Meritage Homes Q1 2026 Earnings Call - Navigating Macro Headwinds with Community Growth and Capital Discipline

Operator: Greetings, and welcome to the Q1 2026 Meritage Homes analyst call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. Please be advised that today’s conference is being recorded. If you should need operator assistance, please press star zero. I would now like to turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes: Thank you, operator. Good morning and welcome to our analyst call to discuss our Q1 2026 results. We issued the press release yesterday after the market closed. You can find it, along with the slides we’ll refer to during this call, on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our 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 2025 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman, Phillippe Lord, CEO, and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today’s call to last about an hour. A replay will be available on our website later today. I’ll now turn it over to Mr. Hilton. Steve?

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes0: Thank you, Emily. Welcome to everyone joining today’s call. Today, I begin with a brief overview of market trends and highlight our Q1 results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we were cautiously optimistic that lower interest rates and pent-up demand would translate into a solid performance for home builders, balanced by more muted volatility. As you well know, a few weeks into the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost days of sales, military operations in Iran commenced at the end of February, increasing interest rates, gas prices, and inflation, all of which negatively impacted consumer confidence.

Despite these challenges, our Q1 2026 sales orders totaled 3,664, 5% below last year’s Q1, as our slower absorption pace was almost fully offset by our increase in community count. While we still believe that long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential home buyers to hesitate and that capturing demand for the near term will require higher than anticipated use of incentives. Looking to our operations, our 60-Day Closing Guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contribute to another quarter with exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter.

However, the slower start to the spring selling season and the increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31st, 2026, our book value per share increased 6% year-over-year. With that, I’ll now turn it over to Phillippe.

Phillippe Lord, CEO, Meritage Homes: Thank you, Steve. Given the current uncertainty in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities, which we then grew to 345 by March 31st, another company record. In the near term, we expect total volume and top-line results will largely be driven by increased community count, not higher per-store absorptions. Our Q1 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31st, 2025, and up 3% sequentially compared to 336 at December 31st, 2025. During the quarter, we brought on 40 new communities throughout all of our regions. We reiterate our expectations of 5%-10% full-year community count growth for 2026. We continue to lean into our strategy in this competitive market.

Through our 60-day closing guarantee, move-in-ready homes, and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that Steve mentioned, we believe that long-term demand remains supported by favorable demographics and an undersupply of affordable homes in the U.S. When demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks, repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026. Taking advantage of the significant discount to intrinsic value for our share price.

Additionally, we increased our dividend 12% to $0.48 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to slide four. Q12026 orders were 5% lower year-over-year, primarily due to an 18% decline in average absorption pace, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remains slightly below the historical average of mid to high teens as we benefit from a quick sale to close process. Our Q1 2026 average absorption pace was three point, compared to four point four in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue four net sales per month where community-level market dynamics would not support it.

While over the long term, we strive to be fournet sales per month in all markets, as we believe we best leverage our fixed costs at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive tensions, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts, as well as geographical mix shifting from the higher ASP west region into lower ASP east region. We saw a nice uptick in March, even though it wasn’t quite as strong as typical spring selling season. After a slow start, April is feeling the same as March.

Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on slide five. As always, sales performance was driven by local market conditions in the Q1. While all markets required additional incentives, in some markets such as Dallas, Houston, and Phoenix, consumer demand was comparatively more elastic, where incremental volume was achievable with only small incremental incentives. Meanwhile, other markets such as Austin, parts of Florida, and Charlotte continue to be tougher selling environments. Turning to slide six. We’ve been right-sizing our starts pace and WIP inventory to align with our faster cycle times. We maintained a sub-110 calendar day construction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences.

In Q1, we moderated starts to approximately 2,500 homes, 30% less than last year’s Q1 and 6% lower than Q4. We traditionally align our starts pace with our sales pace, but due to faster cycle times and the need to work through some inventory in certain locations, we reduced our starts pace this quarter. We expect our go-forward starts pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year over year from approximately 2,000 as of March 31, 2025, to approximately 1,900 homes as of March 31st, 2026. We reiterate our long-term backlog conversion target of 175%-200% as we expect to carry fewer finished specs in the future.

Internally, we look at our inventory as the combined total of specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy Q6 ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 19% sequentially from Q4. The 14 specs per store this quarter was our fewest level, lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under four months supply, intentionally at the low end of target of four to six months supply of specs due to the slower demand expectations and improved cycle times.

Comparatively, in the Q1of 2025, we had 23 specs per store or 5 months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the Q4 of 2025. Still above our target of approximately one-third completed specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Thank you, Phillippe. Let’s turn to slide seven and cover our Q1 results in more detail. Q1 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting the tougher demand environment this quarter. As Phillippe noted, with nearly 70% closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L.

While our closings and revenue reflects our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP on closings was still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. Home closing gross margin of 17.5% for the quarter was 400 basis points lower than prior year’s 22% as a result of increased use of incentives, higher lot costs, and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense, and faster cycle times. Q1 2026 home closing gross margin included $2.4 million of real estate inventory impairments and $1.4 million in terminated land deal walkaway charges, compared to no impairments and $1.4 million in terminated land deal walkaway charges in the prior year.

Coupled with about 20 basis points from lost leverage, unanticipated higher closing revenue, these impairments also impacted margins by about 30 basis points. Our current land basis is primarily comprised of higher-cost land vintages from 2022 through 2024 and will continue to negatively impact margin in 2026. Based on what we’re seeing in the market today, we expect some margin relief will start at the tail end of 2027 due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per sq ft on a year-over-year basis as we were able to flow to the income statement the lower costs from our extensive vendor negotiations. However, lumber costs have started to trend higher this quarter, and as a result of the Iran conflict, we are monitoring any potential long-term inflationary impact on oil prices.

Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5%-23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A, as a percentage of home closing revenue in the Q1 of 2026, was 11.8%, compared to 11.3% for the Q1 of 2025, despite curtailing discretionary spend. Although SG&A dollars declined year over year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key driver to our success.

Our broker relationships remain strong, with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year-over-year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The Q1 effective income tax rate was 23.7% this year, compared to 23.3% for the Q1 of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30, as our eligibility for such credits was significantly reduced starting in 2025, when the higher construction thresholds went into effect.

Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in Q1 2026 diluted EPS to $0.82 from $1.69 in 2025. Before we move on to the balance sheet, I wanted to cover our customers’ Q1 credit metrics. As expected, FICO scores, DTIs, and LTVs remain consistent with our historical averages. Despite market volatility, we haven’t seen much movement in these metrics over the last year or two, validating our belief that hesitation in the market is at least partially a psychological decision versus a purely financial one. On to slide eight. Our balance sheet remains healthy at March 31st, 2026, with cash of $767 million, nothing drawn under our credit facility, and a net debt to cap of 17.4%. As a reminder, the ceiling for our net debt to cap ratio remains in the mid-20% range.

As we’ve been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the Q1, or 2.7% of shares outstanding at the beginning of the year for $130 million, nearing three times more than Q1 of 2025, as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value.

With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buying back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shifts. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For the Q1 of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide nine. In the Q1 of 2026, we secured almost 400 net new lots under control, which included an impact of about 850 terminated lots. In the Q1 of 2025, we put nearly 2,200 net new lots under control.

As of March 31st, 2026, we owned or controlled a total of about 75,500 lots, equating to five point two years supply of the last 12 months closings. In today’s market conditions, we believe that this is the right amount of the needed year supply of lots to meet our growth targets. We also had approximately 14,600 lots that were still undergoing diligence at the end of the quarter, which is another potential one-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31st, 2026, was owned and 30% optioned compared to prior year where we had a 62% owned inventory and a 38% option lot position.

As we shift more land to off balance sheet, we are doing so very slowly and cautiously, remaining hyper-focused on margin and IRR, and only considering land deals with sufficient margin to absorb the additional cost, as we do not believe that all or most land to date belongs off-book. While we have set 40% as our initial off-book target, our actual percentage will be solely driven higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I’ll direct you to slide 10. Based on current market conditions, we are updating our guidance for full year 2026 home closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we areprojecting total home closings between 3,650-3,900 units. Home closing revenue of $1.37-$1.47 billion.

Home closing gross margin around 18%, an effective tax rate of 24.5%-25%, and diluted EPS in the range of $1.18-$1.46. With that, I’ll turn it back over to Phillippe.

Phillippe Lord, CEO, Meritage Homes: Thank you, Hilla. In closing, please turn to slide 11. Before we conclude, it’s worth reinforcing what sets Meritage apart. We are a top 5 home builder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differentiates us from peers and is anchored on three tenets, our 60-day closing guarantee, move-in ready inventory, and strong realtor engagement. Together, who we are and how we operate give us a competitive advantage in the entry-level space to provide homebuyers certainty and consistency. Amid today’s market backdrop, our priorities are centered on balance sheet strength and disciplined capital allocation. We are maintaining a low net debt-to-capital and structuring land deals off-balance-sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends.

When we pair our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage is well positioned to capture incremental market share as demand conditions improve and normalize, and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Operator: Thank you. To ask a question, you will need to press star one on your telephone keypad. If you want to remove yourself from the queue, please press star two. In the interest of time, we ask that you limit yourself to one question and one follow-up. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We’ll take our first question from Trevor Allinson with Wolfe Research. Your line is now open.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes2: Hi. Good morning. Thank you for taking my questions. First one’s on your spec count, which you noted is the lowest it’s been in several years. I think we’ve heard other builders talk about a reduction in specs across the industry, helping take some pressure off of margins here. Appreciating you guys operate a spec model, are you seeing both your lower spec count and also kind of industry lower spec counts ease the margin pressure here? Is that something you expect to be supportive of margins moving forward even if demand remains choppy?

Phillippe Lord, CEO, Meritage Homes: Yeah. Thanks, Trevor. I think that’s absolutely the condition we’re seeing. A lot of builders are either pivoting away from carrying as much finished inventory as they did before during COVID and supply chain environment. They’re moving to reduce finished inventory, selling homes earlier in cycle. Some folks are pivoting more to a BTO model, which is clearing out a lot of inventory in the market. I think we saw across all of our markets, less finished inventory that we were competing with, and we’re optimistic as we move throughout the year that that creates a better environment for margin stability on a go-forward basis, specifically for our strategy, where we are focused on continuing to build specs and carry them to a later stage.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes2: Okay. Thanks, Phillippe. Very helpful. Then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures? Any detail on how those agreements are structured with an eye on your ability to walk away, and then just generally your view on use of land banks moving forward for your off-balance sheet needs. Thanks.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah, I can take that one. About 38% of our total inventory controlled is off book. About a third is with land bankers. All in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don’t cross-collateralize, so we always have the ability, if any deal goes sideways, to walk away from that deal without maybe some other hooks and implications that would make us stay in a transaction that doesn’t structurally work or financially work any longer. We’re very cautious from that perspective. The only thing at risk for us would be the deposit and any other ancillary costs.

Phillippe Lord, CEO, Meritage Homes: The only thing I would add is that, as Hilla said, it’s a very small percentage with true lot financing. Because it’s not cross-collateralized, I think working through those deals on a one-by-one basis is much easier. We have had some scenarios where we’ve gone back to our land bank financers and asked for some more time to stabilize the market, stabilize our inventory levels, and again, working on one deal it creates more of an opportunity to do so.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah. I think we addressed this in our prepared remarks. Because we’re very selective at the get-go as to what deals even go off-book, we typically have a little bit of breathing room on the margin versus having arbitrary targets where we’re forcing deals off-book to hit a percentage. For us, the ability to work with our off-book partners is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes2: Very helpful. Thank you for all the color, and good luck moving forward.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Thank you.

Operator: Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is now open.

Stephen Kim, Analyst, Evercore ISI: Yeah, thanks very much, guys. I appreciate it. If I could follow up on the land bank question. Can you give us a sense for roughly what % of your land bank deals you’ve extended your takedown schedules? And am I right in thinking that in a typical land bank deal, any individual land bank deal, if you extend, let’s say, six months, that might drive roughly 100 basis point lower gross margin on the remaining lots versus the initial expected lot price?

Phillippe Lord, CEO, Meritage Homes: Thanks, Stephen Kim. First part, again, we have such a small percentage of our land book is land bank with lot financing. Even as you look at what % of our deals required us to restructure, and when I say restructure, maybe we needed a quarter delay in the next take to buy some time to get through some inventory or stabilize margins or whatnot. For the most part, that was very small as well. Most of our deals are performing fine. We’re continuing to take lots down, and we’re moving through the inventory as we planned. As far as your other question, I think it’s a little bit of an oversimplification. It really depends on the deal, how many lots you’re buying per quarter, the structure of the deal.

In some cases, I think some land bankers are willing to actually give you a take for no carry just to keep you in the deal rather than taking back the lots and owning the lots. I think we’re sort of in that environment today, at least with our folks. It’s hard to answer. It really depends on your relationship, and it depends on the deal. I guess if all things being equal, they were going to charge you for those delays, your math might be close. I don’t know, Hilla, if you want to add anything to it.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah, it depends what part of the cycle and how many assets you still have on book, part of that math, and of course, what your interest rate is. For us, when we look at it, bad things don’t get better with age. If we’re asking for a hold, it’s typically for us to rework a product lineup or to value engineer something. We’re not just holding and crossing our fingers and thinking something arbitrarily is going to get better in three-six months. Again, that’s kind of the beauty of being very selective as to what deals you’re putting into an off-book structure in the first place. Yeah, there’s definitely, if you can’t work a freebie, it’s typically going to cost you whatever your interest burden is for that six-month hold.

Yeah, there seems to be an implication, but 100 basis points may be a little heavy.

Stephen Kim, Analyst, Evercore ISI: Okay. Appreciate that. Yeah, and I also appreciate your comments about how there is a human component to this. It’s not all just simply math. I think that’s an important point to make. If I could also talk about your long-term gross margin target of 22.5%-23.5%, which obviously is where you were not that long ago and is but something that’s quite above where you are currently. You’ve talked in the past, Hilla, about the importance of volume in achieving your level of gross margin. Am I right to assume that that long-term target is consistent with at least a four per community absorption rate? Or do you think there’s an opportunity to hit that gross margin level long term with a lower level of absorptions than you had envisioned in the past?

Phillippe Lord, CEO, Meritage Homes: Thanks, Steve. I’ll take part of that question. This is Phillippe. I think it’s a lot easier to get to our long-term goal around 22.5% at four net sales per month. We’re just way more efficient at that level. We leverage our fixed and variable overhead much more meaningfully. We’re able to navigate the volatile cost environment more effectively. The path at four net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in direct margin, which you might be able to hold onto your margins at a slower pace and try to drive it. There is a path at three point five, if you will, versus four, but I think long-term, four is the way to get there.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah, I think Phillippe is exactly right. There’s two components. The first is just absolute volume, and the second is volume per store. We’re much more efficient at 4+, so we definitely want that because the costs at the local store level, the superintendent and the cost of running that location are leveraged better. There’s also costs at the division level that get better leverage period with volume. We think that there’s an opportunity for both. Right now, the opportunity for us is at a higher store count. Hopefully you’ll see that improvement just between Q1 and Q2, right? The volume that we are guiding to on closings on Q2 is nicer than where we are today. We guide it to a higher margin than where we ended the quarter. Part of that’s going to be the incremental leverage.

Once we get back to that four net sales per store average, there’s another bump for us on incremental leveraging above that.

Phillippe Lord, CEO, Meritage Homes: We see our path from where we are to where we want to go, both this year and the future years is really driven by the following things. The volume, we have the higher store count, so we think we can get incremental volume. Less inventory in the market to compete with, so a stronger pricing backdrop. Reducing our incentives over time. A lot of the incentives that are currently in the market are psychological. We’re trying to convince folks that it’s a good time to buy. It’s part affordability and part psychology. We’re optimistic that as long as nothing from the macro environment continues to erode, we can see a path there.

Stephen Kim, Analyst, Evercore ISI: Great. Appreciate it, guys. Thanks.

Operator: Thank you. Our next question comes from Alan Ratner with Zelman & Associates. Your line is now open.

Alan Ratner, Analyst, Zelman & Associates: Hey, guys. Good morning. Thanks as always for the details so far. First question on the margin guide, and I think you kind of touched on it in Steve’s question, but just want to dig a little deeper. Initially, I was pleasantly surprised to see that you expect to hold margins roughly steady quarter-over-quarter. I would have thought, just given what we’re hearing from other builders, what we’re seeing in the macro environment, that there might have been some additional pressure there, at least flowing through in 2Q.

It sounds like some of that is top line leverage, but I’m curious if you feel like, now that you’ve reset some of the absorption goals, at least for the near term, whether this kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today?

Phillippe Lord, CEO, Meritage Homes: Yeah, a lot of questions in there that I’ll answer all of them for you because they’re all very good. I do think that there’s a couple things we see that feel like it’s forming sort of a potential floor. Now this is, again, I don’t know what’s going to happen geopolitically. I don’t know what’s going to happen with a lot of things that are outside of my control that can impact this. In the industry, we see a couple of things. Number one, we see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there’s less inventory out there, I think consumers feel a little bit more urgency than when there’s a lot out there. I think that is helpful. I think the volume is critical. We have the highest community count we’ve ever had.

We’re projecting more community count growth through the rest of this year. Even at these slower absorption paces, we think we can get there and not have to give up more margin to get there. We’re optimistic about that. Look, in the beginning of Q1, we actually started feeling better about things. The weather kind of threw us off. February was okay. We had the war in Iran, and people took a step back in certain markets, but March was pretty good. We started feeling like we had some stability and some predictability in the market. It’s just really hard to tell every week whether that’s going to be something that’s maintained and sustainable or there’s going to be something else that throws the consumer off their game.

I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we’ve opened and the opportunity those give us to gain volume throughout the year.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Two other points on margin, Alan. The first, and we talked about it a little bit on our last earnings call, that as we continue to improve on our direct costs, as we work through our finished spec inventory, you’re going to start to see even better direct costs coming through. That’s a benefit that you’ll see starting in Q2 and continuing through the latter part of the year. Obviously, all new communities are always a new cost. The more volume we have from those, the better that piece is. Then just kind of doing math, if you look at our closings this quarter and what we’re guiding to for next quarter, the back half of the year is going to be higher volume at our current projections, even at the low point of the full year guidance that we provided.

Again, that leveraging component that we’re talking about is going to have an even more material impact for us through the back half of the year.

Alan Ratner, Analyst, Zelman & Associates: Great. All right. Perfect. I appreciate all the detail there. Second question. I know you don’t give specific cash flow guidance, but the last couple of years, cash has been a drag as you’ve been ramping the spec supply, as you’ve been gearing up for this very significant community count growth. It feels like both of those are kind of hitting an inflection point here, where spec inventory is coming down a little bit. Community count’s still going up, but not at the same rate it was. Pretty strong cash flow in the Q1, at least seasonally speaking. Can you give any guidance or color on where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn periods and maybe cash should start to improve even if earnings are under pressure on a year-over-year basis?

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah. We don’t have specific cash flow guidance, as you noted, but the discipline to get down to 14 specs per store is an incredible effort by the team, especially if you think that just a year ago, we were at 23 specs per store. That’s relieved a lot of cash. That was kind of a more measured approach on land development, while definitely increasing shareholder returns, but not by an equal offset is letting us kind of hold steady. If you think about the fact that we have these faster cycle times and we’re trying to time starts with sales pace, you really shouldn’t see something too detrimental occurring on the cash flows and our cash position. We think where we are is probably a good place for us with the size of the balance sheet that we have.

I think that you’re going to see this kind of maintenance of cash flow, the outsized return to shareholders for the balance of this year as we’ve already articulated in our programmatic repurchase plan. I think that you should see a more measured cash utilization as we’re bringing stores online, but a lot of the spend has already been incurred, and we’re definitely monitoring the WIP units and the sticks and bricks cost that we’re spending before we close the home.

Alan Ratner, Analyst, Zelman & Associates: Thanks very much, appreciate it.

Operator: Thank you. Our next question comes from Michael Rehaut with J.P. Morgan. Your line is now open.

Michael Rehaut, Analyst, J.P. Morgan: Thanks. Good morning, everyone. Thanks for taking my questions. I wanted to start off with just kind of broader thoughts around the demand backdrop. So far this earnings season, we’ve heard slightly different narratives across the spectrum. Some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. Also incentives and levels maybe also kind of stabilizing. You kind of noted also a little bit about maybe inventory coming down somewhat, which has been helpful. At the same time, you’ve kind of highlighted some choppiness across your footprint, notwithstanding perhaps March coming back a little bit stronger. I was hoping to get a sense of, with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I’m interpreting that correctly. Is it certain markets that you’re exposed to?

You highlighted parts of Florida, Charlotte, Austin. Is it maybe the price point that you’re offering or the fact that you’re maybe still in kind of that spec area, which I think by definition might cause a little bit more competition? Just trying to reconcile kind of where you are within the industry and how to better understand your positioning and how that relates to your commentary.

Phillippe Lord, CEO, Meritage Homes: Yeah, thanks. I feel like you kind of answered your own question, but I’ll try to add some more to it. I think we’re more cautious than maybe the opposite of being cautious. I think a part of it is our buyer profile seems to be lacking the confidence that maybe other buyer profiles have. They’re stretched more from an affordability standpoint, cost of living. It does feel like the procurement of those sales is very high, which makes us very cautious. I think the other thing is our footprint. We’re in the Sun Belt states primarily. Those were the states where prices got the most stretched during the last five years. Affordability got the most stretched. There’s probably higher levels of inventory that we’re competing with. We’re going head to head with a lot of other entry-level builders that do similar things to us.

For all those reasons, I think when we look at our buyer profile and our geographical footprint, we feel cautious right now.

Michael Rehaut, Analyst, J.P. Morgan: Right. No, understood. Secondly, there was a question earlier about cash flow and community count. Obviously, I believe you reiterated your outlook for this year, and you still have very strong growth kind of flowing through in 2026. How should we think about 2027, 2028, given your current land position? With volumes being such a big driver of leverage, and maybe you’re a little less confident, at least in the near-term around getting significant improvements in absorption. How should we think about community count growth over the near to medium term, two to three years out?

Phillippe Lord, CEO, Meritage Homes: Yeah. Great question. I feel really good about 2027. As I indicated in the script, we will have 5%-10% community count growth this year over last year. We’ll go into 2027 with that. I feel like we’ll be able to hold or grow that incrementally in 2027. Really hard to pin that down just yet until schedules are dialed in and whatnot, so don’t want to commit to anything in 2027. We have the ability to grow our community count in 2027, if it makes sense. We’re obviously rationalizing all new land. As Hila said, we’re phasing developments a lot more slowly these days, so we’ll have to see how that all plays out in the back half of this year. 2028 is pretty far out there. We have 75,000 lots. We have the ability to grow in 2028 as well.

We’re being very conservative on new land deals, although land prices have stabilized, in some places come down. Terms are better. They’re still somewhat difficult to underwrite in the current incentive environment. We’ve been very slow to ramp up new land, and I think we’ll continue to do so. We have enough land to get where we need to go. I think if we need to do some things to plus up 2028, I think the opportunities will be there. I don’t have a lot of visibility in 2028 right now, but I feel good about 2027.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: The goal is not to shrink. Right? We have the ability to maintain or grow, and we’ll take our cues from the market.

Michael Rehaut, Analyst, J.P. Morgan: Great. Thanks so much.

Operator: Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Your line is now open.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes1: Thank you. Good morning, everyone. My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers even though you are seeing a lot more caution in there, and how that came through in that cancellation rate this quarter?

Phillippe Lord, CEO, Meritage Homes: It’s really low. Until it rises, we’re not paying a ton of attention to it. I think a lot of the cancellations that are happening have a lot more to do with the buyer stepping away and just thinking it’s not a good time. Again, it’s a very low amount because we have such a quick sale to close. We got a Closing-Ready Guarantee because our homes are ready to go. As soon as you buy it, you’re picking out your furniture. Our cancel rate is extremely low, and we expect it to remain that way given our strategy. I think when people can start to imagine moving into the house 60 days, they start planning their lives, and so it’s extremely low. We expect it to remain very low. I’m not sure I’m answering your question. If there’s another question, let me know.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Susan, I think everything Phillippe said is dead on. Pretty much the amount of time that it takes them from the time we enter into the sales contract until the time they close the house, they spend getting documents to the mortgage company. There’s not a lot of time to rethink and tour other homes and maybe get convinced away from the commitment that they already made. They’re so hyper-focused on just getting everything to the finish line that that’s really helpful for us in a cancellation rate perspective. Even though our commitment is 60 days, if you look at our backlog conversion rate, you can see it’s actually happening much faster than that. At 254% backlog conversion, we’re getting folks from sale to move-in in less than 60 days. They literally don’t have any time to second-guess the decision.

The fallout is typically an event outside of not wanting the home that’s causing them to have a cancellation. It’s something that occurred either in their financial position or in their personal life that’s causing the cancellation rate. It’s very rarely that they still continue to tour homes thinking they’re moving into a house in 40 days, and they fell in love with something else and walked away from the deposit. Hopefully, that’s helpful.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes1: Yes. No, that is helpful. That gets to my question of, you’re not seeing any change there. Obviously, the strategy of that quick close is helping to keep those people engaged and get them through that process, which is great to hear. That’s good. My second question is on the SG&A. You mentioned that obviously there was some impact of less leverage, overhead leverage that you saw this quarter. I guess as you think about the back half of this year, how are you expecting that to come through to? Or what will that mean for SG&A? As we think over time, can you talk a bit more about the back office automation and other savings that you’re implementing?

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah. Typically, Q1 is our high water mark. For SG&A, we have some certain retirement compensation triggers that disproportionately skew expenses into the Q1 anyway. Based on our full-year guidance for closings, it’s going to be our lowest level quarter on closings. Definitely some lower leverage opportunities for us on SG&A costs in Q1. You should definitely see an improvement in that target for the balance of the year in every one of the upcoming quarters. As far as the back office automation, there’s a tremendous amount that’s still done in home building. Taking one piece of paper and typing it into another system, whether it’s a closing document, something from title, escrow, mortgage. A lot of people doing things that are not their job description, right? If your job is an analyst, it’s not a typist.

We’re finding ways for AI and technology to interpret documents and auto-feed a lot of data into our systems, which should help us gain efficiencies, and it’s part of the path for us.

On getting to that 9.5% SG&A target in the future. Obviously, those numbers become even more meaningful at higher volumes. It would have required more man-hours to do some of those tasks. It helps you not just with cost, but also with accuracy and rework. We’re pretty excited about some of the initiatives. There’s also a lot of customer-facing initiatives, whether it’s something that we’ll be rolling out. I don’t want to steal the thunder from our sales and marketing team, so stay tuned for some fun announcements about some of our customer-facing solutions that we have, both back office and customer-facing tools that should both drive SG&A leverage benefits in the very near term.

Emily Tadano, VP of Investor Relations and External Communications, Meritage Homes1: Okay. That all sounds great. Thank you. Good luck with the quarter.

Phillippe Lord, CEO, Meritage Homes: Thanks.

Operator: Thank you. Our next question comes from John Lovallo with UBS. Your line is now open.

John Lovallo, Analyst, UBS: Hey, guys. Thank you for taking my questions as well. You opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption, just given higher levels of interest and wait lists and things of that nature. The question is, did you experience higher absorption in these new communities? How many more communities should we expect as we move through the year?

Phillippe Lord, CEO, Meritage Homes: Thanks, John. I think most of the communities we opened up in Q1, a lot of them opened up the last month of the quarter. They kind of hit what we thought. They met our expectations. I wouldn’t say they exceeded our expectations. I wouldn’t say they underperformed. They kind of did what we thought they were going to do. Probably Q2 will tell us more about whether they’re hitting their stride. They seem, they’re all very good locations, strong positions, strong margins, strong pricing. I think we feel pretty good about them. Then as we said on the script, we expect 5%-10% range of growth year-over-year. I think you can expect a little bit more here in the back half of this year to get us to that number. We’ll see how everything goes around opening those up.

We’re committed to a 5%-10% year-over-year growth in our community count this year.

John Lovallo, Analyst, UBS: Okay. That’s helpful. Then, in the prepared remarks, and then I think in the press release, you guys called out some storm impact in the Q1, which makes sense. Curious if those deliveries were actually captured in the quarter, or do you expect those to be captured in the Q2? If there’s any way to quantify the number of units.

Phillippe Lord, CEO, Meritage Homes: Yeah. January was softer than we thought. I think the primary reason for that, given what we saw in February and March, was the storm. There were multiple markets that were impacted by that storm. In some cases, mobility was impacted. We just didn’t see the traffic that we would have thought we would have saw towards the end of January. As you can see from our guidance, we missed our guidance, and we think that was why. I think that incremental volume that we thought we were going to see in January didn’t materialize. If we would have closed an extra 200-300 homes, we probably would have been a lot closer than what we thought we were going to do. Those buyers, we probably captured them in February or March, depending. They’ll probably close into Q2.

Our business doesn’t really work that way. We sell a home, and we close it 60 days later. Whether we got that buyer or not, it’s going to happen next month or the month after that. We’re really just a just-in-time business at this point. Hopefully that’s helpful and answers your question.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: Yeah. It’s lost days of sale. You don’t double up when the stores open back up and you capture two days of sale in one. There are basically three, four, five lost days of sale in a large portion of our markets in January. Those are sales that were not somehow recaptured in the next month. We were trying to press on the gas and figure out a way to accelerate that. As we mentioned, the kind of consumer confidence maybe put a little bit of a damper when inflation and interest rates and gas prices increased. We view those as two lost days. Now we’re working to catch up. You see our projections for Q2 are a lot healthier than Q1, but I don’t know that they were somehow recaptured in February.

John Lovallo, Analyst, UBS: Okay. Got it. Thank you, guys.

Operator: Thank you. Our next question comes from Jay McCanless with Citizens. Your line is now open.

Jay McCanless, Analyst, Citizens: Hey, good morning, everyone. First question I had, Hilla, in the script, I think you talked about land vintages mostly being 2022 to 2024, but I missed some of your other comments around that. I guess how much of either total lots now or owned lots are running at that vintage or are in that vintage area?

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: That’s pretty granular. We always have some long-term communities that were in phase six, and we have some new communities that we probably bought in 2025 that we’re selling right now. We’re not giving that level of breakout, but for the most part, it was mostly just commentary as to why the lot cost is running a little bit hotter. We tend to have community sizes between 100 and 150. At about three point-four point five net sales per store, you can do the math as to how quickly we burn through those. For the most part, for us, everything’s live, I think was the intent of that comment.

What we’re experiencing and what we have been experiencing at the elevated land development cost burden, that’s running through our numbers currently, but hopefully we should be at the tail end of that by the end of 2027.

Jay McCanless, Analyst, Citizens: Okay. That’s great. Thank you for explaining that. The second question I had on the West segment, Q5in a row where orders are down year-over-year and kind of stuck at this mid-80s community count. Maybe what’s the strategy near term? Are there some older dated communities you have to sell through there before you can start to grow that again? Just maybe a quick take on what you’re doing in the West segment.

Phillippe Lord, CEO, Meritage Homes: Yeah, I think you’re talking about the West Region, which is California, Arizona, and Colorado, and Utah. Those are certainly some of the more challenged markets. I think the narrative on Denver is pretty clear. The narrative on what’s been happening in Northern California is pretty clear. Arizona is kind of what it is. SoCal has been okay, and Utah is a pretty strong market. Just in general, the West Region has been a tougher place to do business. The affordability has been a lot of pressure on the buyers. There’s a lot of competition. Land prices are super sticky. Regulatory environment is really high. We’ve been intentionally trying to reallocate a significant part of our business, to the east of the West Region. It doesn’t mean we’re not in those markets, we don’t believe in those markets, but we’re being much more strategic.

The value of your land book is high, and it’s very irreplaceable. We’re willing to run that region at a slower pace and try to maximize the margin of that land book because it took a long time to put it together. You’ll continue to, I think, see, the west region be a smaller part of our business long term.

Jay McCanless, Analyst, Citizens: Okay, great. If I could sneak one more in, Phillippe, I was encouraged to hear what you’re saying about external inventories. If we think about time, whether it’s 12, 18 months, any commentary you have on when you think external spec inventories will be down to a level that will give you guys some better pricing power?

Phillippe Lord, CEO, Meritage Homes: Yeah, great question. I think the builder group in general did a great job these last quarters navigating some of their aged inventory. I think there’s still a little bit of overhang out there. Even our numbers were still a little high on the finished specs that we’re carrying. We’d like to carry a little bit less. I think there’s still some other folks that are navigating as well, but the effort was significant, so I already feel better in general as we go into Q2 that the environment is less competitive. I do think there’s still some more to go. I think as we work through that the rest of this year, I could see going into 2027 with a much different sort of competitive inventory environment.

I think the other thing I mentioned, it’s important, it’s just there’s a pivot away from specs in general in our industry for a lot of reasons, depending on who your consumer segment is and the markets you’re in. I think that’s helpful for us because we’re not pivoting away from specs. That’s our business. Less competition in the spec entry-level business, move-in-ready business, it creates a better and competitive environment for our product specifically.

Jay McCanless, Analyst, Citizens: Okay. That’s great. Thank you.

Operator: Thank you. Our final question comes from Jade Rahmani with KBW. Your line is now open.

Jason Sabshon, Analyst, KBW: Hi. Thanks for taking my question. This is Jason Sabshon on for Jade. I wanted to ask you about AI. Across various surveys, the construction industry ranks quite low in terms of the expected AI impact. You commented on deployment opportunities in back office automation, potentially customer acquisition. Are you seeing any other areas of the business where it could potentially make a difference, be that supply chain management or construction management? Thank you.

Hilla Sferruzza, Executive Vice President and CFO, Meritage Homes: I mean, AI is going to have a place in every sector of every business. I think it’s just deployment and low-hanging fruit. I think we’re starting off with the very easy pieces and hopefully making the mistakes and things that are easily fixable as we grow a new muscle in our skill set. Yeah, eventually it’s going to be a component of everything that we do. The more that we manage our data and are able to use AI in a holistic way in all of our data, we try not to look at things as limited by a system. If you think about your data in a data warehouse, and then you can query everything in AI from that perspective, then there is no limit as to what functional area is benefiting from your AI initiative. Yeah, it’s definitely something that we’re hyper-focused on.

The opportunities for savings on the cost side are massive when you’re thinking about it from that perspective. We’re going to crawl, walk, run, right? We got to take the easy steps first and then advance on to beyond that.

Jason Sabshon, Analyst, KBW: Got it. Thank you. Just as a final question, is there a certain level of mortgage rates or the ten-year that you’d expect to drive an inflection in buyer activity?

Phillippe Lord, CEO, Meritage Homes: Great question. It feels like as things sort of move down to six or slightly below six, we really see buyer psychology change below that level. I think anything below that on your way to five will just be really unleashed demand because of the affordability piece. That’s kind of how we feel about it. six or lower is good for our business. It’s stable. Our rate buydowns are more efficient. Anything below that just provides more tailwind for our industry.

Jason Sabshon, Analyst, KBW: Great. Thanks.

Phillippe Lord, CEO, Meritage Homes: Thank you, operator. I’d like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you.

Operator: This concludes today’s Meritage Homes Q1 2026 analyst call. Please disconnect your line at this time and have a wonderful day.