Meritage Homes Earnings Call: Strength Amid Margin Squeeze

Meritage Homes Corp ((MTH)) has held its Q4 earnings call. Read on for the main highlights of the call.

Meritage Homes Balances Operational Strengths With Earnings Pressure in Latest Call

Meritage Homes Corp’s latest earnings call painted a cautiously constructive picture: management showcased strong operational execution, disciplined balance sheet management and aggressive capital returns even as near-term profitability and demand metrics deteriorated. Record backlog conversion, faster build times and healthy liquidity contrasted with declining revenue, compressed margins, weaker volumes and elevated incentives, leading management to strike a conservative tone for the year ahead while reiterating confidence in its long-term strategy.

Exceptional Backlog Conversion and Faster Cycle Times

Meritage underscored a major operational win in its ability to convert backlog into closings. The company achieved an all-time high backlog conversion rate of 221% in the fourth quarter, helped by a 60-day closing guarantee. Build cycle times improved to under 110 calendar days, enabling more deliveries within the quarter rather than relying solely on existing backlog. This operational speed not only improves visibility and flexibility but also helps mitigate some market volatility by allowing the company to respond more quickly to demand shifts.

Growing Community Count and Expanding Market Footprint

Despite softer demand, Meritage continued to lean into growth of its community base. Ending community count climbed 15% year over year to a record 336 communities. The company opened 35 new communities in the fourth quarter and more than 160 over the full year 2025, signaling a strategic commitment to broadening its geographic reach and product availability. Looking ahead, management expects another 5%–10% increase in community count in 2026, positioning the platform for eventual demand recovery even as near-term sales pace remains below historical targets.

Robust Capital Returns and Share Repurchases

Capital allocation was a clear bright spot. Meritage returned roughly $179 million to shareholders in the fourth quarter through buybacks and dividends. The company repurchased about 2.2 million shares in the quarter at an average discount of around 12% to year-end 2025 book value, and full-year 2025 buybacks totaled $295 million, shrinking the share count by approximately 6%. With $514 million still available under the repurchase authorization, management signaled continued commitment to returning capital, particularly at what it views as attractive valuation levels.

Healthy Balance Sheet and Ample Liquidity

Management repeatedly emphasized balance sheet strength as a key buffer against a choppy housing backdrop. Meritage ended 2025 with $775 million in cash and no borrowings on its credit facility. Net debt-to-capital stood at 16.9%, comfortably below the company’s stated ceiling in the mid-20% range. This conservative leverage profile provides flexibility to continue investing in land and communities while maintaining the capacity to fund buybacks and navigate potential further weakness in demand or pricing.

Operational Cost Improvements and Efficiency Gains

The company highlighted progress on cost control and efficiency initiatives, even as headline margins declined. Direct construction costs on new starts were down nearly 4% per square foot year over year, reflecting better purchasing, design standardization and operational discipline. Management also pointed to improved back-office productivity driven by technology investments and targeted SG&A savings. While these gains were not enough to offset the drag from incentives and pricing pressure in the quarter, they represent structural improvements that could support margin recovery when market conditions normalize.

Tight Management of Spec Inventory

Meritage continued to manage speculative inventory tightly in a more uncertain demand environment. Total spec homes at quarter-end were roughly 5,800, down 17% year over year and 8% sequentially. Specs per community fell to 17 from 24 a year earlier, translating into about a five-month supply—right in the company’s 4–6 month target range. This disciplined inventory posture reduces risk if demand weakens further, while still keeping sufficient ready-to-move-in homes available to capture buyers who need quick closings, especially heading into the important spring selling season.

Customer Credit Quality and Realtor Channel Strength

On the demand quality front, management noted that customer credit metrics, including FICO scores, debt-to-income and loan-to-value ratios, remain consistent with historical norms, suggesting the buyer base is relatively healthy even as affordability is stretched. Realtor relationships are a key sales channel: the company’s co-broker capture rate sits in the low 90% range, and repeat realtor volume is around 40%. These figures indicate strong engagement with the brokerage community, which can help maintain traffic and sales momentum despite macro headwinds.

Revenue and Volume Declines Weigh on Results

Against these operational positives, the financial results reflected clear pressure. Fourth-quarter home closing revenue declined 12% year over year to $1.4 billion, driven by a 7% drop in closing volumes and a 5% decrease in average selling price to $375,000. For the full year 2025, home closing revenue fell 9% to $5.8 billion and closings were down 4% versus the prior year. The combination of fewer closings and lower pricing underscores the extent of demand and affordability challenges the company is facing in the current environment.

Margin Compression Hits Profitability

Margins were a key weak spot. Adjusted home closing gross margin in the fourth quarter dropped to 19.3%, down 400 basis points from 23.3% a year earlier, while GAAP home closing gross margin fell to 16.5% from 23.2%. For full-year 2025, adjusted gross margin was 20.8%, a 420 basis point decline from 25.0% in 2024. This compression reflects heavier use of buyer incentives, pricing pressure and the impact of nonrecurring charges, and it materially reduced profitability despite the company’s cost savings efforts.

Significant EPS Declines Reflect Tougher Conditions

The weaker top line and compressed margins translated directly into lower earnings. Adjusted diluted EPS for the fourth quarter of 2025 came in at $1.67, down roughly 30% from $2.39 in the prior year’s quarter. Full-year 2025 adjusted diluted EPS was $7.05, compared with $10.79 in 2024—a decline of about 35%. For investors, this EPS trajectory highlights how sensitive homebuilder earnings remain to shifts in pricing, incentives and volume, even when balance sheet and operational metrics are strong.

Nonrecurring Land Charges and Impairments

Nonrecurring items added further pressure to the quarter. Meritage recorded $42.9 million of charges in Q4, including $27.9 million in walkaway costs from terminated land deals tied to roughly 3,400 lots, and $7.8 million of real estate inventory impairments. These actions reduced quarterly profitability and net lot activity but also demonstrate management’s willingness to walk away from land that no longer meets return thresholds, prioritizing long-term capital discipline over short-term volume.

Elevated Incentives and ASP Pressure

To combat affordability constraints and sustain sales, Meritage leaned more heavily on buyer incentives, which weighed on both pricing and margins. Management noted that incentive usage remained several hundred basis points above historical levels, contributing to the 5% drop in ASP and lower gross margins. The company expects these elevated incentive levels to persist in the near term, implying continued pressure on profitability until either demand strengthens or mortgage rates ease enough to improve buyers’ purchasing power.

Lower Absorption and Reduced Starts

Sales and production metrics reinforced the cautious backdrop. Fourth-quarter average absorption fell to 3.2 net sales per month per community, down 18% year over year and below the company’s long-term target of 4. Starts were also moderated, with about 2,700 homes started in Q4—24% fewer than the prior-year quarter and 12% below the third quarter. This pullback reflects both softer demand and deliberate pacing, as management seeks to align production with current sales trends and protect margins and inventory levels.

Inventory and Backlog Contraction

Meritage exited the year with a smaller combined pool of spec inventory and backlog, reflecting both weaker demand and conscious discipline. Combined specs and backlog declined to roughly 7,000 units at the end of 2025, down about 19% from 8,600 a year earlier. Ending backlog alone fell around 24%, from approximately 1,500 homes to about 1,200. While this contraction reduces future delivery visibility, it also limits exposure if market conditions deteriorate further and positions the company to rebuild backlog on potentially better terms when the cycle turns.

Higher Cancellations and Persistent Market Weakness

Cancellation rates ticked higher, another sign of a challenging housing market. The fourth-quarter cancellation rate rose to 14%, slightly below the company’s historical mid- to high-teens range but still elevated relative to stronger cycles. Management cited ongoing affordability issues, elevated mortgage rates and softening buyer confidence as key drivers of cancellations and slower sales. These conditions underpin the company’s cautious near-term stance and help explain its reliance on incentives and moderated starts.

Guidance and Conservative Outlook

For 2026, Meritage is signaling caution rather than growth. Management guided full-year 2026 closings and home closing revenue to be roughly in line with 2025 levels—about 14,650 homes and $5.8 billion in revenue—assuming no major change in the market backdrop. For the first quarter of 2026, the company expects 3,000–3,300 closings, home closing revenue of $1.13–$1.24 billion, and a home closing gross margin of 18%–19%, with an effective tax rate of about 24% and diluted EPS projected between $0.87 and $1.13. Longer term, Meritage reiterated its targets for around 4 net sales per community per month, gross margin of 22.5%–23.5%, SG&A near 9.5% and backlog conversion of 175%–200%, along with 5%–10% community count growth off the current base. On capital allocation, the company plans to redeploy $400 million to share repurchases in 2026 through a steady $100 million per quarter program and anticipates up to $2 billion of land acquisition and development spending, supported by its $775 million cash position, low net leverage and remaining buyback authorization.

In sum, Meritage’s earnings call highlighted a company executing well on controllable factors—cycle times, cost efficiencies, inventory discipline and capital returns—while absorbing the impact of a tougher housing environment on revenue, margins and earnings. Management’s conservative 2026 outlook, combined with continued investment in communities and land and an aggressive buyback program, frames a story of near-term earnings pressure but sustained long-term confidence. For investors, the key question is when affordability and demand will improve enough for Meritage’s operational strengths and balance sheet flexibility to translate back into margin expansion and EPS growth.