Meritage Homes Corporation Price & Performance (MTH)

Our higher volume combined with our purchasing team's negotiations translated to additional savings. Both the current land values and savings indirect are reflected in our Q2 margin guidance. Given the cadence of tariff announcements and the evolving start and stop nature of these discussions ever since, we don't yet know to what degree, if any, tariff related cost increases will impact our gross margin in the second half of twenty twenty five. However, the current status quo of no tariffs on lumber should get us most of our expected 2025 closings completed at current market lumber prices. Given our increased scale and ongoing efforts to streamline our operations, we are confident in our ability to work with our partners to minimize the impact of supply chain challenges. As a top five builder, limited floor plans and a high level of product visibility, we intend to continue to leverage our bargaining power with national vendors. During the quarter, labor capacity remained consistent as demonstrated by our cycle times remaining stable at our historical average of one hundred and twenty calendar days. We have not experienced any labor impact from recent immigration actions and we believe there's slack in the system right now due to slower multifamily construction and reduced starts in the industry.

As a reminder, our long term gross margin target is still 22.5% to 23.5% under normal market conditions, which is about 300 bps higher than our historical average. Are a larger scale company with a different operating model today, which we believe permanently improves our gross margin trajectory, from our pre COVID experience. SG and A as a percentage of home closing revenue in the first quarter of twenty twenty five was 11.3% compared to 10.4% in the first quarter of twenty twenty four. Primarily as a result of reduced leverage of fixed costs on lower home closing revenue, as well as greater spend on technology and start up overhead costs for our new Gulf Coast and Huntsville divisions in advance of a full quarter's contribution of home closings. We are confident that our 20,000 closings goal we will fully leverage our overhead platform and achieve our longer term SG and A target of 9.5%. Commissions were relatively flat year over year as a percentage of home closing revenue despite the tougher selling environment. We increased our COBRA percentage to 92% but were able to secure other offsets as part of our strategic shift to maintain stability in total commission rates.

However, if the market slows further, one of our levers is to lean into our external realtor relationships as a small increase in commission rates or bonuses can drive an outsized impact in sales value. The financial services profit of $4,000,000 included a de minimis write off related to rate buy down expiration costs in the first quarter of twenty twenty five. The financial services loss of $1,000,000 in the first quarter of twenty twenty four had $6,000,000 of similar write offs. The first quarter's effective income tax rate was 23.3% this year, compared to 20.5% for the first quarter of twenty twenty four. The higher tax rate in 2025 reflects fewer homes qualifying for energy tax credits under the inflation reduction act giving the new higher construction thresholds required to earn the tax credits this year. Overall, lower home closing revenue and gross margins and a higher tax rate led to a 33% year over year decrease in first quarter twenty twenty five diluted EPS to 1.69 from $2.53 in 2024. Before we move to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, our buyer profile remained relatively consistent with our historical averages.

FICO scores in the mid seven thirties and DTI around 41 to 42. LTVs were still in the mid eighties. This validates our belief that there's still a deep buyer pool that can qualify for our homes and that the hesitation is primarily common coming from consumer sentiment and the desire to feel confident about a home purchase decision rather than the inability to afford a monthly payment. On to slide eight. We maintained a healthy balance sheet at 03/31/2025 with nothing drawn under our credit facility and a net debt to cap of 13.7% as we continue to grow our land position our net debt to cap ceiling remains in the mid-twenty percent range. We ended the first quarter with $1,000,000,000 in cash, compared to $652,000,000 at 12/31/2024, reflecting our new $500,000,000 debt issuance this quarter. Our new ten year senior notes were priced at an attractive 5.65% demonstrating the benefits of our investment grade status and the market's confidence in our sustainable business model. This additional debt offering will help Meritage fund long term growth trajectory and capital return goals. Also, as we mentioned on our last call, we completed a two for one stock split on January 2 this year.

We remain consistent in our capital allocation strategy of managing internal growth and return of capital. Land acquisition and development spend, net of land development reimbursements totaled $465,000,000 and $363,000,000 for the first two quarters of twenty twenty five and 2024 respectively. 28% increase year over year. We continue to expect full year land spend of around 2,500,000,000.0 for 2025 and the next several years, but we are mindful of current economic uncertainties and will shift our capital dollars if further market disruptions were to occur. We increased our quarterly cash dividend 15% year over year to $0.43 per share in 2025, from $0.03 $75 per share in 2024. And we spent 45,000,000 to buy back over 600,000 shares in q one. Tripling our $15,000,000 systematic quarterly commitment. We have demonstrated that we can and will repurchase shares based on market conditions. As of 03/31/2025, $24,000,000 remain available to repurchase under our share authorization program. We returned a total of $76,000,000 of cash to shareholders in the first quarter of twenty twenty five, continuing to prioritize both internal growth and shareholder returns. Slide nine, In the first quarter of twenty twenty five, we secured approximately 2,200 net new lots under control inclusive of the Nashville acquisition lots.

This balance is net of about 1,600 lot contracts that we terminated as part of our routine quarterly review. In the first quarter of twenty twenty four, we put nearly 6,300 net new lots under control. We have a disciplined land acquisition process. Where local market dynamics, including our anticipated incentives and pricing, are captured in our land underwriting. With our healthy land portfolio we can increase or pull back on land acquisitions for the next several quarters based on market demand. As of March 31, 2025, we owned or controlled a total of about 84,200 lots equating to five point four year supply of the last twelve month closings but in line with four to five years of forward looking 2025 demand. We also had over 29,600 lots that were still undergoing diligence at the end of the quarter. As we prepare for our goal of 20,000 closings in 2027, we are actively sourcing both on and off balance sheet land to ensure our balance sheet is not overburdened during our growth cycle. About 62% of our total lot inventory at 03/31/2025 is owned. And 38% was optioned. Compared to prior year where we had a 69% owned inventory and a 31% option lot position.

Finally, I will direct you to Slide 10 for our guidance. Looking into the future, there is a greater amount of market uncertainty dependent on the outcomes of pending federal actions. Based on current visibility and market conditions, we are maintaining our full year 2025 guidance of home closings of 16,250 to 16,750 units and home closing revenue of 6.6 to 6,900,000,000.0. As for Q2 twenty twenty five, we are projecting total closings between 3,800 to 4,100 units home closing revenue of 1.5 to 1,650,000,000.00, home closing gross margin of around 21.5%, and effective tax rate of about 24.5% and diluted EPS in the range of 1.85 to two point one zero dollars With that, I'll turn it back over to Philippe.

Thank you, Hila. To summarize on slide 11, we are proud of our team's efforts and our first quarter twenty twenty five operational and financial results. Which demonstrated the effectiveness of our new strategy in the challenging housing market. And as our spec building and streamline operations afford us flexibility and efficient cost structure, our business model is resilient in good market conditions and even more critical when the market slows. We believe that our move in ready supply for quick closings and our balanced approach for pace and price will enable us to optimize returns and grow our market share. While effectively navigating the uncertain economic environment. Because we are offering consumers affordability and certainty in their homeownership journey. With that, I will now turn over the call to the operator for instructions on the q and a. Operator? Thank you.

Will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. It will indicate your line is in the question queue.

You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, before pressing the star key. One moment please while we pull for questions. [indiscernible] Please proceed.

Hey, guys. Good morning.

Nice job in a very tough market. So congrats on the the continued progress there. First question on the guidance, I guess. If If I look at the midpoint of your range, I think I'm getting to an average closing price of around 410,000, which would be up quite a bit from first quarter levels. And I didn't hear in your comments, you know, any real indication of pricing power. So I'm just curious if you could walk us through what what the expectation is there. Sure. So if looking at our ending backlog, appreciating that our closings were at $3.93, our ending backlog is actually at $4.00 5. So we're starting to see in our ASP a function of mix. It's not necessarily pricing power although we have taken price increases in markets that can allow it. So it's a combination of both, but primarily mix.

Got it. Okay. That that's helpful. And then I guess, just more broadly on on that as far as the pricing power incentive environment. We've heard from a number of builders so far that have had, I would say, more cautious commentary on on April activity compared to what you guys expressed, and I think a number of them have indicated there either in the process of increasing incentives or expect to increase incentives to try to get volume jump started. So I'm curious, you know, as you think I know you're not giving March guidance in the back half of the year, but what is your broad based expectation for your incentive levels as you get through the spring selling season and ultimately in the the seasonally slower months in order to achieve your your volume targets.

Yeah. Thanks, Alan. So as we look into April, we're have one more weekend left and a few days. And as we said in our opening comments, it feels pretty much similar to kind of February and March. So you know, with that, being the current trend in the market, that's really our current expectation for q two. As we think about as we move throughout the year, it's hard to tell. Right? Rates continue to move up and down. When rates move lower, we see increased demand. When rates move higher, we see softness. So it's hard to hard to say what's gonna happen towards the back half of the year. But as we sit here with one weekend left in April, we're feeling feeling pretty good about q two. And we just sold four and a half or 4.4 in q one when things were really challenging.

So we're pretty confident there. The other piece of this for us is just we have a lot of community new communities opening. In the back half of the year. We're finally starting to land our community count growth. We're gonna have double digit community count growth by the end of this year. And those communities are opening up in some of our strongest markets. And traditionally, our new communities have a really strong demand even in non seasonal times. So that's how we're sort of feeling about the rest of this year.

And our confidence, as we move forward.

Yeah. Just to reiterate what Philippe just said, I know some folks are having to dig deeper on incentives to hit their targeted per store volumes, we hit our target per store volume this quarter. So I think that we're comfortable at the current incentive threshold. We understand what it is that we need to do. To hit that four plus target since we were already there in the first quarter.

Makes sense. I appreciate the, the thoughts there, guys. Good luck. Thank you. Our next question is from Stephen King with Evercore ISI. Please proceed.

We think you indicated that new communities are opening up [indiscernible] Good sales, you know, initially, you know, I guess right out of the gate. In those markets sorry. In those in those communities, When are we expecting to see the influx of these kinds of communities? Would it it be as early as this quarter and the second quarter, or is it more likely to be kind of third quarter or even fourth quarter? And the reason I'm asking is because order to hit your targeted closings guide, it it looks like absorptions need to, you know, kind of rise from the level they were in the first quarter. That doesn't usually happen. And so I just wanted to sort of push on that a little bit and see whether or not you know, you could elaborate a little bit more on these new communities coming in.

Yeah. Definitely a little bit more. Although, timing of community openings on a quarter by quarter basis are very hard to predict. But as we look out over the next three quarters, we're very confident in our double digit year over year growth to end end the year and move into the spring selling season. It should be relatively, from where we are to where we wanna end, pretty consistent from here. You'll sort of see it stair step up. But, obviously, most of the growth is gonna come is gonna come in the second half of the year third quarter, fourth quarter, But we're gonna be opening up those communities with move in ready inventory. We're gonna be opening up those communities with things that can close within sixty days. And we personally believe that there's strong demand for that product right now. So as you're looking at your modeling, my suggestion is that it's more about the community count growth that's driving our full year guidance than it is about us assuming that the market's gonna get better.

Yeah. That's helpful. Do you guys do much in the way of bulk sales to investors? You know, like, what what percent of your sales were were were bulk sales to investors? Investors? And what should we expect from those kinds of sales on a go forward basis?

Yeah. I don't have that number in front of us right now. But traditionally, we've always sold somewhere around 5%. Of our product not to bulk investors, but to just investor community. Some of them could be bulk. Some of them could be just mom and pop. And we've never really increased that amount As we stated in the past, we have done some things with some built for rent [indiscernible] We continue to try to do that, but that stuff is somewhat slowed here as you are aware. So we're running probably right around 5% if I had to guess. But we can definitely get you a more accurate number. But would say it's definitely not increased recently.

Okay. Great. That's good to hear. Thanks very much, guys. Appreciate it. Thanks.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed.

Thanks. Good morning, everyone. Thanks for taking my questions.

I wanted to first just kind of revisit you know, the the really you know, and and hats off to you the the ability that you you've demonstrated to reiterate your guidance, amid, you know, what other builders are seeing as a decent level of volatility. Volatility and and and some downward revisions. On both volumes and and margin, And I wanted to drill down a little bit. You talked in the past about the positioning of your [indiscernible] And I was wondering if you try and dial in to the extent you have the best sense you know, the ability to, you know, kinda maintain that targeted sales pace in the face of some of the challenges the industry has seen. If you feel that, you know, it's driven more by know, you're already know, your price point, which is already kind of at the lower end of the range you know, positioning within markets, you know, or or, you know, the way you go about the incentive levels as well or increase in in the sales commissions. Could be a combination of all, but, you know, just trying to get a sense from your perspective of you know, what what's kinda driven the performance year to date.

You you know, from a from a competitive standpoint?

Yeah. I tried to answer that a couple different ways. I think first of all, our confidence as it relates to maintaining our full year guidance is based on really three factors. The first one is that we just did exactly what we thought we were gonna do in q one.

The second is that April's trending positively for us. We're feeling confident in our q two. And the third is that we believe in our double digit growth in our community count.

So that's that's really our confidence. Our crystal balls are about as murky as everyone else's right now on what the incentive environment's gonna look like, the rate environment's gonna look like as we progress through that. But the fact that we were able just to do what we did in q one gives us confidence that we can manage in these conditions. As it relates to what we're doing differently, I'm not sure we're doing anything differently than the rest of the folks. They all manage their businesses really, really well. But I do believe that offering move in ready inventory is is really offering customers something today that is in high demand. They're looking for certainty. They're looking for confidence in their home purchase. And we're able to manage, and solve for affordability in a different way. With that window. And so my my belief is that that has allowed us to, secure the demand that we needed to, in in q one. And we're confident as we move forward that it'll continue to be that case.

Oh, great. Thanks for that, Philippe. I guess secondly, you highlighted an acquisition during the quarter of lots or assets. I was wondering if you could kind of speak to perhaps more broadly the M and A backdrop and how you view to the extent that the landscape might have changed over the last three or six months. With regards to deal flow. You know, small builders or assets that are on the table, and that could be you know, by the way, also including not just you know, homebuilder operations or smaller private builders in in certain markets But also even in the land market side, it's any deals are coming back to the table, people are starting to walk away from things.

Yeah. So deal flow is high right now. Well, I'd say there's a lot of deals out there. It does feel like deal flow last year was pretty high. We working on this one for a while. It's a small builder called Willow Branch. They're a great operator in the Nashville market, great locations. And, it was an all land purchase, which was perfect for us because we could. Build our product on it. And was in a market that we feel very, very strongly about. So there's a lot of those out there. We're trying to pick our spots. We bought Elliot Homes last year, which got us into the Gulf. Coast, which are is a market we wanted to be in. And then the ability to double down in Nashville, we thought was a unique on some really great locations. So we'll continue to look at all that stuff. I think there's gonna be a lot of lot of that stuff out there. It's it's hard to underwrite stuff today. And I think it's getting getting harder. With the current sort of uncertainty that's out there. Incentives running as high as they are. So, you know, land isn't getting any cheaper.

These builders believe that their land has a lot of value. So it's it's getting more challenged to underwriting. In the land market, I would say the same thing. What we are seeing with the current kind of uncertainty in the market is there is an opportunity to renegotiate. We're seeing the ability to renegotiate terms mostly. Push deals out, take them down over a longer period of time. And in some cases, we are seeing some price concessions but but not a ton. Just yet. If this were to continue, I would expect to see more of that. We walked away from 1,600 lots in q one. A lot of that was because the sellers wouldn't renegotiate. We felt like we needed to get that land at a lower price to make the current environment work. So, you know, we'll see how that goes, as we go along here. But land is traditionally sticky. They're very patient. They'll wait for the market to get better. I don't think anyone thinks that this is gonna be a multiyear event at this point. If it's not a multiyear event, land sellers are gonna hold on to their land prices.

Great. Thank you. Thank you.

Our next question comes from the line of Trevor Allison with Wolfe Research. Please proceed.

Philippe, I wanted to follow-up on comments you were just making about early reads on your your realtor and buyer appetite for the sixty day moving guarantee. Have you seen the the mix of realtor attachment rates that you guys were anticipating with that? And in markets that you are seeing higher level of resale inventory, are you guys finding your sixty day guarantee to be a competitive advantage in those markets and that's perhaps what's differentiating you to some degree in this current market?

Well, our co broke is now 92%. Means we're obviously, partnering with the realtors more strongly than we were when we were 75%. That's intentional as part of our strategy. It's our commitment to those folks We believe a lot of those folks, drive the activity on the existing home market. We're giving them the opportunity to do more business with us, which is which is really the goal. Look, I think the competitive advantage with resale is that we're a new home.

As we're a new home. We build our homes energy efficient. No one's lived in them. You can get them the way you want it. It's in a brand new community, hopefully, in in really good school districts. And we can solve, for your payment with rate buy downs, and and those type of things. So I think that really creates the competitive advantage. The, the additional cherry on top, if you will, is the sixty day move in ready kinda commitment and the move in ready homes, which helps realtors help their customers with the the process. When they can tell their customer that the home's gonna be done, done, done, ready for them to move in. There's gonna be no compromise of their lifestyle. And there's a guarantee behind that. That's a really strong selling tool for our realtors with the customer they're bringing to us. And I do think that creates a competitive advantage against the resale market.

Yeah. Just one one more point, Trevor. Maybe we'll start sharing this next quarter. Part of the reason that we got to the 4.4 net sales per month is not just the 92%, co broke It's that the repeat business from those from those same agents. It's not individual transactions with, one time transactions with a broker. It's multiple transactions with the same set of brokers who are seeing us as a partner and bringing their customers to us instead of us having to solicit business from them. So maybe we'll start sharing some of those stats, in future periods. About the repeat business versus just the co broke percentage that's really, kind of the advantage that we're seeing with our with our strategic shifts.

Yeah. That'd be very helpful. And it sounds like the strategy is having a lot of its desired impacts. Second question is, you're the really the only builder in in recent weeks who's maintained your full year guidance. It's encouraging sounds like you're also hearing labor loosen up. Just with the softer market overall, are you expecting to see more direct cost savings with your trades moving forward? Then from an order of magnitude, standpoint, you think it's possible that these direct cost savings could be enough to offset? Any potential tariff impacts whenever those may occur.

Thanks.

Yeah. It's a great question. Really too early to tell. Currently, labor is performing extremely well. As Hila mentioned in her comments, we think there's slack in the system because people have pulled back on starts. Multifamily continues to be slow for now. So we expect labor to continue to perform well. The supply chain is somewhat of an unknown as we sit here today. We haven't layered any tariffs into our forecast because we don't have any cost increase that have been delivered to us in certainty. There's been a lot communication from our vendors of what might come, or what might not come. So we're waiting to see. But I think we're very confident right now in our ability to kinda navigate that cost environment. We're the fifth largest homebuilder, so the relationships we have today with our national vendors are very strong. They provide us more price certainty and clarity because of our scale. Streamlined operating model allows us to pull in different products if things get stuck in supply chain. Our vendors are allowed to replace those products with other products that are similar. You gotta remember we're a % spec builder, so the customer isn't picking out what's going in the homes.

We're picking out what goes in the home. So as long as the home looks good, our customer is happy. They don't have it buyer's remorse if they don't get the carpet they picked out. And and then finally, you know, we have we have eight almost 8,000 homes We just closed another 35 or so.

So the next three starts, the next four months or so of starts are gonna go out here at today's cost, we believe. Which really secures our twenty twenty five year. So tariffs are probably gonna be more of a 2036 for us if all of that happens the way I just stated. And that's kind of currently what we're what we're forecasting our our business to be.

Appreciate all the color, good luck moving forward.

Thank you.

Thank you. Our next question comes from the line of Susan Maklari with Goldman Sachs.

Please proceed.

Good morning. This is Charles Perron in for Susan. Thanks for taking my question. First, I wanna talk a little bit about the balancing between price and pay should market conditions soften from here. You talk about your flexibility in the ramp up community count if you were would be willing to pull back on on, you know, some of these these coming in this year.

I against, you know, maybe leveraging your incentive to maximize your return.

To ensure that you're meeting your your absorption targets across your community.

I I I think there might have been two questions there.

Around, pace and price and how we think about that if conditions were to deteriorate. I guess, you know, we're always gonna go out there and focus on trying to get four net sales per month as our base pace. And then we're gonna maximize returns from there. We were able to just again, achieve 4.4 in what I believe to be very difficult market conditions And and then you know, execute on 22% margins, which I think is is pretty solid in what we thought we were gonna do. And it feels, again, similar to to what we're dealing with here in in q two. As we move into the back half of the year, if things were to get worse, we're gonna focus on getting four net sales per month and then maximize returns from there. That's that's the baseline. Think the other question was, what would we do with our community openings Nothing. Our community openings are scheduled based on when we have the lots and when we have the homes in production, And we're gonna open those up based on based on that, not based on market conditions.

We open up new communities, we typically do really, really well no matter what the market conditions are. We believe strongly in the land that we bought and those where those communities are gonna be opening up. There wouldn't be anything any pullback in our community count growth But you know, again, if incentive if the rates get go higher or there's a lot more uncertainty or consumer confidence continues to deteriorate, we're gonna figure out and solve for four net sales per month and then maximize our margins from there.

Yeah. Just to clarify, our communities are not cannibalizing. Our new communities are cannibalizing existing communities. They're they're complementary. So having any sort of pause on, rolling out new community openings doesn't really make sense. It's additive. It's not it's not a substitution.

Got it. That that's super helpful color.

And I understand you don't have a lot of visibility on on potential tariffs, but I guess my question is more on, you know, the risk from those potential tariffs across the supply chain for you.

You know, obviously made significant improvement in cycle and time over the last few years.

And, you know, how would you address, you know, the risk of you know, potential supply chain disruption from tariffs, and how would you be preparing ahead of that to make sure that, you know, you could keep your production pace intact?

Yeah. I think, you're a % right. There's a lot of risk out there. We're communicating constantly with our vendors. We have day to day conversations with those folks both locally and at the national level. So our main plan is to overcommunicate we understand what's coming. So that we can plan accordingly. We're committed to our starts, which I think is critical. If we don't continue to start homes, we don't have move in ready inventory. And we don't really have the ability to execute on our strategy. So that commitment from us on the starts allows them to plan their business accordingly. And we're over communicating, and then if things are changing out there in the future, we could hopefully, source from different places. And come up with substitute products where where possible. And, just continue to plan our business. So we're not immune to these tariffs any more than any other folks out there, both inside our industry and outside our industry. But we're just trying to be more strategic. And I think we have the ability to kinda plan out our business a little bit differently given our strategy.

Operator? Thank you.

Yes. Thank you. Our next question comes from the line of John Lovallo with UBS. Please proceed.

Good morning, guys. Thanks for taking my question.

I guess the first one is I just wanted to go back and maybe put a finer point on what Steve and Mike were were getting at. You know, to achieve the midpoint of the 2025 outlook, it seems like you need to sell about 11,000 more homes in in the remainder of the year. And I and I get the fact that the community count is ramping nicely, but it does still seem like it would assume better than normal seasonality and absorption. I just wanna make sure that that we're thinking about that right. And if so, you know, what you you know, what sort of gives you confidence in in the ability to to execute on that?

Yeah. Thanks, John. So it's definitely not than normal seasonality. We would say the number one driver in that number is the increased community count. So just the timing of when you're modeling it and the volume of that increase is driving the the majority of that performance. The other piece, and Philippe mentioned it, so I'll just mention it one more time. Typically seem to have a pop in volume when we open up a community. So in a normal month, maybe we're doing four. When you open up a community for the first time, it tends to be more than four. There's excitement and engagement around the first release of lots in a new community. So if we have a high volume of communities opening up, they will have a higher absorption rate in the month of opening. It's not a seasonality change or something, that we're seeing is market driven. It's the fact that it's a new community opening. So the fact that we have a lot of these communities opening, will have a larger pop in that initial month is driving, the confidence we have for the full year number.

Okay. Yeah. That that's helpful.

And then if we think about just the gross margin guide of 21.5% in the second quarter, mean, 60% of your sales intra quarter, it seems like you would have a pretty real time view on gross margin. So I guess the question is, you seeing the 21.5% now? Or is there baking in a little cushion for potentially having to offer, you know, a greater level of incentives?

We're we're not too far from the end of what we're gonna do. Right? Everything's in backlog, and we're three weeks in. Little over three weeks into the quarter. We only have a couple more weeks of volume that's still gonna close in the current quarter. So yeah, I mean, is live. You're seeing it live. Our our current strategy is is very, real time. Numbers. So what you're seeing today is what we're experiencing. We have a high level of of, confidence in that number.

Okay.

Thank you, guys.

Thank you.

Our next question comes from the line of Carl Reichardt with BTIG. Please proceed.

Thanks. Good morning, everybody. Nice to talk to you. Thanks for taking my question.

So what percentage, Hila, of your current option mix? I think it's, like, 32,000 lots is from land sellers, JVs versus land bankers. And and I know Philippe talked about land being sticky, but but how do you think about the owned option mix on a go forward basis given the choppiness in the market where opportunities might be and what the the cost of these lots or the cost to option might be.

Yeah. So we said we're comfortable around that 40 I mean, four zero is not a magic number, a little bit above, a little bit below. Feels like the right number for us. We're trying to remain you know, aware of what's happening in the market today, and we'd like to take everything off book that we could. Although we appreciate that there's a margin pull when you do that. And in today's uncertain environment, it seems a little riskier than what we'd like to go very, very deep into off balance sheet, although we're definitely comfortable doing a little bit more than where we are today. But I think you raise a great point, Carl, which is all off book is not truly off book. We're not paying a land bank or Lyft on all of the off book lots. There's not 38%, 39% that's off book at a very high premium. To us. A lot of that is just structured terms with our We have, very good relationships and fantastic land teams on the ground that are negotiating structure takes with the initial seller. So most of those don't have a heavy lift. The percentage that's true third party, charging us a fee to take something off book is a very small percentage of that, true off balance sheet number that we've given.

Okay. Great. I appreciate that. Thank you, Hill. And then to go back to something you said and also that Trevor asked about, which is Slack in the in the in the labor pool. I mean, the worry was immigration reform, which create problems with availability or cost, and and now it's feeling maybe the opposite is occurring. Can you maybe specify? There's some specific regions in the country where the slack is most noticeable? And some specific trades where it is? Thanks. Yeah. Thank you.

You're right.

I think we all were very concerned about how immigration might impact the labor pool specifically in construction and, specifically in the South. [indiscernible] I think it's, acute. And as of right now, we haven't seen that. I think again, part of it is just the pullback on starts. [indiscernible] not all increasing starts from here. Which has created that opportunity. So for now, it's business as usual or cycle times. Seem to be remaining consistent with what we reported. As it relates to other specific regions or categories, they're not really. Generally, everything is sort of status quo right now. We're not seeing it impact framers differently than foundation folks. Different than roofers. As of right now, it's, kind of a steady state across all that.

Great. Thanks, Talith. Thanks, Hila. Thank you.

Our next question comes from the line of Alex Barron with Housing Research Center.

Please proceed.

Yes. Thank you. I guess wanted to ask, you know, some of your bigger competitors who are doing also specs and focused on entry level seem to be leaning heavily on price cutting. So I'm wondering how you guys are dealing with that, or can you avoid it, or can you just deal with it through offering lower interest rates to not do that?

Yeah. Great question. You know, again, it's community by community depending on where we are and who our customer is and who our competitors are. We have places where we're adjacent to some of those competitors. You referred to and we have to adjust accordingly. But generally, we're not really cutting prices across our business. We're solving and competing with those folks through rate buy downs and some other incentives that we're using with external realtors, etcetera.

So for now, we don't have a lot to report on actual price cutting. But at the end of the day, I think incentives are the same as a price cut. It's all what what's the house price. But the main tool we're using is rate buy downs, affordability, and payment seem to be the key to all of it. And as long as we can solve for a payment, and provide that sixty day move in window, we're we're able to compete without cutting our prices, you know, as we sit here today.

Yeah. Alex, cutting fry at at the end of the day, a customer is trying to sell from month payment, right? The price of the home is a headline number, but can they afford the monthly payment?

So So a price cut does not go as far in your monthly payment as a reduction in interest rate that you can get through a rate buy down. So for us, offering a rate buy down helps the customer solve the affordability question much, much more efficiently, cost us a lot less money than trying to reduce the price down to a monthly payment that makes sense. So I think that we're kinda combating against those those, offers with the right monthly payments through interest rate buy downs.

I really believe that's where that balanced approach is most important. You're in a situation where you have to cut your prices dramatically to solve for that four net sales per month, Maybe that's not the right decision for that community depending on all the competitive what's going on with competitors and how much your land cost and whatnot. So that's really how you need to find that ballet balance. If you can solve for four without cutting your prices, you know, that's a that's much better outcome.

Yeah. No. I mean, I agree with you a 10%, which is why I'm surprised they're going in that route because mathematically and financially, it makes a ton more sense to buy down the rate. Like, I saw you guys in Texas offering 4.5%.

Which is great for the consumer, and it goes a long way towards making the payment affordable. But you know, nearby, there's competitors cutting prices 10%, which I'm like, why why are they doing that? It doesn't doesn't make sense to me. But then I think it puts pressure on you and other builders if people see like, oh, that guy's offering a lower paint lower price. I guess until you convince them that you're offering a better or lower payment. You know?

Yeah. So far, we haven't had to operate that way.

But, you know, we're not immune to bunch of competitors around us cutting prices. But for now, we've been able to achieve our four net sales per month without having to cut prices.

Okay. Well, best of luck, guys. Thank you. Thank you so much.

And I is there one more, operator?

No. There are no further questions.

Okay. Thank you so much, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes.

We hope you have a, wonderful rest of your day and a great weekend. Thank you.

This concludes today's teleconference. May disconnect your lines at this time. Thank you for your participation.