Meritage Homes Reports Results for the Second Quarter of 2014

Second quarter EPS of $0.85 increased 15% compared to 2013;

Home closing revenue grew 15% and pretax margin increased to 10.9%

SCOTTSDALE, Ariz.--(BUSINESS WIRE)-- Meritage Homes Corporation (NYSE: MTH), a leading U.S. homebuilder, today announced second quarter results for the period ended June 30, 2014.

MANAGEMENT COMMENTS

“We are quite pleased to show year-over-year growth in 2014 across nearly every key operating metric, given that market conditions were generally not as strong in the second quarter this year as they were a year ago,” said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. “We increased net earnings by 25% through a combination of higher revenue, margins and operating leverage. Home closings increased 4% and home closing revenue by 15%. We coupled that with a 40 basis point improvement in home closing gross margin and additional operating leverage to produce a pretax margin of 10.9%, compared to 8.5% in last year’s second quarter.

“We also grew new home orders and backlog in both units and total value, benefiting from increases in our average sales prices, while also increasing our average sales per community over 2013 in five of seven states,” said Mr. Hilton. “Texas and the Carolinas generated strong order growth in the second quarter - up 12% and 32% over 2013 respectively - which resulted in 67% and 45% respective increases in their backlog value at June 30. Colorado’s second quarter orders and backlog also grew in 2014, and Tennessee supplemented our total year-over-year increases as an additional market in 2014 that delivered well above our average sales pace.

“Our ending community count of 175 was 6% higher than one year ago and we had 9% more average communities open during the quarter than we did in the second quarter of 2013. We increased the average number of actively selling communities over last year in every state except Florida," he continued. “We plan to open many new communities this quarter within our existing markets, expanding the total to approximately 190 by September 30 and 205-215 active communities by year-end, not including our pending acquisition of Legendary Communities. Considering our June 30 backlog value is up 18% year over year, we are expecting strong revenue and earnings growth in the second half of 2014.”

Mr. Hilton added, “We are enthusiastic about our agreement to acquire Legendary Communities, which will put us into two additional markets with Atlanta and Greenville-Spartanburg, as well as bolster our presence in Charlotte. The acquisition is expected to close in the third quarter and we anticipate it will add approximately 40 actively selling communities to our total. Legendary closed approximately 500 homes in 2013 and generated $156 million in home closing revenue, and we believe that they can grow these by at least twenty percent in 2014 and 2015, with meaningful earnings accretion in 2015. That growth represents a significant potential increase in our long-term earnings power, in addition to the other markets we’ve entered in the last few years.”

SECOND QUARTER RESULTS

• Net earnings increased by $6.9 million for the second quarter to $35.1 million or $0.85 per diluted share, from $28.1 million or $0.74 per diluted share in the second quarter of 2013, driven by higher home closing revenue and gross margins, assisted by additional operating leverage. Weighted average diluted shares outstanding of 41.6 million for the second quarter of 2014 included our public offering of approximately 2.5 million shares in January, compared to 38.8 million for the second quarter of 2013.
• Home closing revenue increased 15% over the prior year, combining a 4% increase in home closings and a 12% increase in the average price of homes closed during the quarter, partially due to a greater proportion of larger homes in higher-priced communities. Respective increases of 36% and 54% in the Central and East regions more than offset a 6% decline in home closing revenue for the West region, which reflects a 24% decline in California, partially offset by a 41% increase in Colorado.
• Home closing gross margin increased 40 basis points (bps) to 21.9% in the second quarter of 2014 compared to 21.5% in the second quarter of 2013.
• General and administrative expenses for the second quarter decreased slightly to 4.9% from 5.0% of total closing revenue in 2014 compared to 2013.
• Interest expense declined $3.1 million year over year to 0.3% of second quarter 2014 closing revenue, compared to 1.0% of second quarter closing revenue in 2013, as a greater percentage of total interest incurred was capitalized to lots and homes under development.
• Pre-tax margin increased 240 bps to 10.9% in the second quarter of 2014 from 8.5% in 2013. Our effective tax rate was 36% in 2014 compared to 27% in 2013. Last year’s second quarter included a tax benefit of approximately $2.6 million primarily due to energy tax credits and a partial reversal of the deferred tax asset valuation allowance in California.
• Total order value grew 8% to $618.4 million. The increase was primarily driven by a $57.0 million (31%) year-over-year increase in Texas’s order value over 2013. Total orders for 1,647 homes were the most for Meritage since the second quarter of 2007. The company’s average selling price of homes ordered increased 7% year over year in the second quarter.
• Average orders per active community during the quarter slowed to 9.0 in the second quarter of 2014 compared to 9.8 in 2013. California’s sales pace remained the highest in the company at 12.8, followed by Tennessee at 11.5, Colorado at 10.8 and Florida at 10.3. Texas was at 9.8, also above the company average.
• Ending community count at June 30, 2014 was 175 active communities, compared to 165 at June 30, 2013.
• Ending backlog value at June 30 was 18% higher in 2014 than 2013, with 12% more units in backlog and average prices up 6%.

YEAR TO DATE RESULTS

• Net earnings of $60.5 million for the first half of 2014 compared to net earnings of $40.2 million for the first half of 2013, which included a $3.8 million loss on early extinguishment of debt.
• Home closings and closing revenue for the first half of the year increased 4% and 18%, respectively, for 2014 over 2013, with an increase of 14% in average prices.
• Year-to-date home closing gross margin improved by 170 basis points to 22.3% for 2014, compared to 20.6% for 2013, as a result of higher selling prices of homes and leverage of certain costs.
• Total commissions and selling expenses were constant as a percentage of home closing revenue, while general and administrative expenses fell to 5.1% of total closing revenue in the first half of 2014 compared to 5.4% in 2013, reflecting operating leverage.

BALANCE SHEET

• The company ended the second quarter of 2014 with $290.6 million in cash and cash equivalents plus investments and securities, compared to $363.8 million at December 31, 2013 and $310.0 million at June 30, 2013, reflecting increased investment in real estate.
• Real estate assets increased to $1.64 billion at June 30, 2014, compared to $1.41 billion at December 31, 2013 and $1.23 billion at June 30, 2013. The largest increases were in homes under contract under construction and home sites either finished or under development.
• Net debt-to-capital ratio at quarter-end was 37.6% compared to 39.1% at December 31, 2013 and 37.2% at June 30, 2013.
• Total lot supply at the end of the quarter was approximately 25,800, compared to approximately 22,600 a year earlier. Based on trailing twelve months closings, the June 30, 2014 balance represents a 4.8 years supply of lots.

CONFERENCE CALL

Management will host a conference call today to discuss the Company's results at 11:00 a.m. Eastern Time (8:00 a.m. Arizona Time). The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's web site at http://investors.meritagehomes.com. Telephone participants may avoid any delays by pre-registering for the call using the following link to receive a special dial-in number and PIN.

Conference Call registration link: http://dpregister.com/10048558.

Telephone participants who are unable to pre-register may dial in to 888-317-6016 on the day of the call. International dial-in number is 1-412-317-6016.

A replay of the call will be available until August 15, 2014, beginning at 12:30 p.m. ET on July 24, 2014 on the website noted above, or by dialing 877-344-7529, and referencing conference number 10048558. For more information, visit www.meritagehomes.com.

(2) Ending cash and cash equivalents excludes investments and securities totaling $59.9 million as of June 30, 2014 and excludes investments and securities and restricted cash of $135.3 million as of June 30, 2013.

About Meritage Homes Corporation

Meritage Homes is the ninth-largest public homebuilder in the United States, based on homes closed in 2013. Meritage builds and sells single-family homes for first-time, move-up, luxury and active adult buyers across the Western, Southern and Southeastern United States. As of June 30, 2014, the company had 175 actively selling communities in markets including Sacramento, San Francisco's East Bay, the Central Valley and Orange County, California; Houston, Dallas-Ft. Worth, Austin and San Antonio, Texas; Phoenix/Scottsdale, Green Valley and Tucson, Arizona; Denver and Fort Collins, Colorado; Orlando and Tampa, Florida; Raleigh and Charlotte, North Carolina; York County, South Carolina; and Nashville, Tennessee.

Meritage has designed and built more than 80,000 homes in its 28-year history, and has a reputation for its distinctive style, quality construction, and positive customer experience. Meritage is the industry leader in energy-efficient homebuilding and has received the U.S. Environmental Protection Agency's ENERGY STAR Partner of the Year for Sustained Excellence Award in 2013 and 2014, for innovation and industry leadership in energy efficient homebuilding. Meritage was the first national homebuilder to be 100 percent ENERGY STAR qualified in every home it builds, and far exceeds ENERGY STAR standards today.

For more information, visit www.meritagehomes.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management's expectations for community count and strong earnings growth in the second half of 2014, the anticipated closing of the Legendary Communities acquisition and the expected growth rate for closings and revenue from that acquisition with potential earnings accretion.

Such statements are based upon the current beliefs and expectations of Company management, and current market conditions, which are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations. Meritage's business is subject to a number of risks and uncertainties. As a result of those risks and uncertainties, the Company's stock and note prices may fluctuate dramatically. The risks and uncertainties include but are not limited to the following: the availability of finished lots and undeveloped land; interest rates and changes in the availability and pricing of residential mortgages; fluctuations in the availability and cost of labor; changes in tax laws that adversely impact our homebuyers; the ability of our potential buyers to sell their existing homes; cancellation rates and home prices in our markets; weakness in the homebuilding market resulting from an unexpected setback in the current economic recovery; inflation in the cost of materials used to construct homes; the adverse effect of slower order absorption rates; potential write-downs or write-offs of assets, including pre-acquisition costs and deposits; a change to the feasibility of projects under option or contract that could result in the write-off of option deposits; our potential exposure to natural disasters; competition; the adverse impacts of cancellations resulting from relatively small deposits relating to our sales contracts; construction defect and home warranty claims; our success at prevailing in litigation matters and on contested tax positions; our ability to obtain performance bonds in connection with our development work; the liquidity of our joint ventures and the ability of our joint venture partners to meet their obligations to us and the joint venture; the loss of key personnel; our failure to comply with laws and regulations; our lack of geographic diversification; fluctuations in quarterly operating results; our financial leverage and level of indebtedness and our ability to take certain actions because of restrictions contained in the indentures for our senior notes and our ability to raise additional capital when and if needed; our credit ratings; successful integration of future acquisitions; our compliance with government regulations and the effect of legislative or other initiatives that seek to restrain growth of new housing construction or similar measures; acts of war; the replication of our "Green" technologies by our competitors; our exposure to information technology failures and security breaches; and other factors identified in documents filed by the company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2013 and our most recent quarterly report on form 10-Q under the caption "Risk Factors," which can be found on our website.

Meritage Homes Corporation
Brent Anderson, 972-580-6360
VP Investor Relations
Brent.Anderson@meritagehomes.com

Source: Meritage Homes Corporation

Released July 24, 2014