Meritage Homes - Earnings Call - Q3 2025

Executive Summary

• Orders grew 4% YoY to 3,636, but revenue and EPS declined on lower ASPs and elevated incentives; Q3 total revenue was $1.424B and GAAP diluted EPS was $1.39 (adjusted EPS $1.55).
• Results missed S&P Global consensus: revenue $1.424B vs $1.474B est and EPS $1.55 vs $1.72 est; higher incentives, lost fixed-cost leverage, and impairments drove the shortfall (see Estimates Context).
• Gross margin compressed: home closing gross margin 19.1% (adj. 20.1%) vs 24.8% LY, reflecting incentives, lot cost inflation, impairments/land walk-aways, and reduced scale benefits; SG&A rose to 10.8% of revenue on higher commissions/tech costs and de-leverage.
• Q4 guidance implies continued margin pressure (home closing GM 19–20%) and EPS $1.51–$1.70; management highlighted consumer-confidence headwinds, but reiterated flexibility via spec strategy, faster cycle times (~105 days), and record community count (334) to support near-term growth.

What Went Well and What Went Wrong

• What Went Well

  • Community count hit a record 334 (+20% YoY; +7% QoQ), underpinning future growth and share gains.
  • Cycle times improved to ~105 days, supporting high backlog conversion (211%) and intra-quarter closings (~60% of deliveries), enhancing asset turns and flexibility.
  • Capital returns accelerated: $85M returned in Q3 (dividends + buybacks); Board added $500M to repurchase authorization (with $664M remaining).
  • Quote: “We generated home closing revenue of $1.4 billion and achieved an adjusted home closing gross margin of 20.1% and adjusted diluted EPS of $1.55…” — CEO Phillippe Lord.

• What Went Wrong

  • Pricing pressure from elevated incentives lowered ASPs and margins; home closing gross margin fell 570 bps YoY to 19.1% (adj. 20.1%).
  • Impairments and land walk-away charges ($14.5M) further weighed on earnings; GAAP EPS fell 48% YoY to $1.39.
  • De-leverage from lower revenue and calendar cadence (July softness) increased SG&A to 10.8% of home closing revenue; effective tax rate rose (22.6%) as fewer homes qualified for IRA energy credits.

Transcript

Speaker 5

Greetings. Welcome to the Meritage Homes third quarter 2025 analyst call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Emily Tadano, Vice President of Investor Relations and External Communications. Thank you. You may begin.

Speaker 6

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 homepage. Please refer to slide two cautioning you that our statements during this call, as well as in the earnings release and accompanying slides, contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain.

Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 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?

Speaker 1

Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll start by highlighting our third quarter results and current market trends. Phillippe will cover how our strategy is creating a differentiation for us in the context of the evolving market conditions. We'll 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 and 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 home buyers 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. We are satisfied with our results this quarter considering the current economic environment. With that, I'll now turn it over to Phillippe.

Speaker 2

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 buyer psychology. 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 rate 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 longstanding 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 rating 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 six quarters give us the flexibility to ramp up or slow down our 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 four to six months' supply of 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 a four 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 inelasticity of demand. While we are primarily focused on pace as an entry-level spec builder, we are not willing to sell our homes at any clearer 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 book 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 four.

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 remained 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 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.

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 a solution 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 month feels very similar to September, taking into account some additional seasonality. Lower mortgage interest rates have not sparked outside demand, but we believe we can achieve our internal sales order targets through our incentive offerings and by leaning into our broker relationships.

Now moving on to the regional level trends on slide five. The local demand environment in each of our regions continued to vary market by market in Q3. Some of our most favorable markets, Dallas, Houston, Southern California, as well as North and South Carolinas, 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. Colorado remained tough given the impact of stressed affordability. These headwinds were primarily an affordability concern and a 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 six. 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. A higher backlog conversion and shorter cycle times allow us to turn our home inventory about three times per year. With three consecutive quarters of backlog conversion rate above 200%, we now believe our long-term backlog conversion will be between 175% and 200%.

Since 50% or more of our deliveries have been generated from interquarter sales for several quarters now, the aggregate of total specs and backlog is our preferred metric to analyze the right inventory levels at each of our communities. We had approximately 8,000 specs and backlog units as of September 30, 2025, as compared to about 9,100 units as of September 30, 2024. We had approximately 6,400 spec homes in inventory as of September 30, 2025, down 6% from approximately 6,800 specs as of September 30, 2024, and down 8% sequentially from Q2. The 19 specs per store this quarter translated to five months' supply, compared to 24 specs per store and six months in last year's third quarter. Our completed specs comprise 47% of our total count as of September 30, 2025.

Although this is slightly higher than our target of about one-third complete specs, we were comfortable holding on to some of our specs to preserve margins and plan to work down this inventory by year-end. With that, I will now turn it over to Hilla to walk through our financial results. Hilla?

Speaker 6

Thank you, Phillippe. Let's turn to slide seven and cover our Q3 results in more detail. Third quarter 2025 home 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 $380,000 per home. The decline in ASP is primarily due to the increased use of incentives and discounting, as well as some geographic mix to a lesser extent. Home closing gross margin of 19.1% in the third quarter of 2025 was down 570 basis points from 24.8% in the third quarter of 2024, reflecting the increased use of incentives, inventory-related impairment and walkaway charges, higher lot costs, and reduced leverage of fixed costs on lower home closing revenue, all of which were partially offset by improved direct costs and shorter cycle times.

Our Q3 2025 margins included $8.7 million of real estate inventory impairments and $5.8 million of walkaway charges for land deals we are no longer pursuing. This compared to no impairments and $2 million in terminated land walkaway charges in the prior year. Excluding these inventory-related charges, adjusted margins were 20.1% and 24.9% in the third quarters of 2025 and 2024, respectively. As a result of the elevated land development costs that began in 2022 and the typical 18 to 24-month timeline required to bring on a new community, our current land basis is fully comprised of this higher-cost land and is a greater percentage of our revenue than both historical levels and prior year. However, incremental green shoots related to the current price of land and development costs are encouraging.

As many builders have terminated some of their option land, we believe there are opportunities to upgrade our pipeline and find cheaper or better positioned lots. We are also actively rebidding land development spend wherever possible. We expect that the stabilizing land acquisition and development conditions we are now experiencing will be beneficial to our gross margin in late 2027 and into 2028. During the quarter, our procurement team's persistent hunt for cost savings led to a 3% year-over-year reduction in our direct cost per square foot. We continue to find available 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 Phillippe 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 spec 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 us secure volume in a tougher selling environment. Our co-broke percentage was in the low 90% 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 lean 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 2025 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 nine 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 nine 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 eight.

Our balance sheet remains healthy at September 30, 2025, with cash of $729 million, nothing drawn on our credit facility, and a net debt-to-capital ratio of 17.2%. As a reminder, our net debt-to-capital ratio 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 remained 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 nine 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 nine. 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 of lots off 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 to $1.54 billion, home closing gross margins 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 Phillippe.

Speaker 2

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 starts 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 and 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?

Speaker 5

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment, please, for the first questions. Our first questions come from the line of Alan Ratner with Zoman. Please proceed with your questions.

Hey, guys. Good morning. Thanks for all the info so far, much appreciated. My question relates to the strategy pivot that you guys have been embarking on and the impact that that's had on your overall return profile. 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. If I look at your inventory turnover right now, over the last 12 months, you're down to about 0.7 times. Before the pivot, it was north of one. I know you mentioned the accumulation of completed specs and that number trending higher than your long-term plans there. I'm just curious, should we think about this as a trough and as you move towards 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 in the early innings and might take a little bit longer to materialize?

Speaker 2

Thanks, Alan. Yeah, 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 when 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 four-month supply of specs versus the current five to six. As we look into 2026, we think there's a real opportunity to do that. That would be number one. The other thing I would say is, obviously, we've been in significant growth mode. 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. I think we're getting better at that as well. The environment's 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. Between those two things, we feel like those are the biggest opportunities for us to drive a higher ROE and generate more free cash flow.

Speaker 6

I think also this quarter was a unique opportunity. This is the first quarter that we've ticked 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. You're seeing that reset. Phillippe mentioned the reduction in spec starts, so you're seeing that reset start this quarter. As we sell those specs into Q1, you should see a more efficient width balance for us going forward.

Got it. Okay. That's helpful. Second question, just on the community count growth outlook in 2026, sounds like it's going to be another very strong year there. How should we think about the interplay there with margin? I guess what I mean by that is, you know, this year, you guys have posted double-digit community count growth. We know the market's not up double digits in terms of demand, which is, you know, partly why your margins are lower and your absorptions are lower. If we kind of just assume demand stays where it is, you know, 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, you know, kind of puts and takes that we need to consider independent of that?

Speaker 2

Yeah, 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 they're going to be a headwind. Even though we're bringing them on at a higher land basis, they were underwritten at a higher land basis and at a different revenue and absorption profile. 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.

Speaker 6

Yeah, sticks and bricks and land are aligned. Although I think we've mentioned this repeatedly on 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. While the margin profile before overheads is the same, that extra volume should really help us leverage the entire structure.

Speaker 2

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. The significant and meaningful community count growth 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.

Speaker 5

Thank you. Our next questions come from the line of Trevor Allinson with Wolfe Research. Please proceed with your questions.

Hi, good morning. Thank you for taking my questions. I wanted to follow up on the spec commentary. Your total specs and your spec for communities 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 four to six-month range. Is that something you expect to achieve here more near term? How should we think about over the next couple of quarters, your starts relative to your sales?

Speaker 2

Yeah, 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 with 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. We'll work to accomplish that throughout next year. 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.

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. We're going to align our starts cadence with our sales, our sales goals for next year, which we will provide in Q1.

That makes a lot of sense. A question on your expectation for orders in 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, is that the case? If so, is that a decision to lean into volumes here, again, to work down inventory, and striving what seems to be a little bit better than normal seasonal expectation on orders? Thanks.

Yeah, I don't think we're expecting Q4 absorptions per store to be greater than 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 costs, we're going to be really focused on optimizing the profitability of each community. 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.

Speaker 5

Thank you. Our next questions come from the line of Steven Kim with Evercore ISI. Please proceed with your questions.

Yeah, thanks very much, guys. Just had a couple of clarifying questions here. First, I guess, when you talked about margins from new communities coming on at levels that are pretty similar to today, you know, margins typically rise as you progress through a community, you know, kind of opens up with conservative pricing, etc., and then you sort of grow into a higher margin. 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?

Speaker 2

Yeah, 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 a community. We're not in a typical market right now. Unfortunately, with discounts, incentives, and the competitive environment and affordability, I'm not sure we currently feel like there's a ton of upside through the lifespan of a community right now. 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. Obviously, if incentives moderate, affordability gets stronger, people start feeling more confident, the opportunity across our entire land book to improve margins exists not only in the new communities that we're bringing on.

Yeah. 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've had to increase incentives, and obviously, we understand why. 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?

Speaker 6

I think a couple of our peers, Steven, have mentioned it's about one-third, two-thirds of the total composition of the incentive pool, a third being financing-related and two-thirds being not financing-related. We're maybe closer to 40-60, but kind of very, very, very similar. I think all incentives have increased a bit. There's the cost of incentives, the financing incentives is obviously lower, but we're seeing a higher participation pool of folks that are looking for that financing incentive. 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. Looking at the competitive landscape, they're trying to negotiate every deal. 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.

That 40%, how much of that is forward purchase commitments specifically, though?

It's primarily forward purchase commitments. There's some additional layering of maybe like 3-2-1s or 2-1s. There's some early signs that ARMs are gaining some traction, but it's a low % of the total volume.

Gotcha. Okay. Thank you so much. Thank you. Our next questions come from the line of Michael Rehaut with JPMorgan. Please proceed with your questions.

Great. Thanks. Appreciate it. First question, also just wanted more of a clarification on incentives. When we think about the decline that you had in 3Q 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. I'm just wondering if that's mostly a function of the more of the real-time elements of how you sell and close intra-quarter. I'm also thinking, and I think you've referred to the fact that you've had this more intense, perhaps, focus on reducing some of the finished spec. 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.

Speaker 2

Thanks for the question. I'll let Hilla jump in here. 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. When you back out our impairments and walkaways 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. The reason we're not guiding to flat or up margins in Q4, after you back out impairments and walkaways, 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.

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.

Yeah, I think that's right. Go ahead, Hilla.

Speaker 6

Perfect. I think I was just going to agree with everything that Phillippe just said. Our margins last quarter without impairments were 21.4%. Our margins this quarter without impairments were 20.1%. There was a pullback. We said about 50 bps was lost leverage. The rest is just market conditions. There was a decline from Q2 to Q3, although maybe not as material as it seems if you're taking it inclusive of the impairments. 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. 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 in acknowledgement 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.

Yeah. No, no, no. Thanks for that. I was looking at the wrong line in the model. That was my fault. I appreciate the clarification there. I guess, secondly, I just wanted to shift to share repurchase, you know, your comments around, I believe, just kind of directionally saying perhaps you're looking at a higher level going forward. I think, you know, starting out the year or earlier this year, you talked about maybe a $15 million per quarter cadence, if I remember that right. You've exceeded that somewhat regularly since then. Should we be thinking more of, you know, I don't know, something in a $50 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.

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

Speaker 5

Thank you. Our next questions come from the line of John Lovallo with UBS. Please proceed with your questions.

Good morning, guys. Thanks for taking my questions. The first one is, certainly recognizing that soft consumer confidence has held back demand despite the drop in rates so far. It sounds to us like the desire to own is still very strong. Traffic is reasonably good. Rates, as early as today, could start tweaking down even lower. I guess the question is, how quickly, in your opinion, could the sales environment change with improved consumer confidence? Along those same lines, how quickly can you guys react to that change?

Speaker 2

Yeah. 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 two quarters, it moves really quickly through your business. You can see how much incentives are part of the game. Every customer is coming in 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, you know, the overall economy. Psychology can change much quicker than affordability can change.

If that happens, 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. If the buyer psychology changes, I think we can capture market share really, really quickly. Frankly, I think we can pull back on incentives pretty quickly as well, as long as the industry works in concert there. It can move really quickly, John, and we'll see how the spring springs because that's the opportunity.

Speaker 6

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

Speaker 2

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. We feel very good about those positions, those markets, the land. We can really increase our market share in a better macro backdrop.

Okay. No, that's helpful. You know, 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. You guys have size, you have the leverage with suppliers, you have a streamlined portfolio, the amortization expense is lower. It really feels like the only missing piece is the incentive level. To the extent that consumer confidence improves and incentives are able to come back, it would appear to us that getting to those 22.5% to 23.5% margins could happen sooner than later. 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 the 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. 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. That's really what we're focused on. I think we can continue to control what we can control with our cycle times and our direct costs and try to continue to open up these communities that we believe in to give us the market share opportunity.

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.

Speaker 5

Thank you. Our next questions will come from the line of Susan McLaury with Goldman Sachs. Please proceed with your questions.

Thank you. Good morning, everyone. 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 this strategy in this kind of an environment? 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?

Speaker 2

Yeah. Thanks, 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. We actually sorted it better than that if you really look at, you know, kind of adjust for that. I think that's a pretty strong number when I look across the industry and what others are accomplishing. I think we're absolutely taking that market share from the existing home market. 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's 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. 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. In my mind, based on what we're guiding, we're not shrinking as much as the overall sector. 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. 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, 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 four quarters, frankly, it's pretty remarkable. It's actually put us, it hasn't completely kept us, allowed us to overcome the incentive environment, but it's kept us a lot closer than we would have been if we didn't do it. As you look at our new starts that are going out, they're at meaningfully lower costs 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.

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 things that I think could benefit us and continue to allow us to extract some costs and cycle times, but you also have some things out there that are a little concerning. 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. 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. There may be some opportunity there given our strategy.

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. There also are some indications that tariffs are going to impact costs in 2026. Those could go the other way. Obviously, you have immigration issues that are happening throughout the United States that could affect labor. 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. I think we can absolutely hold the line where we are right now.

Speaker 6

I think, as we mentioned in our remarks, you know, we're always going to push for more because we want more. The real opportunities are going to manifest themselves once the 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. It's going to be a little bit of a longer timeline until those become visible in the P&L. I think that the kind of more material round of opportunities really lay on the land development side. Although we are still going to push on the purchasing side, we're at a pretty low cost right now. Not sure there's something very, very material on that front.

Speaker 5

Thank you. Our next questions come from the line of Rafe Jadrosic with Bank of America. Please proceed with your questions.

Hi, Dick. Thanks for taking my questions. Can you talk about the lot inflation that you're seeing today and if there's any visibility going forward on 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 2026?

Speaker 6

Yeah, 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. Hopefully, we'll all start seeing the improvement in the lot cost starting in 2027 and then more meaningfully into 2028. Obviously, a huge piece of that is a function of the incentive environment, right? A lot is a percentage of total revenue, even though obviously it has an absolute cost on its own. We're not prepared to provide any specific guidance on lot costs. I would say we're not an outlier from what our peers are experiencing.

Okay. I think the midpoint of the revenue guidance and that delivery ASP is up sequentially from what you did this quarter. I think the orders are basically sort of more flattish. Can you just talk about, one, where the delivery ASP has been coming in the last couple of quarters? It's been a little bit below guidance. Is that just incentive and discounting environment? What's driving that improvement as we go into the fourth quarter?

Speaker 2

Yeah. Where revenue and ASPs have missed the midpoint of our guidance over the last few quarters has absolutely 100% been incentives. Just incremental incentives that we had to offer throughout the quarter to achieve the absorptions we were targeting. As we look into Q4, the higher delivery number is just built off of our community count growth. That's really what's driving that. 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. We're not assuming much more incentive load, a little bit more because of what Hilla said, year-end. A lot of builders are pretty aggressive during the non-seasonal time of home buying. There's a little bit of that. Most of it's just driven by the mix and the incremental volume we should get from our community count growth.

Speaker 5

Thank you. Our next questions come from the line of Jade Rahmani with KBW. Please proceed with your questions.

Thank you very much. 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?

Speaker 2

Yeah. I think consistent with what others have said, certainly there's more inventory in the market than there was a year ago. I think there are specific markets out there where we would say it's more relevant than others. 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 buy-down perspective. We don't really feel like it's extremely competitive. 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.

We do believe as 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 head-on.

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

Yeah. We're hanging in there in Arizona. The economy is doing really well here. There's a lot of jobs being created here. There's a real diverse set of jobs that are coming into the market. Obviously, the semiconductor business is growing really fast here. The economy is strong. Quality of 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. Although there's 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.

Speaker 5

Thank you. Our next questions come from the line of Jay McAnlis with Wedbush Securities. Please proceed with your questions.

Hey, thanks for taking my questions. Just a quick one for me. You know, thinking ahead to 2026, 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? 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 y'all's business?

Speaker 2

Yeah, I think what you're referring to is we were talking a little bit about the cadence of our business. 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 are 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. I would expect to see a similar pattern. 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's going to increase our volume as long as the market, you know, stays consistent.

That's what you should look for. Again, I think Q1 and Q2 are going to be higher margin quarters for us as long as the spring selling season is there, with Q2 and Q3 being modestly lower.

Speaker 6

Nothing's really changed on, you know, we don't change market dynamics. 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 statements. That's really the cadence. I think that's what you were referencing, but I just wanted to clarify.

Absolutely. Could you talk about when the community count is expected to hit next year? Is it going to be front half loaded or what have y'all said about that?

Speaker 2

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's happening the way it's happening. 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. 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.

Speaker 5

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