Meritage Homes Corporation Q2 FY2026 earnings call

Market Demand Overview

• Slower-than-normal spring selling season drove Q2 2026 new sales orders 9% lower YoY to 3,575 units, with no sequential demand deterioration from Q1; average absorption held steady at 3.5 net sales per community per month (3.6 in Q1, 4.3 YoY).
• Affordability pressures and economic uncertainty continue to impact buyers, but management remains confident in long-term demand for entry-level and first move-up (1MU) homes.
• Demand is highly localized: strong performance was seen in parts of Texas, Southern California, Atlanta, Raleigh, and Coastal Carolinas (where limited inventory supports activity), while softer demand was recorded in Orlando, Denver, Salt Lake City, and Northern California. Temporary dips in mortgage rates sparked noticeable demand improvements, signaling potential for future recovery.

Operational Progress

• Achieved a 200% backlog conversion rate (within the 175-200% target range) due to the firm's quick-close strategy, with nearly 60% of Q2 closings sold during the quarter.
• Reduced finished spec home inventory by over 1,100 units YoY, cutting total spec inventory to 5,100 units (27% lower YoY) and completed specs to 1,500 units (42% lower YoY, representing 30% of total specs, near the 1/3 target). Spec inventory currently equals ~4 months of supply, near the lower end of the 4-6 month target range.
• Maintained construction cycle times under 110 calendar days for the fifth consecutive quarter, with further incremental improvements reducing carry costs, improving liquidity, and supporting the 60-day closing guarantee.
• Secured nearly 6% year-over-year reduction in direct construction costs per square foot, driven by collaborative efficiency gains with strategic trade partners, with savings from both labor and materials.
• Active community count reached 340 as of Q2 end, 9% higher YoY and 1% lower sequentially due to timing of openings and closeouts; management confirms full-year 2026 community count growth of 5-10% YoY remains on track.

Strategic Updates

• The firm is intentionally rebalancing its product mix to reach a long-term target of 1/3 1MU homes and 2/3 entry-level homes, aligned with U.S. demographic trends: the company will continue serving entry-level buyers (Gen Z, move-down customers) while expanding 1MU offerings to follow millennial buyers through their homeownership journey. This rebalancing was part of the original long-term strategy, paused temporarily during peak demand for entry-level product over the past five years. The shift will be gradual, with full mix impacts expected in 2028 and beyond.
• Capital allocation remains disciplined: Q2 2026 land spend moderated 30% YoY to $357 million, with the firm focusing exclusively on high-opportunity land acquisitions, with increased allocation to 1MU land. Full-year 2026 land spend is projected between $1.7 billion and $2 billion.
• Returned $131 million to shareholders in Q2 via dividends and share repurchases (74% higher YoY): repurchased 1.5 million shares (2.3% of beginning-of-quarter outstanding shares) for $100 million at a 16% discount to book value, and increased the quarterly dividend 12% YoY to $0.48 per share.

Balance Sheet Highlights

• Maintained a strong investment-grade balance sheet as of Q2 end: $807 million in cash, no outstanding borrowings under the revolving credit facility, and a net debt-to-cap ratio of 17.1% (well below the mid-20s ceiling). Refinanced the revolving credit facility in June to increase size to $980 million, extend maturity to 2031, and expand the accordion feature to allow up to $1.47 billion in total capacity.
• As of Q2 end, the firm owned or controlled 73,200 total lots, equal to 5.2 years of supply based on the last 12 months of closings, slightly above the 4-5 year target to support planned community growth through 2027. 69% of lots are owned and 31% are optioned, in line with the firm's 40% target option lot ratio.

Meritage Homes reports consolidated results only for homebuilding, with no separate product segment breakdown provided in the call. For Q2 2026, the firm recorded 3,725 home closings, generating $1.4 billion in home closing revenue (14% lower year-over-year, driven by an 11% drop in closing volume and a 4% decrease in average selling price (ASP) to $373,000). Reported home closing gross margin was 18.3% (280 bps lower YoY), while adjusted home closing gross margin (excluding impairments and terminated land deal charges) was 18.6% (80 bps higher sequentially from Q1 2026). Selling, general and administrative (SG&A) expenses were 10.4% of home closing revenue, compared to 10.2% YoY. Reported diluted EPS was $1.37 (33% lower YoY), and adjusted diluted EPS was $1.42. For the first half of 2026, home closing revenue totaled $2.5 billion (16% lower YoY), with adjusted diluted EPS of $2.24.

• Management upwardly revised full-year 2026 guidance, now projecting home closings and revenue will be approximately 5% lower than full-year 2025 results, an improvement from prior guidance that called for a larger decline. Home closing revenue could trend slightly lower if market conditions require higher incentives.
• Q3 2026 guidance projects total home closings between 3,300 and 3,600 units, home closing revenue between $1.26 billion and $1.35 billion, home closing gross margin around 18%, effective tax rate between 24.5% and 25%, and diluted EPS between $1.10 and $1.30.
• Share repurchases will be adjusted to a minimum of $55 million per quarter for the remainder of 2026, with incremental opportunistic repurchases funded by operating cash flow and during stock price dips. $284 million remained available under the repurchase program as of Q2 end.
• Management expects margin relief from lower-cost land will begin to appear in late 2027 or early 2028, barring prolonged increases in oil and gas prices. The long-term adjusted gross margin target of 22.5-23.5% under normalized market conditions remains unchanged, as does the long-term SG&A target of 9.5% of revenue.

• Persistently high mortgage rates and ongoing affordability pressures continue to suppress home buyer demand, with recent rate increases creating uncertainty for near-term sales trends. Incentive costs are inversely correlated to volatile mortgage rates, which are driven by both domestic and international political developments.
• Higher-cost land vintages purchased between 2022 and 2025 will remain a near-term headwind for gross margins.
• Recent lumber price increases are expected to create incremental cost headwinds over the next two quarters, with impacts flowing through to financial results within about two quarters.
• Forward-looking results are inherently uncertain, and actual outcomes may differ materially from management expectations due to a wide range of unforeseen risks, as detailed in the firm's SEC filings.
• Community opening timing is subject to municipal approval delays, which can create variability in quarterly growth outcomes.

Q: What drove the better-than-expected Q2 gross margin, and will incremental cost savings continue going forward?

A: The gross margin beat came from three combined factors: higher closing volume than Q1 created better fixed cost leverage, the firm achieved a 6% year-over-year reduction in direct construction costs, and a temporary mid-quarter dip in mortgage rates allowed the firm to sell and close homes in the same quarter with lower incentive costs. These benefits offset the ongoing headwind of higher-cost legacy land still rolling through results.

Q: Is the planned shift to a 1/3 first move-up product mix an opportunistic adjustment, or a long-term strategic change, and will the operating model change?

A: This rebalancing to a 1/3 1MU / 2/3 entry-level mix has always been part of the firm's long-term strategy, which was temporarily paused when entry-level land was more abundant and attractively priced over the past five years. The shift is now possible because the land market has changed, with more attractive 1MU land opportunities becoming available. The core operating model will remain largely unchanged: the firm will not offer extensive customization or design studios, but will make minor tweaks (earlier home release to accommodate buyers selling an existing home, slightly upgraded standard finishes) to align with 1MU buyer preferences.

Q: Would M&A be considered to accelerate the build-out of the first move-up business?

A: The firm evaluates M&A on a strategic, not just scale-driven, basis. Management would consider targeted local or private M&A that would increase 1MU market penetration or expand into attractive new markets (such as underpenetrated Midwest markets), so M&A could be used to speed up the 1MU expansion if the right opportunity arises.

Q: What explains the projected 18% Q3 gross margin, which is lower than Q2's 18.6%? Is the full-year 4Q closing growth driven by aggressive incentives to hit volume targets?

A: The projected sequential gross margin decline is primarily driven by lower expected Q3 closing volume (which reduces fixed cost leverage, by ~20-30 bps) and higher mortgage rates in June that increased incentive and rate buy-down costs. The projected 10% YoY 4Q closing growth is driven entirely by planned community count growth in the second half of 2026, not by plans to ramp up incentives to drive unplanned demand gains. Management remains conservative about demand and absorption trends for the back half of the year, with all incremental closings coming from new community openings that already have started homes ready for 60-day closing.