improves and incentives are able to come back, I mean it would appear to us that getting to those 22.5 to 23.5 margins could happen sooner than later. I mean would you agree? Or where would you push back on that?

No, we would agree. I think the building blocks are exactly what you stated. We have to scale so we can leverage our cost structure. If we can get back to a solid 4 to 4.5 net sales per month, we'll get to leverage. If we can pull back on incentives just a little bit and get to a more normal incentive environment. I mean we're a long ways from a normal incentive environment. So with the combination of lower rates, and better consumer psychology.

If we can just pull back on our incentives modestly, there's a clear path to get back to our long-term target. And that's really what we're focused on. I think we can continue to control, we can control with our cycle times and our direct costs and try to continue to open up these communities that we believe it to give us the market share opportunity, but we just need the incentive environment to moderate a little bit, and I think we can get back to where our long-term goals are.

Our next question will come from the line of Susan Maklari with Goldman Sachs.

My first question is around the current psychology that buyers have relative to your strategy. With the ability to close within 60 days, do you think that they are leaning more into your homes, your products? Do you think you're essentially gaining share with the strategy in this kind of an environment? And if so, who do you think you're taking that from? How do you think about it relative to your peers on the new home side relative to existing home sales?

Yes. Susan. I mean I think 3.8 net sales per month in Q3 is a pretty strong number, especially since a lot of the new communities we opened, we didn't open until late in the quarter. So we actually sort of did better than that if you really look at kind of adjust for that. So I think that's a pretty strong number when I look across the industry and what others are accomplishing.

And I think we're absolutely taking that market share from the existing home market. I think as resale has remained sort of bottled up because of the lock-in effect and realtors are driving more customers to the new home space, I think they're driving more homes to our product more than anybody else is because we offer that certainty, we offer that closing ready guarantee.

The buyer can lock in their rate, they know they're going to close their home and they're getting a great affordable product that's really well built. So I think we're taking market share from the existing home market. I would say that as you look at the overall industry this year based on what other people are projecting, it's going to shrink.

And in my mind, based on what we're guiding, we're not shrinking as much as the overall sector. And I think we're taking that market share from other affordable builders, and we're taking that market share from the existing home market.

Yes. Okay. And then turning to the cost structure. You've done a nice job of working with your suppliers to find improvements in there and savings in this kind of an environment and with the growth that you have already seen in the business over the last couple of years, can you talk about your ability to recognize further savings and what that could mean in the coming quarters?

I mean, I would -- well, first, I would say, I think we've done a really nice job pulling back our costs. You look at the savings our teams have accomplished over the last 4 quarters, frankly, it's pretty remarkable.

And it's actually put us -- it hasn't completely kept us -- allowed us to overcome the incentive environment, but it kept us a lot closer than we would have been if we didn't do it. And as you look at our new starts that are going out, they're meaningfully lower cost than what our starts were going out a year ago.

Same thing with our cycle times, our ability to build homes as quickly as we are, allows us to pull back on the amount of specs we're building and really helps us optimize our strategy. So those have been incredible efforts that have set us up to really accomplish the results that we are accomplishing right now. As I look out into the future, you have some themes that I think could benefit us and continue to allow us to extract some cost and cycle times, but you also have to leave it out there that are a little concerning.

So I'm not sure I'm ready to say that I think there's opportunity. Obviously, there's a lot of capacity in the market right now with people pulling back on starts and multifamily slowing down, labor seems available. And I think with us continuing to lean into our 100% spec strategy we're capturing that labor. They want to build our homes. They want to be on our sites, we're offering them production.

So there may be some opportunity there given our strategy. And then given the fact that we're very streamlined on the purchasing side, if there are tariffs that come through, our main suppliers have ways to pull through other product lines into our portfolio that can help us mitigate anything that's happening on the tariff side. But there also are some indications that tariffs are going to impact costs in 2026. So those could go the other way. And then obviously, you have immigration issues that are happening throughout the United States that could affect labor. So it's hard, honestly, to say whether it's going to get better or worse where I sit today, but I'm really proud of what the team has accomplished, and I think we can absolutely hold the line where we are right now.

I think as we mentioned in our remarks, we're always going to push for more because we want more. But the real opportunities are going to manifest themselves once a newer land vintage comes through as we're working to negotiate land development contracts or renegotiate land development contracts and maybe see some slight savings in the land market. So it's going to be a little bit of a longer time line until those become visible in the P&L.

But I think that the kind of more material round of opportunities really lay on the land, land development side. Although we are still going to push on the purchasing side, we're at a pretty low cost right now. So not sure there's something very, very material on that front.

Our next questions come from the line of Rafe Jadrosich with Bank of America.

Can you talk about the lot inflation that you're seeing today? And if there's any like visibility going forward, how that should trend? I know you're saying that the costs could start to come down as we go in the out years, but just like relative to where it is today, what's the expectation for '26?

Yes. We're not providing that level of guidance on lot cost inflation or the land inflation, especially because we're not providing any 2026 guidance just quite yet. I don't think that we're any different than our peers. I think everyone said that what you're seeing is going to continue or maybe get even a little bit worse. As you tip into 2026 and then hopefully, we'll all start seeing the improvement in the lot cost starting in 2017 and then more meaningfully into '28.

Obviously, a huge piece of that is a function of the incentive environment, right, a lot as a percentage of total revenue, even though, obviously, it has an absolute cost on its own, but we're not prepared to provide any specific guidance on low cost, but I would say we're not an outlier from what our peers are experiencing.

Okay. And then I think the midpoint of the revenue guidance implies that delivery ASP is up sequentially from what you did this quarter and like the orders are sort of more flattish.

Can you just talk about, one, like where the delivery in ASP has been coming in the last couple of quarters has been a little bit below guidance. Is that just incentive and discounting environment? And then what's driving that improvement as we go into the fourth quarter?

Yes. So what's -- where revenue and ASPs have missed the midpoint of our guidance over the last few quarters has absolutely 100% be incentives. So just incremental incentives that we had to offer throughout the quarter to achieve the absorptions we were targeting.

And then as we look into Q4, the higher delivery number is just built off of our community count growth. So that's really what's driving that. And any change in ASP is driven by the mix of the communities that we're opening up and closing homes in versus our prior mix. But we're not assuming much more incentive load a little bit more because of what he said year-end, a lot of builders are pretty aggressive during the nonseasonal time of home buying.

So there's a little bit of that. But most of it is just driven by the mix and the incremental volume you should get from our community count growth.

Our next questions come from the line of Jade Rahmani with KBW.

Can you comment on how existing home inventory is trending in your markets and if you're experiencing any increased competition? And if the 60-day guarantee is helping to offset if you're getting uptake from that.

Yes. I think consistent with what others have said, certainly, there's more inventory in the market than there was a year ago. I think they're specific markets out there where we would say it's more relevant than others. But then I would also say, as I said in my prepared remarks, really when we see the existing home inventory increase in our markets, it's not very competitive it's older homes.

It's not as affordable. It's not in our price range. They're not offering the incentives that we are from a rate buydown perspective. So we don't really feel like it's extremely competitive. And then, yes, our strategy is 100% built on competing when that inventory comes back. We are offering a new home exactly the way you can buy a used home, but you don't have to make the compromise.

So we do believe that inventory comes back we're going to be leaning even harder into our strategy around the move-in ready home, the closing ready guarantee and our realtor strategy to make sure we're competing with that existing home inventory had on.

In terms of the market commentary you provided, I don't think I heard Phoenix. Could you give an update on that market, please?

Yes. we're hanging in there in Arizona. The economy is doing really well here. There's a lot of jobs being created here. and there's a real diverse set of jobs that are coming into the market. Obviously, the semiconductor business is growing really fast here. So the economy is strong. quality life is strong. It's very competitive.

Affordability is really critical here. We're seeing one of the more competitive environments from our other peers as it relates to competing. So although there is a strong demand environment and I think supply is manageable, the margin compression is significant in Phoenix due to the incentives and the affordability that we're trying to solve.

Our next questions come from the line of Jay McCanless with Wedbush Securities.

Just a quick one for me. Thinking ahead to '26 and when you guys lined up the new strategy, you talked about how it would have a little abnormal seasonality. Is that what you're still expecting for next year? And just to let the community count drive the volume growth? Is that how we should think about it and not really worry about what normal seasonality used to be for your business?

Yes. I think what you're referring to is we were talking a little bit about the cadence of our business. So traditionally, when you're a move-up builder and you have longer cycle times. Q1 is traditionally a lower leverage quarter.

Q2 is slightly better and then Q3 and Q4 when you really close all the homes that you sell in the spring. Since we're selling homes real-time we really feel like Q3 is our lowest leverage quarter. And then Q1 and Q2 are actually much stronger with Q4 being in the middle. So I would expect to see that a similar pattern. But that all being said, we have significant community count growth and more coming for next year, which will sort of mute some of that because of the increased store count that we have that is going to increase our volume as long as the market stays consistent. So that's what you should look for.

Again, I think Q1 and Q2 are going to be a higher margin quarters for us as long as the spring selling season is there. with Q2 and Q3 being modestly lower.

So just to clarify, Jay, nothing has really changed on -- we don't change the market dynamics. So the net sales per store don't change from where they've always been. It's just how quickly do we get those closings into the financial statement. So that's really the cadence.

And I think that that's what you were referencing, but I just wanted to clarify.

Yes, absolutely. And then could you talk about when the community count is expected to hit in sort can be front half loaded? Or what have you all set about that?

We're not guiding to 2026 yet in Q1, we'll give you some more visibility. I think we want another quarter to make sure that the cities do what they said they're going to do and the development is happening the way it's happening. But as we said, we're very confident that we're going to have another double-digit year of growth in community count next year in the aggregate of what we accomplished this year. Thank you. Operator...

Thank you...

I'd like to -- thank you, operator. I'd like to thank everyone who joined the call today for their continued interest in Meritage Homes. We hope you have a great rest of the day and a great rest of the week. Thank you. .

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. We appreciate your participation. You may now disconnect.

Greetings, and welcome to the Meritage Homes Second Quarter 2025 Analyst Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to our host, Emily Tadano, Vice President of Investor Relations and External Communications. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our second quarter 2025 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 2, 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 2024 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 release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025, stock split for all prior periods. 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 listening in on our call. Today, I'll start by touching on our second quarter results and current market trends. Philippe will cover our strategy, how our strategy helps us navigate the changing market conditions and the highlights of our quarterly performance. Hilla will provide a financial overview of the quarter and forward-looking guidance. We are proud of our team's efforts to navigate the tougher selling conditions and we secured orders of 3,914 homes in the second quarter of 2025.

Our strategy is focused on move-in ready inventory and the continued use of financing incentives allowed us to better compete in a challenging market because we provide our customers with certainty to help overcome strained consumer confidence. This performance generated a strong [indiscernible] absorption pace of 4.3 net sales per month this quarter. In the second quarter of 2025, we delivered 4,170 homes. Our improved cycle times and move-in ready spec strategy drove another quarter of backlog conversion above 200%.

We generated home closing revenue of $1.6 billion this quarter and achieved adjusted home closing gross margin of 21.4%, excluding terminated land deal charges, which contributed to EPS -- diluted EPS of $2.04. We also increased our book value per share 10% year-over-year. It is well documented that home buying demand has softened over the last several quarters and even more so this past quarter. Mortgage rates increased and remained volatile, while consumer hesitancy went up, causing potential buyers to take an extended timeframe to commit to a home purchase. And at the entry-level segment, affordability remains the primary barrier to homeownership. We believe our strategy was designed to provide certainty and weather these challenges head on, and we remain positive on the long-term outlook of our industry given favorable demographic trends.

And with that, I'll now turn it over to Phillippe.

Thank you, Steve. As Steve noted, we believe that Meritage is well positioned. Despite today's macro headwinds, we remain competitive and gain market share because we are choosing to focus on what we can control by having an agile business model with a go-to-market strategy, which delivers certainty for customers during challenging times. First, we want to commend everyone at Meritage for their dedication and hard work to focus on these controllables. We're happy to share that our second quarter 2025 ending community count was 312 active stores, the highest community count in company history with more planned growth to come in the second half of the year.

Further, our teams once again challenged themselves and we were able to reduce our construction time from approximately 120 calendar days in the first quarter of 2025 to about 110 this quarter, which allows us to reduce our starts per community. These 2 achievements are laying the groundwork for continued growth even during a time when there are macro factors that are challenging the entire industry. Next, I want to underscore the agility of our affordable spec building strategy. We can pull various levers at the local level to ensure we optimize every asset. Our operations and cost structure are more efficient when we are building, selling and closing at a consistent pace of 4 net sales per month.

We know that these savings and efficiencies can be used to offset the impact of increased incentives that are currently being offered to achieve the target. However, homebuilding is a local business, and we look to balance pace and price on a community-by-community basis to ensure we are maximizing our financial performance. As you have seen us do in the past, the sales pace starts to slow, we moderate our starts in order to maintain our targeted level of specs, which is 4 to 6 months supply on the ground. We also changed the pace of our starts based on our cycle times to ensure we have an optimal amount of ready inventory.

As part of our agile business model, we exercise a disciplined yet flexible approach around our land strategy that helps us optimize our land position on a market-by-market basis. We routinely review all of our land under control and determine if it still aligns with the changing market conditions. As a result of this analysis, we regularly terminate land deals that no longer fit our criteria, which in Q2 was approximately 1,800 lots. Lastly, our go-to-market strategy provides the certainty that buyers are looking for today. Our 60-day closing commitment and move-in-ready offerings complete -- compete directly with resale inventory, but with all the benefits of a new home. And our focus on including our customers' brokers in the buying process make us a partner of choice for both future homeowners and the broker community.

We believe our strategy and agility have allowed us to maximize our earnings while continuing to have a strong balance sheet with a focus on liquidity. We are making all of these decisions with the bigger framework of our capital allocation decisions. To align with prevailing macro dynamics, we have intentionally toggled between our spend on land and a focus on shareholder returns, which Hilla will cover later.

Now turning to Slide 4. Demand remained healthy during the spring selling season as we work through affordability concerns on a customer-by-customer basis. Second quarter 2025 orders were 3% higher year-over-year due to a 7% increase in average community count that was partially offset by a 4% decrease in average absorption pace. The cancellation rate of 10% this quarter remained lower than historical average given the limited time between sale to close with our 60-day closing rate commitment. Average absorption pace decreased to 4.3 in the second quarter of 2025 from 4.5 per month in the prior year, but was in line with our target of spring selling sales pace greater than 4 per month.

Under normal market conditions, we expect a sales pace that is higher in the first half of the year and a little lower in the second half of the year, balancing to around 4 net sales per store annually. ASP on orders this quarter of $395,000 was down 5% from prior year due to a greater utilization of rate buydown financing incentives. We offer a wide range of incentives to our customers and rate buydowns continue to be the most attractive offering in the majority of our markets as they drive affordability and help our customers solve for a monthly payment.

Our second quarter 2025 ending community count was 312. This was up 9% year-over-year compared to 287 at June 30, 2024, and also up 8% compared to 290 at March 31, 2025. During the quarter, we brought over 50 new communities online with additional community count growth in the second half of the year. We reiterate our outlook of double-digit year-over-year growth for our 2025 year-end community count. As for early July indications, the first few weeks exhibited normal seasonality at a slower pace. July is traditionally one of the slowest sales months and the timing of the 4th of July holiday caused the month to start slower than anticipated, but demand has improved to normal seasonality since then. We believe we can continue to solve affordability concerns and achieve our internal sales targets through our incentive offerings and broker relationships.

Moving to the regional trend levels on Slide 5. The Central region had our highest average absorption pace of 5.2 in the second quarter, followed by the East with 4.1 net sales per month. The West region had an average absorption pace of 3.9. During the quarter, we continued to see diversity in performance across the country with some of our markets experiencing healthy demand, while others were more impacted by the elevated mortgage rates and growing retail supply. Although no market is immune to the current economic conditions, we saw relatively strong demand and sales performance in Arizona, Dallas, Houston and Southern California. Florida, Colorado, Austin and San Antonio continue to face more challenging conditions with increasing existing inventory and stretched affordability, while the balance of our markets were performing as expected.

Now turning to Slide 6. We started approximately 4,000 homes in the second quarter of 2025, 5% less than last year's Q2, given our faster cycle times while aligning with the current sales volume. We will continue to review seasonal sales patterns and our improved cycle times when planning for our starts pace per community in Q3 and beyond. With over 200% backlog conversion, our ending backlog declined from 2,700 units as of June 30, 2024, to 1,700 homes as of June 30, 2025. The lower ending backlog balance is an intentional output of our strategy as we were able to convert sales to closings quicker.

The higher backlog conversions and shorter cycle times are also generating improved WIP asset turns, helping us to achieve home inventory turns of around 3x per year. As we gain additional experience and consistency under our new strategy, we will be reevaluating our target for backlog conversion rate this year. Since about half of our deliveries have been generated from inter-quarter sales for several quarters now, we consider the aggregate of total specs and backlog to determine the right inventory levels of each of our communities.

We have had approximately 8,700 specs and backlog units as of June 30, 2025, as compared to over 9,200 units at June 30, 2024. We had approximately 6,900 spec homes in inventory as of June 30, 2025, up 400 units from over 6,500 specs as of June 30, 2024, and up 2% sequentially from Q1. While the total number of specs slightly increased, our specs per store held steady at approximately 22 specs per community this quarter, which corresponds to about 5 months supply in the middle of our 4- to 6-month target.

As a reminder, to have the appropriate amount of inventory to meet our 60-day closing ready commitment, we intentionally release our homes for sale when they're nearly moving ready. So similar to Q1, we maintained our percentage of complete specs at 38% as of June 30, 2025. We continue to balance our inventory levels to ensure success in our go-to-market strategy and offer customers peace of mind. Our strategic focus and community count growth create an opportunity for near-term growth during time of economic transition.

With that, I will now turn it over to Hilla to walk through our financial results.

Thank you, Phillippe. Let's turn to Slide 7 and cover our Q2 results in more detail. Second quarter 2025 home closing revenue of $1.6 billion was 5% lower compared to prior year despite a 1% increase in closing volume, primarily as a result of increased utilization of financing incentives, which drove our ASP on closings lower to $387,000 per home. Home closing gross margin of 21.1% in the second quarter of 2025 was down 480 bps from 25.9% in the second quarter of 2024, reflecting the increased use of financing incentives and higher lot costs, partially offset by improved direct costs and cycle times.

Our Q2 2025 margins also included terminated land deal walkaway charges of $4.2 million compared to $1.4 million in the prior year. Excluding these charges, adjusted margins were 21.4% and 26% in the second quarters of 2025 and 2024, respectively. As we look at the components of margin, we note that despite some green shoots in the current pricing of land, the land basis that is reflected in our closings was acquired and developed several years ago and remains elevated due to the higher-than-normal land development costs experienced since 2022. While we've not yet seen these costs start to notably decline, we have seen them stabilize, and we are in the midst of ongoing efforts to actively rebid land development spend.

During the quarter, we were successful in reducing our direct costs by more than 1% per square foot year-over-year. We also achieved direct cost savings sequentially from Q1 to Q2. In addition to [indiscernible] prices trending down, our higher volume, combined with stronger national vendor partnerships and our purchasing teams negotiations led to the incremental savings. Labor also seems to be more available in our markets, potentially stemming from slower multifamily construction and reduced starts in the industry.

Our Q3 margin guidance reflects the current incentive environment, our actual land costs, the savings in the direct from lower prices and improved cycle times. On a sequential basis, Q3 margins incorporate some loss leverage from Q2 since we have already closed most of the high volume of the spring selling season orders in Q2 and July, which now generates about 1/3 of our closing volume for Q3 under our new strategy is one of our slowest months of sales, as Philippe already mentioned.

Our pace typically picks up in August and September, but most of those closings won't occur until Q4. Our longer-term gross margin target remains at 22.5% to 23.5% under normal market conditions, which is about 300 bps higher than where we were pre-COVID due to our structural differences since that time. We are a larger scale company with a different operating model today, which we believe permanently improves our gross margin trajectory from our historical averages. We believe this target is achievable with even just a small pullback from the current above-normal levels of incentives being utilized by a large percentage of our customers.

SG&A as a percentage of home closing revenue in the second quarter of 2025 was 10.2% compared to 9.3% in the second quarter of 2024, primarily as a result of higher commissions, start-up costs for our newer divisions, carry costs related to increased spec inventory as well as some loss leverage. Given the tougher selling conditions, commission rates were higher year-over-year and our marketing spend also increased, respectively. Our co-broke percentage is in the low 90s and remains similar to Q1 this year.

Under our new strategy, the higher volume of specs resulted in an increase in utilities, cleaning and landscaping costs, all of which are included as a component of our selling expenses. We are assessing all SG&A components to ensure we have the appropriate overhead to align with the current operating environment. There are also some AI opportunities we are pursuing that can help us further streamline operations in the future. We are maintaining our long-term SG&A target of 9.5% once we achieve higher closing volumes.

The second quarter's effective income tax rate was 23.9% this year compared to 22.1% for the second quarter of 2024. The higher tax rate in 2025 reflects fewer homes qualifying for energy tax credits under the Inflation Reduction Act, given the new higher construction threshold required to earn the tax credit this year. Overall, lower gross margins as well as higher SG&A and tax rate led to a 35% year-over-year decrease in second quarter 2025 diluted EPS to $2.04 from $3.15 in 2024. We also generated a return of equity -- return on equity of 12.5% for the 12 months ended June 30, 2025.

To highlight just a few results from the first half of 2025. On a year-over-year basis, orders were flat, closings were down 1% and our home closing revenue decreased 6% to $3 billion. Adjusted home closing gross margin of 21.7%, excluding terminated deal charges, was 420 bps lower than 2024. SG&A as a percentage of home closing revenue was 10.7% and net earnings decreased 35% to $270 million with $3.73 in diluted EPS.

Before we move on to the balance sheet, I want to discuss our customers' second quarter credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages with FICO scores in the 730s and DTIs around 41 to 42. LTVs were in the high 80s. This strong credit profile validates our belief that there is still a deep buyer pool that can purchase our homes and that as of today, student loans are not a material headwind. The current market slowing isn't just a qualification or affordability issue, but also a function of weakened consumer sentiment.

On to Slide 8. Our balance sheet remained healthy at June 30, 2025, with cash of $930 million, nothing drawn on our credit facility and net debt to cap of 14.6%. Additionally, earlier this month, we refinanced our revolving credit facility to extend the maturity from 2029 to 2030. We are committed to our long-term growth trajectory while managing to a strong balance sheet and maintaining our investment-grade credit rating. As such, our net debt-to-cap ceiling remains in the mid-20% range. We aligned our capital spend with current market conditions. We reduced land acquisition and development spend net of land development reimbursements to $509 million for the second quarter of 2025. This was a 12% decrease from $576 million in the prior year.

Accordingly, we are lowering our full year land spend target from $2.5 billion to $2 billion, given today's economic uncertainties. We also shifted our capital dollars to return more cash to shareholders this quarter, exceeding our programmatic threshold. We again tripled our $15 million quarterly commitment in the second quarter of 2025, demonstrating that we can and will repurchase shares opportunistically based on market conditions. We spent $45 million to buy back over 674,000 shares in Q2, recognizing the current undervaluation of our stock. To date, in 2025, we have spent $90 million on share buybacks, reducing our December 31, 2024, outstanding share count by almost 2%.

As of June 30, 2025, $219 million remain available to repurchase under our share authorization program. We increased our quarterly cash dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividends totaled $31 million in the second quarter of 2025 and $61 million year-to-date. We returned a total of $76 million of cash to shareholders in the second quarter of 2025 and $151 million for the first half of this year as we intentionally slowed our land spend and recalibrated our capital allocation to maximize returns in prevailing market environment.

Slide 9. In the second quarter of 2025, we put approximately 1,800 net new lots under control. This balance is net of the 1,800 lots that we terminated as part of our routine quarterly review of land deals that no longer met our underwriting standards. In the second quarter of 2024, we put nearly 8,700 net new lots under control. As of June 30, 2025, we owned or controlled a total of about 81,900 lots, equating to 5.3 years supply of the last 12 months closings. We also had nearly 26,200 lots that were still undergoing diligence as of the end of the second quarter.

Given our strong land portfolio as of June 30, we owned or controlled all of the land we need for the next several quarters. About 66% of our total lot inventory at June 30, 2025 and 2024 was owned and 34% optioned. Our maximum ceiling for option land remains in the 40% range.

Finally, I'll direct you to Slide 10 for our guidance. Due to volatility in the market at this time and our high backlog conversion, we have little visibility beyond the next quarter. Therefore, we are only providing Q3 guidance. For Q3 2025, we are projecting total home closings between 3,600 and 3,900 units, home closing revenue of $1.4 billion to $1.56 billion, home closing gross margin of around 20%, an effective tax rate of about 24.5% and diluted EPS in the range of $1.51 to $1.86.

With that, I'll turn it back over to Phillippe.

Thank you, Hilla. In closing, I want to highlight on Slide 11 that we have worked hard to create a business model that maximizes return and is flexible enough to allow us to navigate successfully through periods of economic transition. Our spec strategy provides us flexibility and an efficient cost structure to maintain the right level of WIP and lot inventories. We are offering consumers affordability and certainty in their homeownership journey and believe our go-to-market strategies make us resilient as we compete with resale and grow our market share.

In Q2, we achieved community count expansion and shorter cycle times to prepare us for future growth opportunities and also demonstrated our commitment to disciplined land spend and growth in the business while increasing our return of cash to shareholders. Through our operations and capital allocation strategy, we are focused on maximizing returns.

With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

[Operator Instructions]

Our first question comes from Trevor Allinson with Wolfe Research.

I appreciate your high backlog conversion rate and the volatile environment really limits your visibility into full year volume. So I guess a question on what you're seeing regarding absorption rates on new communities. I think previously, you expected that as you bring on a significant number of new communities, you would expect to see pretty good absorption rates relative to fleet average on those. Can you just comment on how that has trended versus what you expected?

Yes. Thank you for the question. It's trended pretty well. As you can see from the Q2 results, we opened up 50 stores and achieved 4.3 net sales per month in that quarter. So they opened up and met our expectations as it relates to what we were thinking we were going to get from those communities.

Okay. Definitely encouraging to hear. And then the second question is somewhat related on community count specifically. You've had a really nice growth there, expecting more in the second half. Can you talk about the cadence that you're expecting in the second half? You talked about up double digits by the fourth quarter by any community count. Any additional color on what exactly you're thinking with double digits? And then with what you have in the pipeline, any early reads on where 2026 community count could grow?

Yes. Thank you again. I think from -- this was a really big quarter for us, Q2. We knew we were going to get a big pop here. I think from here, the rest of it is pretty even flowed between Q3 and Q4 to achieve the double-digit community count growth. We still feel that we're going to end the year there. As it relates to 2026, still doing a lot of planning around that, but we expect another solid year of double-digit growth between the beginning of that year and the end of 2026.

Yes. Trevor, I think we touched on this a little bit in various conversations, but the double-digit growth is not going to be 10.0, but it's also not going to be 20. So it's somewhere in between, but it's going to be north of 10.

Your next question comes from Alan Ratner with Zelman & Associates.

So first question on the volume outlook, understanding not updating the full year guidance. I'm just trying to think through how you're positioned from a volume standpoint for the remainder of the year. If I look at your homes under construction, the specs and backlog of about 8,700 and I look at the closings year-to-date, it would still seem like if the market cooperates, you're positioned to deliver 16,000-plus homes, like not too far off from where you were before. I just want to make sure I'm thinking about that correctly. And I guess, in general, are you scaling back spec starts at all here in the third quarter? And will that have any impact on your ability to deliver homes this year? Or is that more of a '26 story?

Yes. Thanks, Alan. I think you are thinking about it the right way. Q3, based on our high backlog conversion rate is now going to be one of our lowest volume quarters because we basically close out all the spring demand, and then we obviously have July to start the quarter out. So that's really what's driving the lack of visibility and some of the macro conditions that we're experiencing. But we certainly have the community count and the inventory to achieve the numbers that you're mentioning. It's just a matter of whether the market will cooperate. To your second question, we are slowing down starts because of our cycle times. And so we can reduce the amount of starts we have based on just the timing that's taking to build homes. And then we're ramping up starts because of our community count growth. But between those 2 things, I still think you'll see a slower Q3 to kind of match the seasonality of demand, but we're still starting quite a few specs in all these new communities that we're opening up between now and the end of the year.

Got it. That's helpful. And then just thinking through kind of cash capital allocation, you've been buying back stock at a slightly greater rate than kind of the quarterly commitment you've set forth. I'm just curious with you pulling back the land spend by $500 million, is there an opportunity? Or are you thinking about accelerating that buyback number even further? Because it would seem like that should free up a pretty meaningful amount of cash in the back half of the year, if I'm thinking about that correctly.

Yes. We're definitely looking at rebalancing those 2, a good catch on the fact that we're pulling back on the expected spend by $0.5 billion. So we're definitely going to be pressing on the gas on the repurchases while kind of just keeping an eye on the store. We do have quite a few communities opening and all those need new specs as well, which is also a cash utilization for us. So we're balancing all those pieces, but definitely an intentional rebalancing from the volume of land spend that maybe we projected coming into the year based on current economic conditions and redeploying that cash back into return of capital to shareholders.

Yes. And I would just say that with our stock trading where it is, it's just for us, you can expect us to continue to buy more than our programmatic commitment because of the value that we see in our stock.

Well, based on my conversations with investors, I would imagine that, that would be very well received, especially considering where the stock is at today.

Thank you.

Perfect. Thanks, Alan.

Your next question comes from Stephen Kim with Evercore ISI.

Appreciate the color. Touching up -- following up on the comment, I think, that Trevor made regarding this -- your new communities opening up being a boost to sales. Am I right that communities when they open up, they typically have a somewhat lower margin profile than when they're sort of later in their life. Is that a dynamic that, first of all, is true for you guys? And is that something that is something we should be thinking about as to the impact of these communities on your margin?

So yes, I think traditionally, when you open up a new community, you set it up to make sure you set it up to gain momentum because momentum is really important, it gives the consumers confidence. And so we certainly evaluate and make sure we price our new community openings to really achieve that momentum. I don't think it's fair to say that we open up new communities at lower margins just as a standard course of business. It's really sort of market by market. In today's environment, I think the theory of being more conservative when you open up to make sure you get those first sales is probably a reality just because of the amount of incentives out there in the market and whatnot. But I'd have to go back and look a lot of the new communities we opened up this last quarter are really good locations and really good spots. So I feel pretty good that the margin profile was pretty good. But yes, to your point, we always traditionally try to open up a community and gain momentum. And usually the #1 lever to do that is pricing.

Yes, I appreciate that. Another question relates to some of the change -- one of the changes you made in addition to guaranteeing move-in in 60 days, you've also changed the way in which your sales folks can cross-sell, sell homes in communities that are not the one they're sitting in. And I was curious, first of all, that seemed like it might be a really good thing for your strategy in terms of developing the relationships, not just with the realtors, but with also consumers who may be looking at more than one community. But I was wondering if you could give us some statistics on that, like roughly what percent of your sales are done in a cross-sell manner? And secondarily, are you seeing any of your peers copying this or not? And if not, why do you think that is?

Yes. So I would say, first of all, the reason we're doing this, the cross-selling is exactly what you highlighted. When we spoke to our customers and spoke to the realtors, they really create a relationship with a specific salesperson and just because they don't want to buy a home in that community or the realtor doesn't want to sell a home in that community, they still want to work with that salesperson. So cross-selling allows that relationship to translate across our communities, which is why we do it to build those deeper connections with our customers and with our realtors.

I have to get you stats on that, but I think it's pretty high because we're cross-selling across the entire company. So I think there's a lot of salespeople in our business selling in communities that they don't "station". But frankly, Stephen, we don't station them anymore. They are driving around, meeting with realtors, meeting with customers, showing homes, and we really don't tender to a community anymore. So I think it's -- at some point, it's just going to become 100%. The last thing you asked was whether competitors are following us. I would say, yes, in some form or fashion. We see a lot of competitors starting to cross-sell. Lennar was one of the first ones to start doing it a long time ago in a couple of markets, but they probably still do it for different reasons. They're still tethering their salespeople to a particular community, but allowing them to cross-sell, while in our case, we're not tethering it to that community and all we do is cross-sell. I hope that's helpful.

Your next question comes from John Lovallo with UBS.

I wanted to talk about the gross margin. So the third quarter gross margin seems like it's expected to decline about 140 basis points sequentially. And I know you guys pointed to lower closings given the new strategy, higher land cost and higher incentives. So as a starting point, I was hoping maybe you could bucket those 3 categories as it pertains to that 140 basis points decline. And then importantly, it seems like the fourth quarter gross margin is expected to step up from -- sequentially from the third quarter. I wonder if you could just help us kind of put some context around the magnitude of that potential step up.

Yes. So we actually didn't give any guidance on Q4. So I don't think we're going to have any discussion about that. However, the commentary probably still stands. We did note that there's going to be a lost leverage in Q3 in our prepared remarks and that -- and you can see that from the volume projections that we provided in the guidance, and that's really a function of July being a little bit of a tougher month and that pickup that you're seeing subsequent to that is really not going to materialize in closings until Q4. So I think that you're seeing that lost leverage is the primary driver of the pullback in margins. If you recall from discussions in prior years, it can be 75 to 100 bps in lost leverage in gross margin alone from volume.

So as we're looking at our expectations for Q3, and we know that the volume is going to be less, the majority of the pullback that you're seeing is loss leverage. As I said, we didn't give any guidance into Q4, and we didn't reiterate our full year guidance. But putting logic together, if we're expecting a different volume for the last quarter of the year, any lost leverage could potentially be recovered if the units increase at that point in time. So I think that that's the majority. I don't know that the other categories make up meaningful buckets. It's primarily the loss leverage.

And just to amplify the things that you highlighted, I mean most build order builders, their lowest leverage quarter is going to be Q1 because they close out all their backlog in Q4. For us, based on our new strategy, it's going to be Q3 -- and traditionally, July is the slowest month of sales across the whole year. Sometimes December can be slow, too, but July is traditionally the slowest. And then we start to see volume pick back up between September, October and November. So that's kind of what we're currently expecting. But right now, it's tough to see with everything that's going on.

Yes. When you think about the fact that we closed out such a material portion of our backlog, and we're coming in with a lower backlog, there's not that cushion to go into it. So some of those closings were accelerated into Q2. The strong volume that we're going to have in the back half in sales in Q3 isn't going to close until Q4. So it kind of creates this dip in Q3, which, as Philippe said, is a different quarter for other builders.

Yes. And I think that's really helpful clarity, particularly when be able to see the 20% in the third quarter and start trying to run rate that. And I think reiterating the 22.5% to 23.5% also is really helpful. But the second question would be, in terms of land cost inflation, curious what you're seeing today. And I know you talked about the potential for rebidding and some potential lower development costs. Curious when that may start rolling through? I mean is that a fourth quarter? Or is that more in 2026? And what would you expect kind of that land cost inflation to look like as we move into 2026?

Yes. So just to give you a feel for what's happening in the land market, and I'm not sure I'm going to say anything different than what you've heard from others because we're all sort of competing for the same land. But generally, the land market is slowing, which creates some opportunities to restructure deals, mostly terms and timing, breaking up deals into multiple takes, potentially closing a deal closer to being shovel-ready and things like that. We haven't really seen land prices decline anywhere except a few distressed pieces here and there in certain locations. I'm not sure we should expect that at all until next year. I think most land sellers are patient, and we'll wait to see if this thing extends into 2026 before they start getting a little bit more religion on what their lands were.

As far as rebidding land development jobs, we have seen some green shoots recently as we've gone out and rebid new jobs that we were about to start develop or future phases of existing communities. We've seen more competitive bids, more people bidding, and therefore, we've seen some potential cost savings there. Those obviously wouldn't impact until the back half of 2026. It usually takes about 6 to 9 months to develop land. We're sitting here in August -- sorry, July, almost August. So at the earliest, you wouldn't really see that impact our P&L until second quarter, probably more like third quarter, fourth quarter of 2026.

Your next question comes from Susan Maklari with Goldman Sachs.

This is Charles Perron from Susan's team. Just first on the -- with the rising for-sale inventory that we're seeing in the markets, are you making further changes to your approach to broker commission to support traffic and volume, especially in your new communities?

No. I mean I think our over -- our enterprise-level strategy is to directly try to mirror and compete with the existing home market. So as that inventory comes back, we want to be a compelling choice to buy a new home over a used home. And as part of that strategy, we believe having a consistent and reliable commission structure for our realtors that they can count on is a key part of that. We operate at a market rate, whatever the market rate is for that commission in that market and in that submarket is where we position our external commissions. And that's it. I think there are -- right now in the competitive market, there are a lot of people doing a lot of different incentives, including doing some different realtor bonuses and things like that. So that's kind of an industry thing, not a meritage thing. And in certain communities, we may do that as well where realtors are really driving the customer base in that market. But generally, we don't do anything unique when we open up a new community versus an existing community, our realtor strategy is market-based at kind of the MSA level.

Yes. And just to clarify, I think a couple of our peers have already mentioned this. There's no denying the fact that resale inventory is increasing across the U.S., but it's not necessarily a head-on competitor in all of our markets. The inventory that's coming online isn't necessarily entry level. A lot of it is aging. And as we mentioned, you typically are not able to get a financing incentive when you're buying from an individual homeowner. So it's not -- it hasn't created the drag that we had expected in the markets that have seen the return of the resale inventory. certainly there and it's certainly a competitor, but it's not a head-to-head competitor.

Yes. I think that's a really important point. The incentives we're seeing out there are in the existing home space. the incentives that are -- we're competing with right now are more in the new home space.

That's very helpful color. And it's nice to see that stick and brick costs were declining year-over-year this quarter. When you consider the recent decline in lumber and OSB against the potential for tariffs flowing through your P&L, do you see opportunities for further reductions going forward in your stick and bricks? And how does this play out in your third quarter margin outlook?

Yes. So most of our third quarter homes have already been started. Actually, all of our third quarter homes have already been started. So the guidance that we provided includes the sticks and bricks that we're experiencing right now. There's always an opportunity to reset. So our teams never stop rebidding, never stop competing for a lower price. I think several of our peers have also said the tariffs have not really flown through our numbers in any material way. We've been able to successfully push back on any tariff asks, and there haven't been nearly as many as we had anticipated, kind of trying to read a leaves is difficult. But at this point in time, we're not modeling any expectation for increases in our direct. We actually think that there's potential savings. We haven't modeled incremental savings, although we're going to continue to push internally to find those.

Your next question comes from Michael Rehaut with JPMorgan.

I wanted to start off with some of the comments around how to think about closings for the full year. I think Alan brought that up. And obviously, you have a decent amount perhaps of a thought around volume, I would assume already. Gross margins obviously taking a little bit of a downward move in the third quarter and sensibly assuming a relatively stable backdrop. I know that might be a big assumption, but I would assume that there's some way to think about 4Q even at this point. I'm wondering about the pulling of the full year guidance at this point in the year. And if there's other variables outside of just what you're seeing today in terms of maybe being a little less certain that maybe we're not fully appreciating in terms of pulling the guidance rather than perhaps just adding a little bit of a wider range or maybe lowering the high end of the range versus what you had 3 months ago?

Yes. I mean it's a great question. I think it's all just really built on the lack of visibility we have right now with our current backlog and you start to model out our current community count and our guidance for Q3, you can back into what our absorptions per store is. So I think that's pretty indicative of what we think the market is going to give to us. And then we're optimistic that demand will trend the way it normally does seasonally. The example I gave earlier was that usually August and September and October pick up meaningfully from July. But based on the macro backdrop, I think we just don't -- we're not really ready to commit to that until we see it. July will close this quarter, August will close this quarter. If September is strong and October follow course and our community count that's going to happen in the back half of the year, we can get to a pretty good number full year. But until we experience that, I just think that given our low backlog rate, it's tough to continue giving out full year guidance. That's kind of discussion we had with our Board and everyone else around the company, and we thought that was in our best interest.

Yes. So I'll just add -- this is very, very obvious, but I'm just going to say it anyway because it needs to be said. If you look at the backlog that we have coming into the quarter at 1,700 units, we guided to 3,600 to 3,900 closings. We don't even have all of our closings yet for Q3. We have 0 closings identified yet for Q4. So just because of the current market dynamics, we thought it didn't make sense to put a number out there and potentially be wrong one way or the other, up or down. We didn't think it was a responsible action to put a number out there that at this point, I guess, the market dynamics are moving around so quickly. It's tough to gauge them.

We have a good level of confidence about Q3, even though we're coming into the quarter with less than half of those closings. So I think that at this point, when we see market conditions stabilize and we see the community count opening trends stabilize, then we'll be able to provide better guidance on a go-forward basis. But unlike many of our peers, we don't have any units currently sold beyond the current quarter. So it's really just a very educated guess on our end, which didn't seem like the right call.

Right. No, no, I appreciate it. I just thought I'd kind of probe it a little bit more. So I appreciate you having the patience to answer that. Secondly, I wanted to kind of explore a little bit on the gross margin side. You said, Hilla, that the 3Q decline versus 2Q primarily due to reduced leverage. But when I look at what you're expecting to generate from a revenue standpoint versus the back half of '24, you averaged about a 24% margin in the back half of '24. Your revenue guidance for third quarter, if you kind of -- it's a little bit less than the back half average. But clearly, there's a change in cost structure or profitability. And I'm just kind of wondering in terms of year-over-year over the last several quarters, actually, maybe perhaps just more year-to-date, what have you seen in terms of headwinds from higher -- specifically just incentives, either financing incentives or just a more challenging pricing backdrop that's impacted the gross margin year-to-date? And if you've seen that trend, presumably a headwind continue throughout 2Q and you expect that to continue into 3Q in terms of incremental headwinds?

Yes. So I think this is a good point. The dynamics are fairly different than they were in 2024, right? It's primarily the incentive environment. So if you look at our ASP year-over-year, it's quite a material difference, right? I think we were from $411 to $387. So it's that ASP differential that's causing the margin pullback in the ASP differential. A little bit of it is mix and product, geographic mix and product, but a big piece of it is increased use of incentives. So as we kind of talked about it in the prepared remarks, there's a lot of buyer hesitancy. So even though folks may be able to qualify for a home, they want that comfort and security of that lower affordability point to get them over the fence to make that purchasing decision. So what we're seeing is an increased use of financing incentives.

The financing incentive cost hasn't moved too much, but the number of folks that are asking for that financing incentive to be included with their home purchase has increased. So that's really the pullback that you're seeing in margin when you're looking at '24 to '25. And then kind of sequentially from Q1 to Q2 to Q3, it's really that increased utilization that is the main driver. Our costs are actually, as we mentioned, are coming down. So we're not really seeing anything else change in the profit equation. It's really just the fact that the top line number is lower because of that incentive usage. As a reminder, I know different builders record that differently. For us, that comes right off the top. It reduces ASP. We don't have it in financial services. So it's a function of reduced revenue, which for us, obviously affects margin versus maybe some other folks that have it rolling through a different line item.

That's a great point, Hilla. And obviously, that also kind of ties into when you're talking about reduced operating leverage. I assume it's fair to say or maybe not, maybe you can clarify, when you talk about reduced operating leverage because of less revenue, that's really because of the increased use of incentives that's ultimately driving the lower gross margin and the reduced operating leverage is a byproduct of those higher incentives. Is that fair or...

Exactly. So the reduced leverage, both as a component in gross margin and all the way down to SG&A, right? Again, folks that are recording that as a financial services reduction, it's not showing in their SG&A. So our SG&A control has actually been very tight. But because of the lower per home ASP, the net percentage calculation is increasing even though the dollars are kind of doing what we thought that they could and should be doing. So you're 100% right, Mike.

Okay. And then one last quick clarification, Hilla. You said earlier in the call that you're talking about year-over-year community count growth. I wasn't sure if you're referring to year-end '25 year-over-year growth or year-end ' 26. It was an answer to a question talking about '26. And you said not 10.0%, but not 20%. I wasn't sure if you were referring to the year-end '25 or year-end '26 in terms of year-over-year growth.

You know what, both. It's going to be both. So for sure, '25, and we're expecting double-digit growth in '26 as well.

And your next question comes from Rafe Jadrosich with Bank of America.

Just following up on some of the prior questions on the fixed cost side. Can you give some color on the fixed costs that are in cost of goods? It would be really helpful if we could get a dollar amount, so we sort of break out what the deleverage could be in the third quarter and what the leverage was in the second quarter?

Yes, that's too detailed. We don't go into components of gross margin, but you guys can probably back into it if we're giving you the lost leverage pieces. We can tell you that it's mostly people, people costs, right? So there's superintendents and land [indiscernible] team members that no matter how many homes we sell, they're still working. So it's really the leveraging of the human capital that's the primary driver.

Got it. Just -- so the 140 basis point step down from 2Q to 3Q, that's all deleveraged. It's not higher incentives quarter-over-quarter?

No. So it's not all deleverage. I think we've gone on record many times in the past, the deleveraging from your highest quarter to your lowest quarter is typically 75 to 100 bps. So it's not the 140. It's just the large portion of that pullback. The rest is 1 million other factors going forward and backwards, product mix, geographic mix. It's a lot of other little things here and there.

Yes. I mean we're not currently thinking that incentives are going to rise between Q2 and Q3. They were already pretty high. But certainly, July is a tough month, and we see some pretty aggressive stuff out there in July to kind of get through the summer slowdown.

3

Okay. So, the fixed cost at 75 basis points roughly from 2Q to 3Q of that [indiscernible].

Yes.

That's super helpful. And then in terms of the community count growth outlook, the double digit this year and then also targeting that for next year. Can you talk about how many of those communities are in newer markets or expanding into additional markets versus places where are like in existing markets that you have today?

Yes. So we went into Jacksonville and Utah recently a couple of years ago. And then, of course, we bought Elliott Homes recently, which got us into the Gulf Coast. So other than those 3, all the new community count growth we're talking about for this year and next year is in our existing footprint. But I would say we are overinvesting, obviously, in Jacksonville, Utah and the Gulf Coast because we want to gain scale there, although the Elliott Homes transaction came with almost 5,000 lots. So we have quite a few lots through that acquisition. But there is no new community growth between now and next year in markets that we're currently not in.

And that ends our question-and-answer session. I'll hand the floor back to Phillippe Lord for closing remarks.

P

Yes. Thanks. I appreciate everyone joining our call today. Thank you so much for your interest in our organization, and we look forward to seeing everyone next quarter. Appreciate it very much.

Thank you. And that concludes today's call. All parties may now disconnect. Have a good day.