What portion of the off-balance sheet portfolio is with land banks, how are agreements structured regarding walkaways, and what's the view on land bankers moving forward?

About 38% of total inventory is off-book, with only about 1/3 of that (10% of total supply) with traditional land bankers. Deals are not cross-collateralized, allowing walkaways with only deposit at risk. They are selective, focusing on deals with sufficient margin. “About 38% of our total inventory control is off book. Of that, about 1/3 is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time.”

Is the 22.5%-23.5% long-term gross margin target consistent with a 4+ per community absorption rate, or can it be achieved with lower absorption?

Achieving the long-term gross margin target is "a lot easier" at 4+ net sales per month due to better efficiency and leverage. While a path at slower paces exists, it would require direct margin offset. Volume per store and absolute volume are key. “I think it's a lot easier to get to our long-term goal around 22.5% at 4 net sales per month. We're just way more efficient at that level we leverage our fixed and variable overhead much more meaningfully.”

Given the Q2 margin guide of 18% (steady QoQ), is this sustainable through the year if market conditions remain steady, considering current macro environment and absorption goals?

Management sees potential for a margin floor due to stabilizing inventory levels and higher community count. They are optimistic about reducing incentives over time. Direct cost improvements and higher projected volumes in H2 also support margin. “I do think that -- there's a couple of 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... But 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.”

MTH

Meritage Homes (MTH) Q1 FY26 earnings call: guidance and Q&A

Q: Are lower spec counts industry-wide helping to alleviate margin pressure, and do you expect this to support margins moving forward?

Management believes lower finished inventory across the industry, driven by builders pivoting away from carrying as much or moving to BPO models, is creating a better environment for margin stability, especially for Meritage's spec strategy. “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 creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage.”

Earnings call· Mar 2026 (Q1 FY26)· Consumer Discretionary· Apr 23, 2026

Source: earnings call transcript

Executive summary

Meritage Homes Q1 FY26 — Community Count Growth and Capital Returns Amidst Market Caution

Meritage Homes navigated a cautious Q1 FY26, marked by market choppiness and increased incentives, yet achieved record community count and strong capital returns. The company's strategy of spec building, quick closings, and disciplined capital allocation positions it for future market share gains as demand normalizes, despite current affordability pressures and fragile consumer confidence.

Highlights

Community count grew to 345, up 19% year-over-year, a new company record.
Repurchased $130 million worth of common shares in Q1, exceeding the $100 million target.
Increased quarterly dividend by 12% to $0.48 per share.
Backlog conversion rate was 254%, significantly exceeding the long-term target of 175%-200%.
Maintained a sub-110 calendar day instruction schedule for the fourth straight quarter.

Concerns

Sales orders totaled 3,664, 5% below last year's Q1.
Home closing gross margin was 17.5%, down 400 bps year-over-year from 22%.
Diluted EPS of $0.82 a share, a 51% decrease year-over-year.
Average absorption pace declined to 3.6 from 4.4 in the prior year.
ASP on orders was $382,000, down 5% year-over-year due to increased incentives and geographic mix shift.

Guidance & targets

Category	Target	Timeline	Confidence
Full-year community count growth	5% to 10% high materiality	FY26	High
Full-year home closing volume and revenue	at or within 5% of full year 2025 results high materiality	FY26	Medium
Q2 2026 total home closings	3,650 and 3,900 units high materiality	Q2 · FY26	High
Q2 2026 home closing revenue	$1.37 billion to $1.47 billion high materiality	Q2 · FY26	High
Q2 2026 home closing gross margin	around 18% high materiality	Q2 · FY26	High
Q2 2026 effective tax rate	24.5% to 25% medium materiality	Q2 · FY26	High
Q2 2026 diluted EPS	$1.18 to $1.46 high materiality	Q2 · FY26	High
Long-term gross margin target	22.5% to 23.5% high materiality	Long-term	Medium
Long-term SG&A target	9.5% medium materiality	Long-term	Medium
Long-term backlog conversion target	175% to 200% medium materiality	Long-term	High
Full-year land acquisition and development spend	up to $2 billion high materiality	FY26	High
Programmatic share buyback	$100 million high materiality	Per quarter · FY26	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
West Region Includes California, Colorado, and Utah. These markets are challenged by affordability pressure, high competition, sticky land prices, and a high regulatory environment. The company is intentionally trying to reallocate a significant part of its business away from this region long term, willing to run it at a slower pace to maximize margin of the land book. Orders: down YoY (fifth consecutive quarter)Community count: mid-80s	—	—	—	—

MTH operating KPIs by quarter

MTH operating KPIs stated on its earnings calls, by fiscal quarter
KPI	This call Mar 2026 Q1 FY26	Jun 2026 Q2 FY26	Change vs prior quarter
Backlog conversion rate	254% Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with exceptional backlog conversion rate of 254%. Source: earnings call transcript	200% Operationally, we continue to focus on what's within our control, delivering a 200% backlog conversion rate, further improving cycle times and working down our finished inventory levels. Source: earnings call transcript	-54 pt
Homes delivered	2,967 We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. Source: earnings call transcript	3,725 These efforts generated 3,725 home closings and $1.4 billion of home closing revenue in the quarter. Source: earnings call transcript	+25.5%
Stores	345 We started the year with 336 active communities which we then grew to 345 by March 31, another company record. Source: earnings call transcript	340 Our active community count of 340 as of June 30, 2026, was at 9% year-over-year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Source: earnings call transcript	-1.4%
New stores opened	40 During the quarter, we brought on 40 new communities throughout all of our regions. Source: earnings call transcript	27 We brought 27 new communities online across our regions during the quarter and 67 year-to-date. Source: earnings call transcript	-32.5%
Cancellation rate	11% The cancellation rate of 11% remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Source: earnings call transcript	13% Cancellation rate of 13% was a little higher than the 11% in Q1, but still remain below typical industry averages as we benefit from a quick sale to close process. Source: earnings call transcript	+2 pt
Average absorption pace	3.6 Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. Source: earnings call transcript	3.5 Demand remained relatively stable between Q1 and Q2 this year with no meaningful sequential deterioration as average absorption pace of 3.5 net sales per month this quarter was in line with the 3.6 in the first quarter. Source: earnings call transcript	-2.8%
Home starts	~2,500 In Q1, we moderated start to approximately 2,500 homes. Source: earnings call transcript	~3,900 Q2 starts totaled approximately 3,900 homes, down 4% year-over-year, yet up around 1,400 units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. Source: earnings call transcript	—
Ending backlog	~1,900 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 31, 2026. Source: earnings call transcript	~1,720 Our ending backlog was approximately 1,720 as of June 30, 2026, compared to approximately 1,750 homes as of June 30, 2025. Source: earnings call transcript	—
Spec and backlog units	~6,600 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. Source: earnings call transcript	~6,800 As for the combined total of specs and backlog, we had around 6,800 units at June 30, 2026, 22% less than the approximate 8,700 specs in backlog we had at June 30, 2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. Source: earnings call transcript	—
Spec homes	~4,700 We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 90% sequentially from Q4. Source: earnings call transcript	~5,100 We ended the quarter with approximately 5,100 spec homes, down 27% from approximately 6,900 specs in the prior year and up 7% sequentially from Q1. Source: earnings call transcript	—
Specs per store	14 The 14 specs per store this quarter was a huge level -- lowest level since early 2022, but appropriately aligned with our current absorption targets. Source: earnings call transcript	15 The 15 specs per store this quarter translated to about 4 months supply, intentionally near the lower end of our target 4- to 6-month supply due to today's demand environment and our improved cycle times. Source: earnings call transcript	+7.1%
Completed specs as a percent of total specs	46% 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 fourth quarter of 2025. Source: earnings call transcript	30% We reduced our completed specs to 1,500 units in Q2, which was 42% lower than prior year and 30% of our total specs, our lowest percentage in 2 years and right around our target of 1/3. Source: earnings call transcript	-16 pt
Net new lots under control	<400 In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. Source: earnings call transcript	<1,700 In the second quarter of 2026, we secured nearly 1,700 net new lots under control, which is inclusive of the impact of about 300 terminated lots. Source: earnings call transcript	—
Total lots owned or controlled	~75.5K As of March 31, 2026, we owned or controlled a total of about 75,500 lots, equating to 5.2 year supply of the last 12 months closings. Source: earnings call transcript	~73.2K As of June 30, 2026, we owned or controlled a total of about 73,200 lots equating to 5.2 years supply of the last 12 months closings, slightly above our target of 4- to 5-year supply, but reflective of the upcoming community count growth we expect over the next 18 months. Source: earnings call transcript	—
Lots undergoing diligence	~14.6K We also had approximately 14,600 lots, though we're still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. Source: earnings call transcript	~15.3K We also had approximately 15,300 lots that were still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. Source: earnings call transcript	—

Operating figures the company stated on at least two of the calls shown, checked against each call's transcript. Click a figure to read the sentence. A dash means it was not stated that quarter.

Risks & headwinds

Impact of severe winter storm Early Q1 2026

Sales activities halted for several days in many markets

Mitigation:Not explicitly stated, but implies efforts to catch up on lost sales days.

Geopolitical events and macroeconomic pressures End of February 2026 onwards

Military operations in Iran increased interest rates, gas prices, and inflation

Mitigation:Increased use of incentives to capture demand; focus on strong balance sheet and capital allocation.

Consumer hesitation and need for incentives Current market conditions

Potential homebuyers hesitate, requiring higher-than-anticipated use of incentives; ASP on orders down 5% YoY

Mitigation:Offering 60-day closing guarantee, move-in ready homes, strong realtor engagement; moderating pace to avoid margin deterioration.

Lumber cost inflation Q1 FY26 onwards

Lumber costs have started to trend higher this quarter

Mitigation:Not anticipated to have a notable material gross margin impact this year.

Oil price inflation from Iron conflict Ongoing

Potential long-term inflationary impact on oil prices

Mitigation:Monitoring for potential impact; not anticipated to have a notable material gross margin impact this year.

SG&A deleverage on lower revenue Q1 FY26

SG&A as a percentage of home closing revenue increased to 11.8% from 11.3% YoY

Mitigation:Curtailing discretionary spend; investing in back-office automation for long-term efficiency.

Impact of prior land basis on margins Throughout 2026

Land basis from 2022 through 2024 will continue to negatively impact margins

Mitigation:Expect some margin relief at tail end of 2027 from lower land basis and development costs.

Fragile consumer psychology Current

Consumer psychology remains fragile and can be driven by daily news announcements

Mitigation:Believes pent-up demand will materialize once macroeconomic conditions stabilize.

Tougher selling environments in specific markets Q1 FY26

Austin, parts of Florida, and Charlotte continue to be tougher selling environments

Mitigation:Moderating pace to avoid further margin deterioration and optimize land value.

Challenged West Region performance Q1 FY26

West region orders down YoY for fifth consecutive quarter; community count stuck at mid-80s

Mitigation:Intentionally trying to reallocate business to the East; running West region at a slower pace to maximize margin of the land book.

What to watch in Q2 FY26

Community Count Growth

Next quarter (Q2 FY26)

Current 345 active communities (Q1 FY26)

Target Continued growth towards 5%-10% YoY for FY26

Why it matters

Key driver for volume and top-line results, competitive advantage.

We reiterate our expectations of 5% to 10% full year community count growth for 2026.

Find out whether MTH delivers this. Inve re-checks your case every morning.

Q&A highlights

Are lower spec counts industry-wide helping to alleviate margin pressure, and do you expect this to support margins moving forward?

Management believes lower finished inventory across the industry, driven by builders pivoting away from carrying as much or moving to BPO models, is creating a better environment for margin stability, especially for Meritage's spec strategy.

“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 creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage.”

asked by Trevor Allinson · answered by Phillippe Lord

2 min read 7 chapters

Detailed narrative

Market Conditions and Consumer Behavior

The quarter began with optimism but was impacted by a severe winter storm and geopolitical events, leading to increased interest rates, gas prices, and inflation. This negatively affected consumer confidence, causing potential homebuyers to hesitate and necessitating higher incentives. Despite these challenges, the company believes long-term fundamentals for the housing industry remain strong, supported by favorable demographics and an undersupply of affordable homes.

Community Count and Growth Strategy

Meritage achieved a record 345 active communities by March 31, 2026, up 19% year-over-year. The company expects 5% to 10% full-year community count growth for 2026, driving volume and top-line results. This increased store count is seen as a competitive advantage for market share gains when demand normalizes, with a focus on leveraging fixed costs at 4 net sales per month.

Operational Efficiency and Inventory Management

The company maintained a sub-110 calendar day instruction schedule for the fourth consecutive quarter, enabling faster cycle times. Starts were moderated to approximately 2,500 homes in Q1, 30% less than last year, to align with sales pace and work through inventory. The backlog conversion rate was 254%, significantly above the long-term target, leading to a decline in ending backlog to 1,900 homes.

Financial Performance and Margin Pressures

Home closing revenue was $1.1 billion, down 17% YoY, driven by lower closing volume and a 5% decrease in ASP. Gross margin compressed to 17.5% due to increased incentives, higher lot costs, and lost leverage, partially offset by improved direct costs. SG&A as a percentage of revenue increased to 11.8% due to lower revenue, despite reduced discretionary spend.

Capital Allocation and Balance Sheet Strength

Meritage maintains a strong balance sheet with $767 million cash and a net debt to cap of 17.4%. The company returned $162 million to shareholders in Q1, including $130 million in share buybacks (repurchasing 1.8 million shares at a 6% discount to book value) and a 12% dividend increase to $0.48 per share. Land spend was down 30% YoY, totaling $326 million.

Land Strategy and Off-Balance Sheet Financing

The company owned or controlled 75,500 lots, equating to a 5.2-year supply. While 70% of total lot inventory is owned, 30% is optioned, with a target of 40% option lots. Meritage is selectively using off-balance sheet structures, with about 10% of total land supply with traditional land bankers, ensuring no cross-collateralization and focusing on deals with sufficient margin.

Technology and AI Initiatives

Meritage is investing in technology and AI for back-office automation to improve efficiency and accuracy, aiming to reduce manual data entry and streamline processes. These initiatives are expected to contribute to achieving the long-term SG&A target of 9.5% and will also include customer-facing solutions.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.