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Greetings, and welcome to the Meritage Homes' Third Quarter 2023 Analyst Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emily Tadano, Vice President of Investor Relations and ESG. Thank you. You may begin.

Thank you, operator. Good morning and welcome to our analyst call to discuss our third quarter 2023 results. We issued the press release yesterday after the market closed. You can find it along with the slides we will 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 2, 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 outlined and listed on this slide, as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2022 Annual Report on Form 10-K and our most recent 10-Q, which contains a more detailed discussion of those risks. We also have provided a reconciliation of certain non-GAAP financial measures referred to in our press 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 within approximately two hours after we conclude the call and will remain active till November 14th. I will now turn it over to Mr. Hilton. Steve?

Thank you, Emily. Welcome to everyone listening on our call. I'll start by touching on what we're experiencing in the Markets Day and recent company achievements. Phillippe will cover our operational performance, Hilla will provide a financial overview of the third quarter and forward-looking guidance. The home buyer environment this quarter was impacted by the same overarching macroeconomic factors that we've been experiencing since mid-2022. Mortgage rates remain elevated and have now increased to nearly 8%. Meanwhile, millennials and baby-boomers are still collectively having life events that create need-based housing demand, but they are finding limited inventory due to the chronic shortage of existing home listings in the market as current homeowners are wearing and believing they're below market mortgages. With this backdrop, home buying demand held steady in the third quarter of 2023 as we use financing incentives to help customers solve for a monthly payment for our selection of available stack homes. Our third quarter 2023 sales orders increased 50% over last year's third quarter and we achieved an average absorption pace of 4.1 per month. Further, we achieved a record backlog conversion of 96% to generate our highest third quarter of closings of 3,638 homes and home closing revenue of $1.6 billion. Home closing gross margin for the quarter was 26.7%, which combined with SG&A of 10.1%, led to diluted EPS of $5.98. Now on to Slide 4 for our recent milestones. During the quarter, we announced our entry into Jacksonville, Florida is how long a successful history throughout our Florida divisions and with several recent land acquisitions, we are excited to start to generate closings in Jacksonville later in 2024. As a result of our strong workplace culture and employee engagement, Meritage became certified as a great place to work this quarter. We were humbled to be added to the prestigious group of companies with this designation. We were also proud of the continuing acknowledgment of our corporate citizenship -- as it relates to sustainability, we received the EPA's 2023 Indoor airPLUS award for the third consecutive year for building healthy homes and joined Green Builder Media's 2023 ECO Leaders List. We also earned two honors in our headquarters' hometown for our social initiatives by making Arizona most admired companies of 2023 list and we named one of the 2023 Arizona Business Angels Honoree. In August, we published our 2022 ESG report with the enhanced TCFD task force on climate-related financial disclosure data, we have progressed along our ESG journey and encourage the investor community to learn more about our stakeholder engagement, national vendor survey and expanded UN sustainable development goals detailed in that report. And with that, I'll now turn it over to Philippe.

Thank you, Steve. When looking at the current market dynamics, we believe Meritage has two distinct competitive advantages. First, we built stack and provide affordable move-in ready inventory, so we are offering the most desired criteria in homebuilding today. Second, as a large public builder with long-term mortgage financing relationships, we were able to access interest rate locks and rate buydowns that today's customers in searching for to ease the impact of higher monthly payments. We are providing our local teams with a toolkit of available financing solutions that can be customized to each potential homebuyers needs, allowing us to merge the benefit of being a top five builder with the personal service and agility that are required to sell homes in today's markets. Existing home sellers cannot replicate the financing incentive and even smaller private builders may struggle to do so. Consumers reacted positively to our incentives this quarter, resulting in an average absorption pace of 4.1 in Q3, slightly above our target range even in a tough rising rate environment. We also benefited from the further loosening of the supply chain and stabilization of labor this quarter, which helped shorten our construction schedule another 15 days from Q2 to Q3 or a cumulative reduction of over 50 days so far this year. This improvement brings us closer to our internal target of turning our inventory three times a year and to driving increased cash flow. Our structural time for 140 days in Q3. Our operational improvements and careful attention to local market needs resulted in this quarter's stronger sales pace, incremental closings and backlog conversion nearing 100%, significantly exceeding our goal of the high 80s. Now turning to Slide 5. Our sales orders for the third quarter were 3,474 homes with 88% of the volume coming from entry-level homes. Orders were up 50% year-over-year due to a stable housing environment and a cancellation rate of 11% this quarter, which was below our historical average in the mid-teens. As a reminder, last year, our cancellation rates spike to 30% in Q3 when the rapid rise in mortgage rates impacted by technology. Going forward, we expect Q4 to have a similar year-over-year dynamic as Q3. ASP on orders this quarter of $430,000 was up 2% from prior year due to geographic mix. The third quarter of 2023 average sorption pace of 4.1 per month improved from 2.7% in the prior year. We believe Q4 demand will remain steady, although we do see traditional seasonal patterns returning and ongoing concerns regarding interest rate volatility. So we plan to carefully monitor our available finance fee incentives and adjust as needed in order to maintain our sales pace on our targets. In the third quarter of 2023, our average community count of 282 was 3% below prior year, and down 1% sequentially compared to the second quarter of 2023. As a result of early community closeouts due to the strength of demand in the market. We opened 20 new communities this quarter and remain focused on our commitment to get back to growing our community count in 2024 as we acquire additional land and work to develop our existing land inventory. We still anticipate further choppiness over the next few quarters, but expect the general community count trend to increase two and beyond our 300-community target over the next year or so. Slide 6, moving to regional level trends. Our strategy at pace over price led to improvement in our sales pace in the third quarter across all geographies, both year-over-year and sequentially from Q2 to Q3. The Central region had the highest regional abridge absorption pace of 4.5 per month compared to 2.7 last year. The job growth and in-migration environment in Texas, coupled with our steady spec production enabled our Central region to convert over 100% of its backlog this quarter. With the highest regional completed spec inventory at the end of the quarter, we believe this region is well positioned to maintain a strong sales pace. The East region had an average absorption pace of 4.3 per month this quarter compared to 3.8 in prior year, capitalizing on stable market conditions as average community count held study. With some of the tightest home inventory in certain markets, the cancellation rate in this region was in the single-digit this quarter, well below our historical averages. Looking at October results, demand is still solid in these markets. The West region had an average absorption pace of 3.6 per month compared to 1.5 per month for the same period in 2022, benefiting from improved bio psychology and a cancellation rate in line with company average this quarter. The 116% improvement in order volume in the region, coupled with their highest fees drove the consolidated level mix shift and resulted in an increase in order ASPs this quarter. Market conditions in selected markets like Denver and Houston continue to be some of the most challenging in the country, resulting in a lower monthly pace as we continue to work through the right combination of financing incentives in these markets. Now turning to slide 7. During the third quarter of 2023, our closings of 3,630 homes were 4% greater than prior year, due to a shortened cycle time and the commitment to our spec building strategy. With over a-third of the homes we closed this quarter also sold intra-quarter, we achieved a record backlog coverage rate of 96%, which compared to 48% last year. We believe we can maintain the 80% plus targeted conversion rate consistently with the normalization of construction time lines. Given the steady strength of the housing market, our quarterly starts of approximately 4,000 homes in the third quarter, was up 47% from about 2,700 in the prior year and remained in line with the stars cadence in Q2 this year. We ramp-up or down our stars per community as necessary to align with our sales pace. Looking to Q4, we expect to replenish our spec inventory by starting around 4,000 homes to ensure sufficient move-in ready inventory for the 2024 spring selling season. We ended the third quarter with approximately 4,900 spec homes in inventory, which was up 10% sequentially from nearly 4,500 specs in the second quarter. This represented 18 specs per community this quarter, which equates to 4.4 months supply of specs on the ground. This is in line with our optimal level of four to six months of supply. Of our home closings this quarter, 89% came from previously started inventory, up from 75% in the prior year. 16% of total specs were completed at September 30. While we target our run rate for completed specs of about one-third and given sustained high demand for completed inventory, we are still working to meet this goal. Our ending backlog at September 30, 2023 totaled approximately 3,600 homes down from about 6,100 in the prior year, and slightly down from nearly 3,800 at June 30, 2023. I will now turn it over to Hilla to walk through additional analysis of our financial results. Hilla

Thank you, Phillippe. Let's turn to Slide 8 and cover our Q3 financial results in more detail. Home closing revenue increased 3% to $1.6 billion in the third quarter of 2023 driven by 4% greater home closing volume, which was partially offset by a 2% decrease in ASPs due to more costly financing incentives. Home closing gross margin decreased 200 bps to 26.7% in the third quarter of 2023 from 28.7% in the prior year from the same financing incentives with rates hovering around 8%, our continuing commitment to purchasing rate buydowns and other financing incentives is more costly than what we were paying for similar financial solutions in 2022. This quarter's 26.7% gross margin increased 230 bps sequentially from Q2, benefiting from cycle time reductions and greater leverage of fixed costs. Although our teams are continuing to pursue rebuild and are in constant negotiations with our national trades, our total direct costs held steady this quarter as the acceleration in industry starts since January has left little excess capacity in the homebuilding supply chain. Outside of lumber, costs related to all other building materials and supplies are still higher than historical norms, and our direct cost savings are primarily derived from improvements in production times. We believe our target of gross margins of 22% plus remains achievable, although we do expect today's still elevated margins to be potentially impacted in future periods by continuing financing incentives and some stock costs starting to come through our financials from record high land development costs incurred over the last couple of years. Since we know it's front of everyone's mind, I wanted to quickly touch on our customers' credit metrics and what we're seeing in our mortgage operations over the last several quarters. Even with 80% to 85% of our buyers receiving some sort of financing incentives, our qualified buyer profile remained consistent with our historical averages, with FICOs near 740, DTIs around 41 to 42 and LTVs in the mid-80s. Since March of 2022, we have been offering some combination of rate lock and rate buydown assistance like our current 5.875% 30-year fixed rate lock. However, these rate locks were utilized by less than 20% of our closings in Q3, although usage has ticked up a bit in our Q4 backlog. The rest of our customers are using other forms of less expensive financing incentives from 321 or 21 buy-downs, arms and just traditional rate locks or rate buydowns that are not part of our larger forward commitment. We expect utilization of financing incentives to remain elevated and likely more costly at least for the short term as uncertainty around future interest rates is still driving a desire for rate locks. SG&A leverage in the third quarter of 2023 was 10.1% compared to 8.1% in the third quarter of 2022. Higher commissions comprised about 130 bps of the change with the balance primarily relating to higher employee count, mostly within our start-up markets as well as the wage growth pressures. With our increased specs, we also had higher expense this quarter associated with maintaining this larger volume of inventory. We are actively working to reduce our SG&A leverage and expect long-term averages to be in the high single digits. In the third quarter of 2023, we recognized a loss on the early extinguishment of debt of $900,000 in connection with the $150 million partial redemption of our 6% senior notes due 2025 there were no debt redemptions in 2022. The third quarter's effective income tax rate was 22.4% compared to 20.3% in 2022. Although the 2023 rate benefited from the energy tax credit at the higher $2,500 per home level in effect this year, nine months of energy tax credits were recognized last year in Q3, when the new energy tax lot was retroactively approved. Overall, the lower gross margin, greater overhead costs and a higher tax rate partially offset by increased home closing revenue led to a 16% year-over-year decline in the third quarter 2023 diluted EPS to $5.98. This performance resulted in a book value per share of $121.29, up 20% year-over-year and a return on equity of 18.1%. To highlight a few items from the September 30, 2023 year-to-date results compared to 2022, orders were up 4%, closings were up 5%, our home closing revenue increased 5% to $4.4 billion. We had a 540 bps decline in home closing gross margin to 24.7%, primarily due to more costly financing incentives, SG&A, as a percentage of home closing revenue was 10.0% from higher commissions, compensation and technology spend and net earnings declined 26% to $539.9 million. As we turn to Slide 9, we wanted to share a follow-up to last quarter's upgrade by S&P, Fitch has also just elevated us to investment grade with a BBB- rating. We appreciate that two reading agencies have recognized our disciplined approach to balance sheet management even as we pursue a comprehensive plan that encompasses both growth in the business and returning capital to shareholders. We were very active this quarter in our capital spend activities through a three-pronged approach. First, we accelerated our investment in internal growth this quarter with $537 million spent on land acquisition and development, which was up 41% from prior year and up 31% sequentially. On a year-to-date basis, we spent $1.3 billion, and we expect full year 2023 land spend to total north of our prior expectation of $1.5 billion, as we replenish our land portfolio after a short hiatus from land acquisitions that started in the latter half of 2022. As for the next year and onwards, we plan to spend $2 billion plus on land acquisition and development, as we look to grow our community count 10% to 15% on an annual basis. Second, we also prioritize returning cash to shareholders by repurchasing over 3,019 shares of common stock for $45 million this quarter. This brings our year-to-date 2023 spend to $55 million buying back about 413,000 shares of stock or 1.1% of shares outstanding at the beginning of the year. Over $189 million remained available under our authorization program as of September 30, 2023, and we'll continue to be opportunistic with our share repurchases. This quarter, we also spent $9.8 million on our quarterly cash dividend payment of $0.27 per share, and it is our intent to reset the dividend amount in the first quarter of each year. And lastly, we redeemed $150 million of our 6% senior notes due 2025, using our excess cash this quarter, $250 million remained outstanding under the notes as of September 30, 2023. Even given all of our internal and external capital uses, we continue to generate positive cash flows, maintained ample liquidity and a flexible balance sheet and remain below our net debt-to-cap ceiling of the high 20s percent. We had nothing drawn on our credit facility, cash of $1 billion and negative net debt-to-cap of 1% at September 30, 2023, as well as generated $460 million in operating cash flows and $187 million of total cash flows so far this year. In the last five years to seven years, we have been disciplined in reinvesting back in the company and repurchasing equity. This year, we also implemented paying quarterly cash dividends. It is our intent to continue prioritizing both growth in the business and returning cash to shareholders, and we have structured our capital plan to do so. On to slide 10. We picked up momentum on land deals in Q3 by putting approximately 5,000 net new lots under control compared to about 2,800 in Q2. We owned or control a total of about 6,700 lots at quarter end, slightly higher than when we started the quarter. This equated to 4.2 year supply of lots at September 30, 2023, which compared to about 66,300 lots or 5.1 year supply of lots at September 30, 2022. The new lots added this quarter represent 37 future communities, all for entry-level product. We also have almost 30,000 of additional lots where we're still undergoing due diligence that we're actively pursuing. Our ability to source land that meets our return hurdles has not been impeded by the flurry of land acquisition activity. Land is always competitive where we have been successful in finding dirt that underwrites to for 4 net sales per month pace and our IRR and gross margin hurdles assuming today's current ASPs and direct costs. About 74% of our total lot inventory at September 30, 2023, was owned and 26% was optioned. In the prior year, we had a 69% owned inventory and a 31% option lock position. While we're always looking for ways to carry our land off book, we don't artificially create a financing vehicle to target a specific percentage of option land. We have land bank when it makes sense for a specific deal. Otherwise, we've been able to fund our growth through retained earnings. Our balance sheet is in good shape, especially in light of the recent upgrades to investment grade, and we look to leverage this cheaper capital. While we haven't been an active player in the land banking markets recently, as we look to grow our land position and we see market conditions stabilizing, we do intend to utilize land banking more frequently in the near future. Finally, I'll direct you to slide 11 for our guidance. Our spec strategy, combined with cycle times that have started to normalize, give us visibility into the next quarter's potential closing universe based on our over 3,600 units in backlog and another approximate 4,900 specs in the ground today. For Q4 2023, we are projecting total closings to be between 3,500 and 3,700 units, home closing revenue of $1.45 billion to $1.53 billion, home closing gross margin of 25% to 26%, an effective tax rate of about 23% and diluted EPS in the range of $4.84 to $5.43. While we expect to provide 2024 guidance next quarter, we do anticipate an acceleration in our closing units in the mid to high single digits next year. With that, I'll turn it back over to Philippe.

Thank you, Hilla. To summarize on slide 12, in the third quarter of 2023, we focused on pace by offering financing incentives and achieved an average absorption pace just above our internal goal. We believe housing market demand will remain steady in the near future. Although with the turn of normal seasonality and some near-term volatility from interest rate concerns, we will continue adjusting our suite of financing incentives in order to maintain our sales pace target. With higher order volumes, we gained the operational efficiencies and improved leverage of fixed costs to drive better financial results. We believe in our proven business model of prestarting 100% of our entry-level homes. We are replenishing our move and ready inventory with approximately 4,000 starts a quarter to align with our sales pace and to meet the anticipated Q4 and 2024 spring selling season demand. With normalizing cycle times, we can deliver homes faster and turn our inventory three times a year. Even with the choppiness in our community count over the next several quarters, we believe we can deliver 13,525 to 13,725 homes this year and drive sustainable long-term growth. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

Thank you. And we'll now conduct our question-and-answer session. [Operator Instructions] Our first question comes from Truman Patterson with Wolfe Research. Please state your question.

Hey, good morning everyone. Thanks for taking my questions. First, just wanted a little bit of clarity on the fourth quarter closing, ASP guidance down about 6% sequentially. Just checking to see if that's primarily geographical mix shift, maybe a little bit more incentives? Just seeing if you can provide some color on that.

Yes. Thanks, Truman, it's Phillippe. It's mostly geographical. We're expecting quite a bit of closings coming in from Texas, where we've seen really strong demand and some of the better cycle times. So a lot of it’s geographical. The incentives we have are in the gross margin guidance, there's -- it's not a lot of incremental incentives in Q3 that are playing out in Q4. So it's mostly mix.

Okay. Got you. So clearly, that would imply perhaps a bit of a deceleration in orders out west. And Phillippe, I think you mentioned Denver and Tucson being a little more pressured. I'm just trying to understand, given the recent rate move, if you could go through the markets of the West and give a little bit more color there?

Yeah. I mean, as we said in our opening comments, the West is still the part of our geographical footprint that's not contributing north of four net sales per month. I think we're seeing stronger performance in Southern California and generally in Phoenix. But Tucson and Colorado are a little bit of a drag where prices got really stretched over the last few years. And with the rise in interest rates, we've seen the affordability pressure. But everywhere is doing over three, most of them are doing 3.5. We're trying different things in those markets to capture the demand. But it's -- the West versus Texas versus the South is where we're seeing the largest issues with the rate volatility and acquiring customers.

Okay. Perfect. Thank you all.

Thank you.

Our next question comes from Stephen Kim with Evercore ISI. Please state your question.

Yeah. Thanks a lot guys. Appreciate all the color, particularly some of the longer term commentary like community count growth and stuff, that was -- and margins, that's helpful. My first question relates to, I think you referred to normal seasonality potentially returning in 4Q. I was just wondering if you could be a little more specific, how you think about absorptions, what is that normal seasonality as you move from 3Q to 4Q? And then, sort of, as well, I'm curious about following up on incentive comment you made, I was curious if you could tell us, what was the average rate that your -- customers that used your finance company, what is the average rate that they actually got and what would you say it is now on the orders you're seeing coming in, in 4Q?

Yes, I'll let Hilla answer the second part. The first thing I would say is October, we're kind of through October here, and it feels a lot like what we just experienced in September. So, it's still hard to say what normal seasonality is going to look like. I mean when we think about seasonality long term, Stephen, we feel like, we're going to sell four to five net sales kind of February through June for sales, July through September, October and then maybe 3 to 3.5 sales October through January when the holidays are. That's traditionally how our business has worked as long as I've been in. It hasn't worked exactly that way the last four years, but that's how we generally think of our business when there's normal seasonality. I'm not saying we're experiencing that today, but we expect over time that it will revert back to that. And then when you average that all out, that 4 to 4.5 net sales per month. So that's how we think about it long term, and then I'll let Hilla answer the incentive question.

Sure. So the incentive question, if you think about it, we've always had kind of around 80-ish percent cap rate in our mortgage company. It's a little higher than that, obviously, because we're offering the incentives, so we're having a higher take rate. So we're kind of mid-80s. And of that buyer pool, which is the majority of our buyers, our Q3 numbers are right around 6% all in. We're seeing maybe about 25 bps higher than that right now as to what's going to get closed out here or scheduled to get closed out here in Q4. So there is a slight increase although not material and both rates are significantly below the 8% that we're seeing in the marketplace.

Yes. No doubt. That's -- yes, that's super helpful, really encouraging as well. Second question I had for you in light of the [indiscernible] case that just the jury took all of like two seconds to think about it. It seems like we might be seeing buyer commissions coming down in the next few years. I was curious if you could remind us, what your -- what commissions represent as a percentage of your home sales revenue right now? I know that you said that it was 130 basis points of the year-over-year change. But what is the actual level at this point on a percentage of revenues?

Sure. So obviously, traditionally, it's about 3% in today's market, this is a marketing tool. This is a selling tool for us. So, most markets are 3%, some markets, particularly in Texas, maybe a little bit north of that 4%, we try not to touch 5%, but it's a market by market, sometimes you may by community decision and then our participation rate is running about three quarters. It's somewhere between 70% and 75% of our homes are sold with the co-broke.

Okay. So what was the actual rate though, that 130 basis point year-over-year change? Like what was the actual number within SG&A?

I don't think we're going to get into that level of detail, but I can definitely say that in 2022, we were running very low. 1% to 2% is probably what we were paying in commissions at the time. And now I would say we're probably around 3%.

Okay. Thanks very much guys.

Thank you.

Our next question comes from Mike Rehaut with JPMorgan. Please go ahead.

All right. Thanks. Good morning, everyone. Just I appreciate the kind of forward look on '24, talking about closings up mid to high single digits. I was curious if you could kind of give us a sense of if that growth you expect to be predominantly driven by community count? And I don't know if you kind of gave an update, I apologize if I missed it. Where you expect community count to finish out this year?

Yes. We didn't give out any guidance for this year. As we said, in our comments, we think it's going to be choppy here for the next quarter, but we also said that we do expect community count growth into the back half of next year in 2025. So we're not expecting that our absorption rates per store are generally going to increase from where they're at. We're hitting our target. So I guess there lies the answer, right? It's community count growth throughout 2024, mostly in the back half of next year.

Okay. Great. I appreciate that, Phillippe. I guess, secondly, just to clarify on the answer before talking around incentives and around how that's impacting the current gross margins I guess, with the 4Q gross margin guidance given obviously your spec model in the more rapid reflection of current market conditions in your numbers sure then later all equal. Is it fair to say that the gross margin guidance for 4Q largely reflects the more recent changes in incentives and perhaps higher more expensive rate buydowns that I think the industry is kind of absorbing at this point?

Yes, that's 100% fair. I mean, it's 100% accurate, right? Our fourth quarter guidance, most of those homes are sold. We've locked those folks in at the rate that we need to, to get them through the homeowner journey. So it's captured in our fourth quarter guide, what we're utilizing to acquire those customers.

Great. Thanks so much. Good luck.

Yes. Thank you.

Thank you. Our next question comes from John Lovallo with UBS. Please state your question.

Hey, guys. Thank you for taking my questions as well. Maybe on the cost side, I think you mentioned relatively stable year-over-year costs in the third quarter. Can you just help us maybe break this out a little bit between what you saw for land, labor and materials? Were they all sort of similar on a year-over-year basis? Or were there some offsets within that group?

Yes. So I would say -- you're talking about year-over-year?

Yes.

Yes. So it's -- we've obviously shared what our direct costs have done year-over-year. Most of that's been lumber, but there are some offsets and other places, so it's relatively stable. Labor has been also stable for the most part. But certainly, higher land costs are flowing through as we open up new communities at higher land basis or higher land development costs. We don't give out the level of detail between all those cost components, but again, stable labor cost, stable vertical costs, but higher land costs.

Okay. That's helpful. And then maybe on that mid to high single-digit closing outlook for next year growth. How are you thinking about that in the context of the overall industry and what new home sales growth could look like? And then in terms of just the health of the general consumer and the economy overall?

Yes. I think generally, what we've read and heard from the folks that talk about the macro level, given the backdrop of the used home market being locked up, I think they're expecting kind of low-mid-single-digits. So we think that's about right for us. We have the land in place to achieve that growth as long as the market doesn't regress from here. So this is what we know today. The current market conditions, what we're able to do in Q3 and what we're feeling in October. We feel confident about that guidance, and we think that will be increasing our market share in the market if we're able to accomplish that.

I would say also, if you want to read through a telegraph our commitment to the continuation of the rate locks, right? We're making a commitment to make sure that to hit our absorption pace, as Steve mentioned, we're to get to that number, it's mostly community count based. So, in order for the absorption to hold steady at the current rate, we're committed to making sure that we're solving the home affordability question, whether that comes from rates coming down organically or us helping the rates to come down. We're committed to making sure that we're in the affordable price end.

Yes. I mean after the -- obviously, after experiencing the demand we did in Q3, we're pretty optimistic that the spring selling season is going to be there based on what we're seeing today.

Sounds good. Thanks very much, guys.

Our next question comes from Alan Ratner with

Hey, guys. Good morning. Thanks for the time. Phillippe, first question on the start pace, I know you indicate that the goal there is ultimately to match starts to sales, which certainly makes sense. But, you've been running at a hotter pace recently on the start side. You've started about 20% more homes than contracts you've written in the last two quarters. And it sounds like in the fourth quarter that gap is going to potentially widen further if you maintain a 4,000 start pace. So, what I'm trying to figure out, if I take your initial 24 commentary on mid to high-single-digit growth that still doesn't quite get you to a 4,000 quarterly unit run rate. So, at what point should we actually see orders converge with that level? Or is this an inflated start pace and something more in that the mid-3,000 might be your longer-term target?

Yes. I think we're still catching up, Alan, on having the inventory we want by community. We're getting there, but we like to have the third of our homes, finished the third of our homes that are ready to move into the next 30, 60 days and then a third of our homes that are ready to move in 90 days or 120 days. So we're not there on a community-by-community basis. Certain communities maybe have more, but they're seeing higher absorptions. So this is really about us catching up and getting to where we want to be, especially for the spring. We're not there yet. I think as we -- cycle times have contracted, we're getting a lot closer. And so you're going to start to see that really kind of marry up -- starts marrying up with sales as we move into 2024. But I feel like we still have some catching up to do right now.

Got it. Okay. I appreciate that. Second, on the rate buydown dynamic, I'm curious, when you think about the incentives you're offering, would you characterize it more as something that is needed to get perhaps a buyer off the fence and convince them to buy one of your homes versus a resell home? Or is the rate buydown actually necessary to get that buyer to qualify, meaning they perhaps can't qualify at an 8% rate and they need a 6% or something in the -- to actually qualify for the mortgage?

Yes, Alan. I mean I hate to phone in the answer here, but we're a community-by-community business. So, I would say in certain markets and communities, we need those rate locks to achieve our for net sales per month, and that's to get folks qualified. In other communities, it's more of just in replacement of nicer cabinets or a move-in-ready appliance package or a little bit of a base price discount. So, everyone is using it differently. We need it differently depending on the market, the community So, it's hard to answer that question in generalities. But obviously, as rates continue to increase, we're using more of it to get people qualified than we were maybe two quarters ago. But it's still very much community-by-community and buyer-by-buyer.

The only thing I would add is, in all communities, it's a marketing tool, right? So, it's critical -- the customer is looking for that. So, it's critical to advertise that to get them in the door. Once they're there, we can walk through the benefits of one financing solution versus another and kind of understand what their need is. But I think it's critical today to have that as an advertising solution.

Yes. But just like when I describe the markets in the West, we probably need more of those rate locks in the West to qualify people than we do in Texas, for example, or Florida or the South.

Got it. Appreciate it, guys.

Yes, thank you.

Our next question comes from Carl Reichardt with BTIG. Please go ahead.

Thanks everybody. Hilla, you talked about sort of thinking about land banking option on a go-forward basis is something you might utilize more. And so what's changed there? I mean the balance sheet is as good a shape as it has been. We've been self-developing for a long time. And so I'm just sort of interested in your thinking on making that switch over time.

I would say maybe the two big changes would be our expectation for future growth, I think is fairly robust. So, we want to make sure we're still going to continue to use our own balance sheet, of course, but we can supplement that in corn an even faster pace if we're also using third-party financing. The other item that we mentioned in our prepared remarks is the stabilization of the market. The extended time lines and cost bust on land development over the last couple of years has made the math to the model on land banking difficult, right? You're paying carry costs and the timelines are extending and it's outside of your control. So, we're really kind of pausing and waiting for the market conditions to stabilize, so that we can understand the actual burden that attaches to every lot from a land banking development perspective. So, I think we're now very close to a point where we're feeling confident in both the timelines and the budgets on land development, it makes a lot of sense for us to leverage that tool where the capacity in the margin on the deal allows for it.

Thank you. That's a great answer. I appreciate that. And then you purchased $45 million, I think, this quarter repurchase stock, you've been sort of up and down on that over time. With the model now shifting towards one where you're generating cash on a more consistent basis. And my guess is you'd expect to continue to do that more so than the more volatile cash generation periods in the past. Is your expectation that share repurchases are not going to be a more permanent part of the capital reinvestment plan for Meritage? Thanks.

Yes, it is. I mean we've always been very programmatic about not diluting our shareholders. Recently, we've been even more programmatic about taking more shares out of the system than we put in. I think it's a great way to return shareholder value as long as it balances out with our ability to grow our business and generate revenue growth on the top line through market share and community count growth in orders. So it's a key part of our strategy for returning capital back to our shareholders. And especially when our stock price is trading below book, -- it just seems like the responsible thing to do, when we buy our land at below book, when we know our land is worth above book. So we continue to do that.

Thank you, Phillippe.

Our next question comes from Susan Maklari with Goldman Sachs. Please state your question.

Thank you. Good morning everyone. Thanks for taking my questions. I think that during the commentary, you talked a bit about the construction times continuing to improve during the quarter. Can you talk about the key constraints perhaps that are still out there, that are kind of preventing that from going back to where we were before the pandemic. And any thoughts on the cadence at which that can continue to come down?

We're really close to getting back to where we were pre-pandemic. We probably have a couple more weeks of opportunity. I think the constraints continue to be the same ones, mostly on the front-end of the business, putting down our foundations, framing our house and those types of things. But especially with all the increase in starts that are happening right now and all the builders starting way more homes. I think there's only so much more we're going to get in the near-term. But we're really pleased with what we've accomplished. We can turn -- again, we can turn our business three times a year with our current cycle times. We'll try to figure out if we can get those extra two weeks back to pre-pandemic levels. We may never get back there. We'll see. But that's what we're seeing in the market right now.

I think, Philippe mentioned in response to a prior question that labor is stable. It's very true from a cost perspective, but the capacity of labor has maybe increased a little bit. So we're definitely seeing the same improvements in the marketplace with our peers.

Yes.

Okay. That's helpful color. And then you mentioned also that you expect SG&A I think, to move to the high single-digit range kind of overtime. But for the quarter, the SG&A came in a bit higher than where we were. Any thoughts on how we should be thinking about that just seasonally as we end the year and then overtime, just the sort of keys to getting to that target that you talked about?

So I think it's the right – high single-digits is the right number over time, although the next couple of quarters with the commitment that we've made to increase our community count and the land that we have under development, you're going to see some incremental overhead coming through, as we look to work through that pipeline. Once the revenue from those communities starts coming through, you're going to see that rebalance. But right now, we're once again in a high-growth period on the acquisition side, and we're just a couple of quarter lag until those communities start to generate cash flows.

Okay. All right. Thank you for that. Good luck with everything.

Our next question comes from Joe Ahlersmeyer with Deutsche Bank. Please state your question.

Hey, good morning, everybody. Thanks for the questions.

Good morning.

I wanted to talk about the community count again. Given the outlook for next year depends on that, largely – could we just talk about how your visibility to that path to 300 and beyond may be different from how it was in the past, even kind of before COVID when you talked about 300 and then when you achieve 300 more recently. Because I'm just thinking about if you are looking at communities where you're targeting a specific absorption and you're using incentives to get people up to that. There's probably less of a risk of sell-out than maybe before. And then as you've increased the land spend here and you're better positioned you might feel better about what you're able to bring online on the growth side of bringing community counts online. So just curious if you could talk through the puts and takes there.

Yes, I think you answered it in your question, but the last time when we kind of said we were going to be 300 communities, the assumption we were going to do three or four net sales per month. And now our assumption is we're going to do four. So we understand sort of the demand and what the closeout scenarios are going to look like, and we've invested in the land appropriately to build off of that assumption. So I think with that, we have a lot better visibility that under a four a month type of environment we can get to that growth for next year. Obviously, we don't ever predict community count growth 12 months 16 months out if we don't have the land under development, and we're not working on those communities. So I think everything is being worked on and actively developed today. So we have that visibility. Even though it hasn't gotten any easier to open up communities, municipal delays, land development is still moving very, very slowly. I think we're getting better at understanding how long it's going to take and be able to predict our business. And we've built in those longer cycles to open up communities into our forecast. So with those two components, I think we feel pretty good about what we're going to do next year.

That's great. Appreciate that. And then just thinking about the mix of either geographic mix, but primarily on the buyer segment side, what that might look like when you do get to $300 million, is it going to be less on 1MU than you're even at today. And then some of your peers have called out when they have sort of the shifting mix a year ahead, kind of what the ASP mix headwind could look like, assuming just all other price is stable, how should we think about potential mix headwinds on ASP next year?

Yeah. We're not prepared to give out guidance into 2024, yet there's a lot of still moving parts and pieces as it relates to feeling comfortable with that. But I think our mix is kind of what it is. I think we're about 80% to 85% entry level and 20% to 15% 1MU. And frankly, those are migrating closer and closer because we just built a really nice entry-level home or really value-oriented 1MU Home. So that's kind of going to be our mix, but we're not comfortable of guiding out ASP at this point because there's just too many things still moving around.

Understood. Thanks a lot. Good luck.

Our next question comes from Jay McCanless with Wedbush Securities. Please state your question.

Okay. Thanks. So the first question I had, you talked about higher land costs starting to work through, is that going to be more second half 2024 given when you think the community count is going to ramp? Or is that something we should be thinking about for gross margin for all of 2024?

Yeah. It's kind of sequential. I would say it's already started. Philippe mentioned that part of our composition of our current gross margin is higher land costs already in Q3 as communities change over it's going to become a more material portion until our entire composition of our land portfolio is going to be that higher land development basis. So I think if you're modeling, I would say, slow growth and land basis from now until the end of 2024 is probably a safe assumption.

Okay. And then incentives, could you talk about what those were in terms of either dollars or percentage of average home price for 3Q 2023? And what are you seeing now in what -- in the orders you're writing?

Yeah. We don't give numbers out in that way. We actually market spec inventory. So the components are not really visible externally. It's not something that we give out, although I think we mentioned that the decline in margin guidance between Q3 and Q4, that's primarily the incremental incentives that we're expecting. So you can see what the change is going to be quarter-over-quarter, but we don't provide details.

Okay. Great. Thank you. Appreciate it.

Thank you.

Thank you.

Our next question comes from Alex Barron with Housing Research Center. Please state your question.

Yeah. Thank you. I was hoping you guys could provide some type of statistics on what your average client looks like in terms of average household income, average FICO, average down payment, those types of things?

Yeah. So we had a little information in the prepared remarks. Our average customer is right around the seven -- so maybe I should pocket it by saying not too much has changed over the last decade. Honestly, we track this monthly for the last decade and not too much has changed. We're right around the 740 FICO hovering right above, right below in any given month. LTV is in the mid-80s DTI, 40, 41, 42, depending on if it's an entry level or first time move up, that's kind of held steady. So we're fairly comfortable with the credit profile of our customers. You can definitely afford the house that they're getting into.

Okay. What about the average income?

I don't believe we provide that. We'll go back and check to see if that's in the stats that we provide. But if not, that's not a new data metric we're going to provide on the call, because there's no context for historical baselines.

Okay. How about -- in terms of your incentives, what percentage of ASP do they represent today either in closing, or in backlog versus, say, a quarter or two ago?

So I think we just answered this question. We don't provide information on incentives as either a percentage or a dollar amount, since our homes are listed as a completed home, we sell spec inventory. So the market price is an all-in price that we don't want to start to break those components out and provide a competitive disadvantage to ourselves. But we will say that 80% to 85% of our customers are using some sort of financing incentives. So it's a fairly material amount. And we expect that trend to continue. And as we've mentioned, we expect the Q4 utilization of the more expensive, the more costly financing incentives to increase, which represents the change in the margin from the 26.7% that we earned in Q3 to the 25% to 26% guidance that we gave to Q4, that's primarily a reflection of incremental incentive usage.

Got it. Okay. Thanks a lot.

Thank you.

Our next question comes from Jade Rahmani with KBW. Please state your question.

Hi. Just a follow-up on the mortgage buydown question. Is 200 basis points the limit in terms of benefit you can pass on to customers through that? And is full term buydown, the most common option that buyers are preferring?

It depends on the buyer, to be honest. I'll take your second question first. A lot of folks are looking for assistance on the entire payment for the third year. That is the most common type of financing incentives, but a lot of folks either 3-2-1 or a 2-1, buy down, right? They're willing to take the extra incentive money and apply it to something else. They just need assistance in this first year or two. And they're comfortable with that. We're also heavily marketing arms, where you can get to with the 76 arm is pretty impressive. Average American doesn't stay in their home more than seven years, so we're trying to increase the education on that front, and we're seeing some traction there. I'm sorry I forgot the first part of the question.

200 basis points.

Oh, 200 basis points, it's actually 300 basis points, but I think a couple of our peers have mentioned this on their calls as well. That is if you are doing an incentive for that buyer for that home, the forward commitment that most of the large builders are purchasing are actually outside of that limit. So there's an opportunity to provide an incentive that's in excess of that 300bps.

Which is another advantage over the existing home market which they had that governor.

So the incremental margin impact that you mentioned going from the $267 million to the $25 million on the 20 basis points. Does that reflect roughly 300 basis points of impact?

No, that's just incremental change from Q3 to Q4, right? That's the incremental change of usage of financing incentives or the more costly financing incentives or more folks using them. So I think we need to maybe not focus on the $300 million everyone is exceeding the 300. There's no rate locks that you're buying that's attractive to a buyer at 300. That's why the builders are doing the forward commitment. So that amount is in excess of 300. But as we mentioned, less than 20% of our closings in Q3 actually use that percentage. So I think that we should think of it more broadly than the 300 that's available.

Got it. Thanks very much.

Of course. Thanks.

Our next question comes from Ken

I appreciate the details on the incentive structure. It is kind of confusing, but it seems like builders one special soft there. A couple of questions here. First, am I getting the price hikes, I think I'm doing the math right? The ASP is going down in the fourth quarter, correct? For your guidance?

It seems

Yes. And that's fine. I mean is there -- I guess, I haven't heard you guys discuss that much in terms of the regional? Or did you just reset? Because obviously, incentives has something to do with the gross price. Can you talk to that a little bit before my -- and then I have one more question.

Yes. As I said in my opening comments and as well as the first question, it's largely mix. We're not cutting our prices in today's market. So there's some incentives here and there. We're doing the rate locks, as we said. But primarily, what's driving the ASP decline in Q4 over Q3 is geographical mix. We're getting a lot more closings out of some of our entry-level communities across the country.

It seems like a big mix shift quarter-to-quarter. Is there -- was it a big closeout related -- I mean, it's right -- I mean, quarter-to-quarter only, it seems like a big value shift?

We can certainly get you more details if you'd like, but…

Okay. That's right. No, no. I mean, I just want to be focused on that one more time. All right. So look, here's my main question. I'm glad we're not focusing on monthly pace. You have your fresh target, it's going to swing around. It seems like things are stabilizing. Could you talk to the gross margins you have now, I believe you mentioned a more normalized gross margin of 22%, given your pace concept. Is that -- did I hear that correct?

Yes. I think what you've heard is that historically, we feel like, over time, we can underwrite to somewhere between 21% and 22% direct gross margins when we're buying new land, et cetera. Obviously, our margins are much higher than that today because we have cheap land flowing through, markets strong, et cetera, et cetera, but 21% to 22% is kind of our long-term outlook over time if things are normal.

Right. And I appreciate that clarity because I'm going to tie it into your for target in terms of what that kind of implies from a return on capital perspective, if you would. Thank you very much.

Perfect. Thank you.

So thank you very much, operator. I think that was our last question. We appreciate everyone being on the call today. Appreciate all the questions and interest in our organization, and we look forward to talking to you next time. Thank you.