Meritage Homes' Q3 2025 Earnings Call: Contradictions Emerge on Incentives, Margins, Inventory Strategy, and Interest Rates

Date of Call: October 29, 2025

Financials Results

• Revenue: $1.4B home closing revenue, down 12% YOY (driven by 7% lower closing volume and 5% lower ASP on closings to $380k)
• EPS: $1.39 diluted EPS, down 48% YOY; adjusted diluted EPS $1.55 excluding $14.5M of real estate inventory impairments and terminated land charges
• Gross Margin: 19.1%, down 570 bps from 24.8% in Q3 2024; adjusted gross margin 20.1% excluding $14.5M inventory/walkaway charges

Guidance:

• Q4 2025 guidance: total home closings 3,800–4,000 units and home closing revenue $1.46B–$1.54B.
• Home closing gross margin expected 19%–20%; effective tax rate ~24.5%; diluted EPS $1.51–$1.70.
• Anticipate higher year-end incentive environment and some clearance of older completed specs that modestly pressure Q4 margins.

Business Commentary:

* Challenging Market Conditions: - Meritage Homes reported a 4% increase in orders year-over-year to 3,636 units in Q3, despite a decline in consumer confidence and affordability concerns. - The company achieved an average absorption pace of 3.8, indicating a softening demand environment.

• Strategy and Market Adaptation:
• The company leaned into its strategy focused on affordable move-in ready homes and a 60-day closing-ready guarantee to provide homebuyers certainty amid market uncertainties.

• This strategy, combined with a 100% spec strategy and realtor engagement, helped secure home sales and closings.

• Community Count and Growth:

• Meritage Homes ended Q3 with 334 communities, a 20% increase year-over-year, contributing to a 5.3-year supply of lots.

• The company plans to maintain this growth with an additional double-digit increase in community count for 2026.

• Margin and Cost Management:

• Despite challenges, the company maintained an adjusted gross margin of 20.1% and adjusted diluted EPS of $1.55 in Q3.
• Cost optimization efforts, such as a 3% year-over-year reduction in direct costs per square foot and favorable labor conditions, helped attain these results.

Sentiment Analysis:

Overall Tone: Neutral

• Management highlighted resilient orders and community growth but materially lower margins: "we grew our orders 4% year-over-year" and "home closing gross margin of 19.1%... down 570 bps." They reiterated long-term optimism: "we remain optimistic about the long-term outlook," while noting near-term incentive pressure and inventory work-downs.

Q&A:

• Question from Alan Ratner (Zelman & Associates LLC): If you look at inventory turnover now (about 0.7x vs north of 1 before the pivot) and the accumulation of completed specs, should we think of this as a trough and expect meaningful cash generation and improved turns as you recalibrate completed specs, or will it take longer to materialize?
  Response: Management: We see opportunity to optimize specs (targeting ~4 months vs current 5–6) and improve land efficiency; those levers should drive higher ROE and free cash flow over time.

• Question from Alan Ratner (Zelman & Associates LLC): With continued double-digit community count growth, if demand stays flat, does that force margins lower as you push supply, or are there offsetting factors?
  Response: Management: New communities are expected to come on at margins similar to today (not a material tailwind or headwind); incremental volume should help leverage fixed costs over time.

• Question from Trevor Allinson (Wolfe Research, LLC): Your specs per community are the lowest in a while and you mentioned moving toward the lower end of a 4–6 month range; do you expect to achieve that near term and how should we think about starts relative to sales over the next few quarters?
  Response: Management: Yes — aim to reduce specs per store from ~19 toward ~16 next year; starts will be aligned with sales but will increase with community count growth.

• Question from Trevor Allinson (Wolfe Research, LLC): Should we expect orders in Q4 to be higher than Q3 and are you leaning into volume to work down inventory?
  Response: Management: We are not leaning into volume enterprise‑wide; Q4 absorptions per store expected similar to Q3 and we're focused on optimizing community profitability while selectively clearing older specs.

• Question from Stephen Kim (Evercore ISI): When you say new communities come on at margins similar to today, do you mean over the life of the community or at initial opening?
  Response: Management: Given today's incentive environment, new communities are modeled to deliver margins similar to current company levels over their life unless incentives moderate.

• Question from Stephen Kim (Evercore ISI): How much of the increased incentives are forward purchase commitments versus other incentives?
  Response: Management: Incentive mix is roughly 40% financing‑related (primarily forward purchase commitments) and ~60% non‑financing incentives; ARMs are a small share.

• Question from Michael Rehaut (JPMorgan Chase & Co): You had a stronger sequential margin decline in Q3 than peers but Q4 guidance looks flat to up — is Q3 mix/impairments the reason and what should we expect in Q4?
  Response: Management: Excluding impairments, Q4 is guided to a modest sequential decline (~19.5% vs Q3 adjusted 20.1%) driven by clearing older specs and seasonally higher year‑end incentives.

• Question from Michael Rehaut (JPMorgan Chase & Co): On share repurchases, should we model a higher cadence than the earlier $15M/quarter indicator — perhaps $50M–$100M?
  Response: Management: The recent cadence (this quarter ~$55M) is a reasonable floor going forward; we can opportunistically increase buybacks beyond that.

• Question from John Lovallo (UBS Investment Bank): How quickly could the sales environment improve with better consumer confidence, and how quickly can you react?
  Response: Management: It can change very quickly; our spec inventory and short cycle times let us capture demand and reduce incentives rapidly when buyer psychology improves.

• Question from John Lovallo (UBS Investment Bank): Is reaching your long‑term gross margin target (22.5%–23.5%) primarily dependent on incentive levels moderating?
  Response: Management: Yes — with our scale and cost controls, a modest pullback in incentives and net sales per store of ~4–4.5 would enable a clear path back to the long‑term margin target.

• Question from Susan Maklari (Goldman Sachs): With a 60‑day close, are buyers leaning into your product and are you taking share from resales or peers?
  Response: Management: Yes — the move‑in ready product and 60‑day guarantee are winning customers, taking share from existing homes and other affordable builders.

• Question from Susan Maklari (Goldman Sachs): Given procurement savings to date, what further cost savings are realistic in coming quarters?
  Response: Management: Procurement gains have driven ~3% direct cost/ft improvement; material further savings are likelier on the land/development side over a longer timeline as new land vintages and renegotiations flow through.

• Question from Rafe Jadrosich (BofA Securities): What is your visibility on lot cost inflation and expectations for 2026?
  Response: Management: We are not providing 2026 lot‑cost guidance; expect lot costs may remain elevated or worsen into 2026 with improvement beginning in 2027–2028, broadly in line with peers.

• Question from Rafe Jadrosich (BofA Securities): The midpoint of revenue guidance implies delivery ASP up sequentially — have ASPs been below guidance due to incentives and what's driving improvement into Q4?
  Response: Management: ASP shortfalls were driven 100% by higher incentives; Q4 revenue/ASP drivers are community count growth and mix, with modest additional year‑end incentive assumptions.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods): How is existing home inventory trending in your markets and is the 60‑day guarantee offsetting that competition?
  Response: Management: Resale inventory has risen in some markets but often is older/not comparable; the 60‑day guarantee and move‑in ready product help us compete effectively and win share.

• Question from Jade Rahmani (Keefe, Bruyette, & Woods): Update on Phoenix — how is that market performing?
  Response: Management: Phoenix demand and jobs are strong but competition is intense; significant margin compression exists due to incentives and affordability pressures.

• Question from James McCanless (Wedbush Securities Inc.): For 2026, do you still expect the abnormal seasonality tied to your strategy (Q3 lowest leverage, Q1/Q2 stronger) and community count to drive growth?
  Response: Management: Yes — cadence remains (Q3 lowest leverage; Q1/Q2 stronger) though significant community count growth next year will mute seasonality and increase volume if market holds.

• Question from James McCanless (Wedbush Securities Inc.): When will community count hit next year and will it be front‑loaded?
  Response: Management: Not providing 2026 timing now; will give more visibility in Q1 — confident in another double‑digit community count growth for 2026.

Contradiction Point 1

Incentive Impact on Margins

It highlights differing perspectives on the impact of incentives on the company's margins, which are crucial for understanding its financial performance and strategy.

How should we assess the relationship between community count growth and margins in 2026? - Alan Ratner(Zelman & Associates LLC)

2025Q3: Incentives are the primary margin headwind, not new community openings. - Philippe Lord(CEO), Hilla Sferruzza(CFO)

What caused the Q3 gross margin decline? - Michael Jason Rehaut(JPMorgan)

2025Q2: The decline is primarily due to increased incentives, impacting ASP, not cost increases. - Hilla Sferruzza(CFO)

Contradiction Point 2

Community Count and Growth Strategy

It involves differing statements about the company's approach to community count growth and its impact on the business model, which affects strategic planning and expectations.

Can you discuss the impact of your strategy shift on your return profile and inventory turnover improvements? - Alan Ratner(Zelman & Associates LLC)

2025Q3: We plan to expand from our current level to 40% of our annual deliveries by 2028. We ended the quarter with 64 new communities under development, bringing us to over 70 communities under development for 2026, providing a significant opportunity for growth. - Philippe Lord(CEO)

What is the expected growth cadence for community count in the second half? - Trevor Scott Allinson(Wolfe Research)

2025Q2: Cadence is expected to be even between Q3 and Q4. Significant growth is anticipated in the second half, with double-digit growth for the year, though not reaching 20%. Planning continues for double-digit growth in 2026. - Phil Lord(CEO), Hilla Sferruzza(CFO)

Contradiction Point 3

Inventory Turnover Strategy

It involves a shift in strategy regarding inventory turnover, which directly impacts operational efficiency and financial performance.

How will your strategy pivot affect your return profile and inventory turnover? - Alan Ratner(Zelman & Associates LLC)

2025Q3: Inventory turnover has decreased due to the strategy shift and completed spec accumulation. However, opportunities exist to optimize the spec strategy, decrease inventory, and reduce cycle times. Potential reduction in specs per store from 19 to 16. The land acquisition strategy is also being refined to improve efficiency. - Philippe Lord(CEO)

What pricing power is expected based on your guidance midpoint of $410,000 average closing price, given your comments didn’t mention pricing power? - Unidentified Analyst(Zelman & Associates)

2025Q1: Our move-in-ready inventory is meeting customer demand, and we're focused on opening new communities in strong markets. In Q2, we expect to deliver 28% more homes than Q1, and we believe we are well positioned for a strong spring selling season. - Philippe Lord(CEO)

Contradiction Point 4

Impact of Interest Rates on Strategy

It involves differing interpretations of the impact of interest rates on the company's strategy, which are crucial for understanding the company's risk profile and market adaptability.

How will community count growth affect margins in 2026? - Alan Ratner (Zelman & Associates LLC)

2025Q3: A 7% interest rate environment makes achieving margins difficult. We feel that if rates improve, we can balance volume and margins. If rates worsen, we'll need to increase incentives. - Philippe Lord(CEO)

If demand remains stable, are there other levers besides incentives to hit full-year closings guidance? - Michael Rehaut (JPMorgan Chase & Co, Research Division)

2024Q4: We feel comfortable hitting the full year closing guidance based on current market conditions, despite a slower January. Our objective is to stabilize the market conditions, letting rates settle and recover, which could help us reach a 17,000 unit number in 2025. - Philippe Lord(CEO)