mth-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-9977

Meritage Homes Corporation

(Exact Name of Registrant as Specified in its Charter)

Maryland

86-0611231

(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification No.)

8800 E. Raintree Drive, Suite 300, Scottsdale, Arizona 85260

(Address of Principal Executive Offices) (Zip Code)

(480) 515-8100

(Registrant’s telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock $.01 par value	MTH	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by a checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	ý	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Common shares outstanding as of July 24, 2023: 36,765,267

MERITAGE HOMES CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2023

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022			3

Unaudited Consolidated Income Statements for the Three and Six Months Ended June 30, 2023 and 2022			4

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022			5

Notes to Unaudited Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22

Item 3. Quantitative and Qualitative Disclosures About Market Risk			33

Item 4. Controls and Procedures			33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			35

Item 1A. Risk Factors			35

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities			35

Items 3-4. Not Applicable

Item 5. Other Information			35

Item 6. Exhibits			37

SIGNATURES			38

INDEX OF EXHIBITS			38

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)



	June 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	1,163,243	$	861,561

Other receivables	210,068		215,019
Real estate	4,348,600		4,358,263

Deposits on real estate under option or contract	70,984		76,729
Investments in unconsolidated entities	12,451		11,753
Property and equipment, net	47,312		38,635
Deferred tax assets, net	45,036		45,452
Prepaids, other assets and goodwill	167,947		164,689
Total assets	$	6,065,641	$	5,772,101
Liabilities
Accounts payable	$	276,123	$	273,267
Accrued liabilities	336,098		360,615
Home sale deposits	49,779		37,961

Loans payable and other borrowings	11,204		7,057
Senior notes, net	1,144,142		1,143,590
Total liabilities	1,817,346		1,822,490
Stockholders’ Equity
Preferred stock, par value $0.01. Authorized 10,000,000 shares; none issued and outstanding at June 30, 2023 and December 31, 2022	—		—
Common stock, par value $0.01. Authorized 125,000,000 shares; 36,765,267 and 36,571,393 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively	368		366
Additional paid-in capital	328,277		327,878
Retained earnings	3,919,650		3,621,367

Total stockholders’ equity	4,248,295		3,949,611
Total liabilities and stockholders’ equity	$	6,065,641	$	5,772,101

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED INCOME STATEMENTS

(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Homebuilding:
Home closing revenue	$	1,543,021	$	1,408,947	$	2,804,944	$	2,654,403
Land closing revenue	24,379		3,434		41,764		44,912
Total closing revenue	1,567,400		1,412,381		2,846,708		2,699,315
Cost of home closings	(1,166,041)		(964,208)		(2,145,503)		(1,832,015)
Cost of land closings	(24,202)		(2,784)		(40,147)		(33,469)
Total cost of closings	(1,190,243)		(966,992)		(2,185,650)		(1,865,484)
Home closing gross profit	376,980		444,739		659,441		822,388
Land closing gross profit	177		650		1,617		11,443
Total closing gross profit	377,157		445,389		661,058		833,831
Financial Services:
Revenue	6,210		5,139		11,941		9,811
Expense	(2,972)		(2,581)		(6,039)		(5,093)
(Loss)/earnings from financial services unconsolidated entities and other, net	(5,795)		1,521		(5,536)		2,695
Financial services (loss)/profit	(2,557)		4,079		366		7,413
Commissions and other sales costs	(95,798)		(69,383)		(178,644)		(134,923)
General and administrative expenses	(52,140)		(47,932)		(99,659)		(87,927)

Interest expense	—		—		—		(41)
Other income/(expense), net	12,862		(458)		21,706		(775)

Earnings before income taxes	239,524		331,695		404,827		617,578
Provision for income taxes	(52,688)		(81,611)		(86,690)		(150,240)
Net earnings	$	186,836	$	250,084	$	318,137	$	467,338
Earnings per common share:
Basic	$	5.08	$	6.82	$	8.67	$	12.69
Diluted	$	5.02	$	6.77	$	8.56	$	12.55
Weighted average number of shares:
Basic	36,765		36,647		36,715		36,820
Diluted	37,191		36,962		37,149		37,239

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities:
Net earnings	$	318,137	$	467,338
Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:
Depreciation and amortization	11,196		11,723
Stock-based compensation	10,401		10,045

Equity in earnings from unconsolidated entities	(2,882)		(2,145)

Distributions of earnings from unconsolidated entities	3,418		2,339
Other	2,148		(601)
Changes in assets and liabilities:
Decrease/(increase) in real estate	14,950		(729,450)
Decrease/(increase) in deposits on real estate under option or contract	5,491		(7,288)
Decrease/(increase) in other receivables, prepaids and other assets	8,962		(90,419)
(Decrease)/increase in accounts payable and accrued liabilities	(27,754)		113,421
Increase in home sale deposits	11,818		18,210
Net cash provided by/(used in) operating activities	355,885		(206,827)
Cash flows from investing activities:
Investments in unconsolidated entities	(1,277)		(5,653)
Distributions of capital from unconsolidated entities	43		—
Purchases of property and equipment	(21,134)		(12,852)
Proceeds from sales of property and equipment	228		247
Maturities/sales of investments and securities	750		1,032
Payments to purchase investments and securities	(750)		(1,032)
Net cash used in investing activities	(22,140)		(18,258)
Cash flows from financing activities:

Repayment of loans payable and other borrowings	(2,209)		(11,800)




Dividends paid	(19,854)		—
Repurchase of shares	(10,000)		(109,303)

Net cash used in financing activities	(32,063)		(121,103)
Net increase/(decrease) in cash and cash equivalents	301,682		(346,188)
Cash and cash equivalents, beginning of period	861,561		618,335
Cash and cash equivalents, end of period	$	1,163,243	$	272,147

See Supplemental Disclosure of Cash Flow Information in Note 13.

See accompanying notes to unaudited consolidated financial statements

MERITAGE HOMES CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Organization. Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family attached and detached homes. We primarily build in historically high-growth regions of the United States and offer a variety of entry-level and first move-up homes. We have operations in three regions: West, Central and East, which are comprised of ten states: Arizona, California, Colorado, Utah, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee. We also operate a financial services reporting segment. In this segment, we offer title and escrow, mortgage, and insurance services. Carefree Title Agency, Inc. ("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers in certain states. Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue. Meritage Homes Insurance Agency, Inc. (“Meritage Insurance”), our wholly-owned insurance broker, works in collaboration with insurance companies nationwide to offer homeowners insurance and other insurance products to our homebuyers. Our financial services operation also provides mortgage services to our homebuyers through an unconsolidated joint venture.

We commenced our homebuilding operations in 1985 through our predecessor company, Monterey Homes. Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation. Since that time, we have engaged in homebuilding and related activities. Meritage Homes Corporation operates as a holding company and has no independent assets or operations. Its homebuilding construction, development and sales activities are conducted through its subsidiaries. Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets. At June 30, 2023, we were actively selling homes in 291 communities, with base prices ranging from approximately $240,000 to $1,400,000.

Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022. The unaudited consolidated financial statements include the accounts of Meritage Homes and those of our consolidated subsidiaries, partnerships and other entities in which we have a controlling financial interest, and of variable interest entities (see Note 3) in which we are deemed the primary beneficiary (collectively, “us”, “we”, “our” and “the Company”). Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full fiscal year.

Cash and Cash Equivalents. Liquid investments with an initial maturity of three months or less are classified as cash equivalents. Amounts in transit from title companies or closing agents for home closings of approximately $51.7 million and $161.5 million are included in Cash and cash equivalents at June 30, 2023 and December 31, 2022, respectively.

Real Estate. Real estate inventory is stated at cost unless the community or land is determined to be impaired, at which point the inventory is written down to fair value as required by Accounting Standards Codification (“ASC”) 360-10, Property, Plant and Equipment (“ASC 360-10”). Real estate inventory includes the costs of land acquisition, land development and home construction, capitalized interest, real estate taxes, and direct overhead costs incurred during development and home construction that benefit the entire community, less impairments, if any. Land and development costs are typically allocated and transferred to homes when home construction begins. Home construction costs are accumulated on a per-home basis, while selling and marketing costs are expensed as incurred. Cost of home closings includes the specific construction costs of the home and all related allocated land acquisition, land development and other common costs (both incurred and estimated to be incurred) that are allocated based upon the total number of homes expected to be closed in each community or phase. Any changes to the estimated total development costs of a community or phase are allocated to the remaining homes in that community or phase. When a home closes, we may have incurred costs for goods and services that have not yet been paid. We accrue a liability to capture such obligations in connection with the home closing which is charged directly to Cost of home closings.

We capitalize qualifying interest to inventory during the development and construction periods. Capitalized interest is included in Cost of closings when the related inventory is closed. Included within our Real estate inventory is land held for development and land held for sale. Land held for development primarily represents land and land development costs related to land where development activity is not currently underway but is expected to begin in the future. For these parcels, we have chosen not to currently develop certain land holdings as they typically represent a portion or phases of a larger land parcel that we plan to build out over several years. We do not capitalize interest for these inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile project budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, sales orders absorptions that differ from our expectations, increases in costs that have not yet been contracted, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control, including weather. To address uncertainty in these budgets, we assess, update and revise project budgets on a regular basis, utilizing the most current information available to estimate home construction and land development costs.

Typically, a community's life cycle ranges from three to five years, commencing with the acquisition of the land, continuing through the land development phase, if applicable, and concluding with the construction, sale and closing of the homes. Actual community lives will vary based on the size of the community, the sales orders absorption rates and whether the land purchased was raw, partially-developed or in finished status. Master-planned communities encompassing several phases and super-block land parcels may have significantly longer lives and projects involving smaller finished lot purchases may be significantly shorter.

All of our land inventory and related real estate assets are periodically reviewed for recoverability when certain criteria are met, but at least annually, as our inventory is considered “long-lived” in accordance with GAAP. Community-level reviews are performed quarterly to determine if indicators of potential impairment exist. If indicators of potential impairment exist and the undiscounted cash flows expected to be generated by an asset are lower than its carrying amount, impairment charges are recorded to write down the asset to its estimated fair value. The impairment of a community is allocated to each remaining unstarted lot in the community on a straight-line basis and is recognized in Cost of home closings in the period in which the impairment is determined. Our determination of fair value is based on projections and estimates. Changes in these expectations may lead to a change in the outcome of our impairment analysis, and actual results may also differ from our assumptions, although if financial metrics improve, we do not reverse impairments once recorded. See Note 2 for additional information related to real estate.

Deposits. Deposits paid related to land option and purchase contracts are recorded and classified as Deposits on real estate under option or contract until the related land is purchased. Deposits are reclassified as a component of Real estate at the time the deposit is used to offset the acquisition price of the land based on the terms of the underlying agreements. To the extent they are non-refundable, deposits are expensed to Cost of home closings if the land acquisition is terminated or no longer considered probable. Since our acquisition contracts typically do not require specific performance, we do not consider such contracts to be contractual obligations to purchase the land and our total exposure under such contracts is limited to the loss of any non-refundable deposits and any related capitalized costs. Our Deposits on real estate under option or contract were $71.0 million and $76.7 million as of June 30, 2023 and December 31, 2022, respectively. See Note 3 for additional information related to Deposits on real estate.

Goodwill. In accordance with ASC 350, Intangibles, Goodwill and Other ("ASC 350"), we analyze goodwill on an annual basis (or whenever indication of impairment exists) through a qualitative assessment to determine whether it is necessary to perform a goodwill impairment test. ASC 350 states that an entity may first assess qualitative factors to determine whether it is necessary to perform a goodwill impairment test. Such qualitative factors include: (1) macroeconomic conditions, such as a deterioration in general economic conditions, (2) industry and market considerations such as deterioration in the environment in which the entity operates, (3) cost factors such as increases in raw materials, labor costs, etc., and (4) overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings. If the qualitative analysis determines that additional impairment testing is required, a two-step impairment test in accordance with ASC 350 would be initiated. We continually evaluate our qualitative inputs to assess whether events and circumstances have occurred that indicate the goodwill balance may not be recoverable. See Note 9 for additional information on our goodwill assets.

Leases. We lease certain office space and equipment for use in our operations. We assess each of these contracts to determine whether the arrangement contains a lease as defined by ASC 842, Leases ("ASC 842"). In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. Leases that meet the criteria of ASC 842 are recorded on

our balance sheets as right-of-use ("ROU") assets and lease liabilities. ROU assets are classified within Prepaids, other assets and goodwill on the accompanying unaudited consolidated balance sheets, while lease liabilities are classified within Accrued liabilities on the accompanying unaudited consolidated balance sheets.

The table below outlines our ROU assets and lease liabilities (in thousands):


	As of
	June 30, 2023		December 31, 2022
ROU assets	$	21,787	$	19,129
Lease liabilities	24,753		22,782

Off-Balance Sheet Arrangements - Joint Ventures. We may participate in land development joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital, although our participation in such ventures is currently limited. See Note 4 for additional discussion of our investments in unconsolidated entities.

Off-Balance Sheet Arrangements - Other. In the normal course of business, we may acquire lots from various development entities pursuant to purchase and option agreements. The purchase price generally approximates the market price at the date the contract is executed (with possible future escalators) and may have staggered purchase schedules. See Note 3 for additional information on these off-balance sheet arrangements.

Surety Bonds and Letters of Credit. We provide surety bonds and letters of credit in support of our obligations relating to the development of our projects and other corporate purposes in lieu of cash deposits. The amount of these obligations outstanding at any time varies depending on the stage and level of our development activities. Surety bonds are generally not wholly released until all development activities under the bond are complete. In the event a bond or letter of credit is drawn upon, we would be obligated to reimburse the issuer for any amounts advanced under the bond or letter of credit. We believe it is unlikely that any significant amounts of these bonds or letters of credit will be drawn upon.

The table below outlines our surety bond and letter of credit obligations (in thousands):


	As of
	June 30, 2023				December 31, 2022
	Outstanding		Estimated work remaining to complete		Outstanding		Estimated work remaining to complete
Sureties:

Sureties related to owned projects and lots under contract	$	968,729	$	689,160	$	926,928	$	616,028
Total Sureties	$	968,729	$	689,160	$	926,928	$	616,028
Letters of Credit (“LOCs”):

LOCs for land development	35,056		N/A		49,442		N/A
LOCs for general corporate operations	5,000		N/A		5,000		N/A
Total LOCs	$	40,056	N/A		$	54,442	N/A

Accrued Liabilities. Accrued liabilities at June 30, 2023 and December 31, 2022 consisted of the following (in thousands):


	As of
	June 30, 2023		December 31, 2022
Accruals related to real estate development and construction activities	$	151,883	$	139,447
Payroll and other benefits	76,642		110,338
Accrued interest	6,841		7,026
Accrued taxes	21,773		25,182
Warranty reserves	36,215		35,575
Lease liabilities	24,753		22,782
Other accruals	17,991		20,265
Total	$	336,098	$	360,615

Warranty Reserves. We provide home purchasers with limited warranties against certain building defects and we have certain obligations related to those post-construction warranties for closed homes. The specific terms and conditions of these limited warranties vary by state, but overall the nature of the warranties include a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home. With the assistance of an actuary, we have estimated these reserves for the structural warranty based on the number of homes still under warranty and historical data and trends for our geographies. We may use industry data with respect to similar product types and geographic areas in markets where our experience is incomplete to draw a meaningful conclusion. We regularly review our warranty reserves and adjust them, as necessary, to reflect changes in trends as information becomes available. Based on such reviews of warranty costs incurred, we did not adjust the warranty reserve balance in the three or six months ended June 30, 2023 or 2022. Included in the warranty reserve balances at June 30, 2023 and December 31, 2022 are case-specific reserves for warranty matters, as discussed in Note 15.

A summary of changes in our warranty reserves follows (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023		2022
Balance, beginning of period	$	37,063	$	26,667		$	35,575	$	26,264
Additions to reserve from new home deliveries	5,982		5,308			10,388		9,836
Warranty claims and recoveries	(6,830)		(538)		(1)	(9,748)		(4,663)		(1)
Adjustments to pre-existing reserves	—		—			—		—
Balance, end of period	$	36,215	$	31,437		$	36,215	$	31,437

(1) Includes recoveries for costs incurred over several years on a foundation design and performance matter that affected a single community in Texas.

Warranty reserves are included in Accrued liabilities on the accompanying unaudited consolidated balance sheets, and additions and adjustments to the reserves are included in Cost of home closings within the accompanying unaudited consolidated income statements. These reserves are intended to cover costs associated with our contractual and statutory warranty obligations, which include, among other items, claims involving defective workmanship and materials. We believe that our total reserves, coupled with our contractual relationships and rights with our trades and the insurance we and our trades maintain, are sufficient to cover our general warranty obligations. However, unanticipated changes in regulatory, legislative, weather, environmental or other conditions could have an impact on our actual warranty costs, and future costs could differ significantly from our estimates.

Revenue Recognition. In accordance with ASC 606, Revenue from Contracts with Customers, we apply the following steps in determining the timing and amount of revenue to recognize: (1) identify the contract with our customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, if applicable; and (5) recognize revenue when (or as) we satisfy the performance obligations. The performance obligations and subsequent revenue recognition for our three sources of revenue are outlined below:

•Revenue from home closings is recognized when closings have occurred, the risks and rewards of ownership are transferred to the buyer, and we have no continuing involvement with the property, which is generally upon the close of escrow. Revenue is reported net of any discounts and incentives.

•Revenue from land closings is recognized when a significant down payment is received, title passes, and collectability of the receivable, if any, is reasonably assured, and we have no continuing involvement with the property, which is generally upon the close of escrow.

•Revenue from financial services is recognized when closings have occurred and all financial services have been rendered, which is generally upon the close of escrow.

Home closing and land closing revenue expected to be recognized in any future year related to remaining performance obligations (if any) and the associated contract liabilities expected to be recognized as revenue, excluding revenue pertaining to contracts that have an original expected duration of one year or less, is not material. Revenue from financial services includes estimated future insurance policy renewal commissions as our performance obligations are satisfied upon issuance of the initial policy with a third party broker. The related contract assets for these estimated future renewal commissions are not material at

June 30, 2023 and December 31, 2022. Our three sources of revenue are disaggregated by type in the accompanying unaudited consolidated income statements.

Recent Accounting Pronouncements.

There are no recent accounting pronouncements that are expected to have a material impact on our financial statements or financial statement disclosures.

NOTE 2 — REAL ESTATE AND CAPITALIZED INTEREST

Real estate consists of the following (in thousands):


	As of
	June 30, 2023		December 31, 2022
Homes under contract under construction (1)	$	987,983	$	822,428
Unsold homes, completed and under construction (1)	932,984		1,155,543
Model homes (1)	113,919		97,198
Finished home sites and home sites under development (2) (3)	2,313,714		2,283,094
Total	$	4,348,600	$	4,358,263

(1)Includes the allocated land and land development costs associated with each lot for these homes.

(2)Includes raw land, land held for development and land held for sale, less impairments, if any. We do not capitalize interest for inactive assets, and all ongoing costs of land ownership (i.e. property taxes, homeowner association dues, etc.) are expensed as incurred.

(3)Includes land held for sale of $8.6 million and $66.8 million as of June 30, 2023 and December 31, 2022, respectively.

Subject to sufficient qualifying assets, we capitalize our development period interest costs incurred to applicable qualifying assets in connection with our real estate development and construction activities. Capitalized interest is allocated to active real estate when incurred and charged to Cost of closings when the related property is delivered. A summary of our capitalized interest is as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Capitalized interest, beginning of period	$	62,452	$	59,082	$	60,169	$	56,253
Interest incurred	15,144		15,171		30,174		30,384
Interest expensed	—		—		—		(41)
Interest amortized to cost of home and land closings	(16,518)		(12,794)		(29,265)		(25,137)
Capitalized interest, end of period	$	61,078	$	61,459	$	61,078	$	61,459

NOTE 3 — VARIABLE INTEREST ENTITIES AND CONSOLIDATED REAL ESTATE NOT OWNED

We enter into purchase and option agreements for land or lots as part of the normal course of business. These purchase and option agreements enable us to acquire properties at one or multiple future dates at pre-determined prices. We believe these acquisition structures allow us to better leverage our balance sheet and reduce our financial risk associated with land acquisitions. In accordance with ASC 810, Consolidation, we evaluate all purchase and option agreements for land to determine whether they are a variable interest entity ("VIE"), and if so, whether we are the primary beneficiary. Although we do not have legal title to the underlying land, if we are the primary beneficiary we are required to consolidate the VIE in our financial statements and reflect its assets and liabilities as Real estate not owned and Liabilities related to real estate not owned, respectively. As a result of our analyses, we determined that as of June 30, 2023 and December 31, 2022, we were not the primary beneficiary of any VIEs from which we have acquired rights to land or lots under option contracts.

The table below presents a summary of our lots under option at June 30, 2023 (dollars in thousands):


	Projected Number of Lots	Purchase Price		Option/ Earnest Money Deposits–Cash
Purchase and option contracts recorded on balance sheet as Real estate not owned	—	$	—	$	—
Option contracts — non-refundable deposits, committed (1)	6,890	400,805		37,672
Purchase contracts — non-refundable deposits, committed (1)	5,408	154,591		19,930
Purchase and option contracts —refundable deposits, committed	2,109	158,893		2,035
Total committed	14,407	714,289		59,637
Purchase and option contracts — refundable deposits, uncommitted (2)	21,171	779,805		11,347
Total lots under contract or option	35,578	$	1,494,094	$	70,984
Total purchase and option contracts not recorded on balance sheet (3)	35,578	$	1,494,094	$	70,984	(4)

(1)Deposits are non-refundable except if certain contractual conditions are not performed by the selling party.

(2)Deposits are refundable at our sole discretion. We have not completed our acquisition evaluation process and we have not internally committed to purchase these lots.

(3)Except for our specific performance contracts recorded on the accompanying unaudited consolidated balance sheets as Real estate not owned (if any), none of our purchase or option contracts require us to purchase lots.

(4)Amount is reflected on the accompanying unaudited consolidated balance sheets in Deposits on real estate under option or contract as of June 30, 2023.

Generally, our options to purchase lots remain effective so long as we purchase a pre-established minimum number of lots on a pre-determined schedule in accordance with each respective agreement. Although the pre-established number is typically structured to approximate our expected rate of home construction starts, during a weakened homebuilding market, we may purchase lots at an absorption level that exceeds our expected orders and home starts pace to meet the pre-established minimum number of lots or restructure our original contract to terms that more accurately reflect our revised orders pace expectations. During a strong homebuilding market, we may accelerate our pre-established minimum purchases if allowed by the contract.

NOTE 4 - INVESTMENTS IN UNCONSOLIDATED ENTITIES

We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile, optimizing deal structure for the impacted parties and leveraging our capital. While purchasing land through a joint venture can be beneficial, currently we do not view joint ventures as critical to the success of our homebuilding operations. Our joint venture partners generally are other homebuilders, land sellers or other real estate investors. We generally do not have a controlling interest in these ventures, which means our joint venture partners could cause the venture to take actions we disagree with or fail to take actions we believe should be undertaken, including the sale of the underlying property to repay debt or recoup all or part of the partners' investments. Based on the structure of these joint ventures, they may or may not be consolidated into our results. As of June 30, 2023, we had two active equity-method land joint ventures and one mortgage joint venture, which is engaged in mortgage activities and primarily provides services to our homebuyers.

Summarized condensed combined financial information related to unconsolidated joint ventures that are accounted for using the equity method was as follows (in thousands):


	As of
	June 30, 2023		December 31, 2022
Assets:
Cash	$	3,114	$	3,389
Real estate	20,301		17,965
Other assets	5,720		11,653
Total assets	$	29,135	$	33,007
Liabilities and equity:
Accounts payable and other liabilities	$	5,313	$	11,397

Equity of:
Meritage (1)	11,637		10,356
Other	12,185		11,254
Total liabilities and equity	$	29,135	$	33,007


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue	$	11,710	$	9,840	$	21,226	$	19,078
Costs and expenses	(9,099)		(7,936)		(17,450)		(16,208)
Net earnings of unconsolidated entities	$	2,611	$	1,904	$	3,776	$	2,870
Meritage’s share of pre-tax earnings (1) (2)	$	1,536	$	1,208	$	2,882	$	2,192

(1)Balance represents Meritage’s interest, as reflected in the financial records of the respective joint ventures. This balance may differ from the balance reported in the accompanying unaudited consolidated financial statements due to the following reconciling items: (i) timing differences for revenue and distributions recognition, (ii) step-up basis and corresponding amortization, (iii) capitalization of interest on qualified assets, (iv) income deferrals as discussed in Note (2) below and (v) the cessation of allocation of losses from joint ventures in which we have previously written down our investment balance to zero and where we have no commitment to fund additional losses.

(2)Our share of pre-tax earnings/(loss) from our mortgage joint venture is recorded in (Loss)/earnings from financial services unconsolidated entities and other, net on the accompanying unaudited consolidated income statements. Our share of pre-tax earnings/(loss) from all other joint ventures is recorded in Other income/(expense), net on the accompanying unaudited consolidated income statements and excludes joint venture profit related to lots we purchased from the joint ventures, if any. Such profit is deferred until homes are delivered by us and title passes to a homebuyer.

NOTE 5 — LOANS PAYABLE AND OTHER BORROWINGS

Loans payable and other borrowings consist of the following (in thousands):


	As of
	June 30, 2023		December 31, 2022
Other borrowings, real estate notes payable (1)	$	11,204	$	7,057
$835.0 million unsecured revolving credit facility	—		—
Total	$	11,204	$	7,057

(1)Reflects balance of non-recourse notes payable in connection with land purchases.

The Company entered into an amended and restated unsecured revolving credit facility agreement ("Credit Facility") in 2014 that has been amended from time to time. In June 2023, the Credit Facility was amended to increase the facility size to $835.0 million, extend the maturity date to June 2, 2028, amend the accordion feature to permit the facility to increase by up to fifty percent of the facility size, increase the letter of credit sublimit up to the maximum size of the facility, eliminate the

liquidity and interest coverage covenant and adjust certain covenant basket amounts. The Credit Facility's aggregate commitment is $835.0 million with an accordion feature permitting the size of the facility to increase to a maximum of $1.3 billion, subject to certain conditions, including the availability of additional bank commitments. Borrowings under the Credit Facility bear interest at the Company's option, at either (1) term SOFR (based on 1, 3, or 6 month interest periods, as selected by the Company) plus a 10 basis point adjustment plus an applicable margin (ranging from 125 basis points to 175 basis points (the "applicable margin")) based on the Company's leverage ratio as determined in accordance with a pricing grid, (2) the higher of (i) the prime lending rate ("Prime"), (ii) an overnight bank rate plus 50 basis points and (iii) term SOFR (based on a 1 month interest period) plus a 10 basis point adjustment plus 1%, in each case plus a margin ranging from 25 basis points to 75 basis points based on the Company's leverage in accordance with a pricing grid, or (3) daily simple SOFR plus a 10 basis point adjustment plus the applicable margin. At June 30, 2023, the interest rate on outstanding borrowings under the Credit Facility would have been 6.490% per annum, calculated in accordance with option (1) discussed previously and using the 1 month term SOFR. We are obligated to pay a fee on the undrawn portion of the Credit Facility at a rate equal to the applicable margin then in effect.

The Credit Facility also contains certain financial covenants, including (a) a minimum tangible net worth requirement of $2.8 billion (which amount is subject to increase over time based on subsequent earnings and proceeds from equity offerings), and (b) a maximum leverage covenant that prohibits the leverage ratio (as defined therein) from exceeding 60%. We were in compliance with all Credit Facility covenants as of June 30, 2023.

We had no outstanding borrowings under the Credit Facility as of June 30, 2023 and December 31, 2022. There were no borrowings or repayments under the Credit Facility during the three and six months ended June 30, 2023 and 2022. As of June 30, 2023, we had outstanding letters of credit issued under the Credit Facility totaling $40.1 million, leaving $794.9 million available under the Credit Facility to be drawn.

NOTE 6 — SENIOR NOTES, NET

Senior notes, net consist of the following (in thousands):


	As of
	June 30, 2023		December 31, 2022
6.00% senior notes due 2025. At June 30, 2023 and December 31, 2022 there was approximately $1,568 and $1,977 in net unamortized premium, respectively.	401,568		401,977
5.125% senior notes due 2027	300,000		300,000
3.875% senior notes due 2029	450,000		450,000
Net debt issuance costs	(7,426)		(8,387)
Total	$	1,144,142	$	1,143,590

The indentures for all of our senior notes contain non-financial covenants including, among others, limitations on the amount of secured debt we may incur, and limitations on sale and leaseback transactions and mergers. We were in compliance with all such covenants as of June 30, 2023.

Obligations to pay principal and interest on the senior notes are guaranteed by substantially all of our wholly-owned subsidiaries (each a “Guarantor” and, collectively, the “Guarantor Subsidiaries”), each of which is directly or indirectly 100% owned by Meritage Homes Corporation. Such guarantees are full and unconditional, and joint and several. In the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the equity interests of any Guarantor then held by Meritage and its subsidiaries, then that Guarantor may be released and relieved of any obligations under its note guarantee. There are no significant restrictions on our ability or the ability of any Guarantor to obtain funds from their respective subsidiaries, as applicable, by dividend or loan. We do not provide separate financial statements of the Guarantor Subsidiaries because Meritage (the parent company) has no independent assets or operations and the guarantees are full and unconditional and joint and several. Subsidiaries of Meritage Homes Corporation that are non-guarantor subsidiaries are, individually and in the aggregate, minor.

NOTE 7 — FAIR VALUE DISCLOSURES

ASC 820-10, Fair Value Measurement ("ASC 820"), defines fair value, establishes a framework for measuring fair value and addresses required disclosures about fair value measurements. This standard establishes a three-level hierarchy for fair value measurements based upon the significant inputs used to determine fair value. Observable inputs are those which are obtained from market participants external to the Company while unobservable inputs are generally developed internally, utilizing management’s estimates, assumptions and specific knowledge of the assets/liabilities and related markets. The three levels are defined as follows:

•Level 1 — Valuation is based on quoted prices in active markets for identical assets and liabilities.

•Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market.

•Level 3 — Valuation is derived from model-based techniques in which at least one significant input is unobservable and based on the company’s own estimates about the assumptions that market participants would use to value the asset or liability.

If the only observable inputs are from inactive markets or for transactions which the Company evaluates as “distressed”, the use of Level 1 inputs should be modified by the Company to properly address these factors, or the reliance of such inputs may be limited, with a greater weight attributed to Level 3 inputs.

Financial Instruments: The fair value of our fixed-rate debt is derived from quoted market prices by independent dealers (Level 2 inputs as per the discussion above) and is as follows (in thousands):


	As of
	June 30, 2023				December 31, 2022
	Aggregate Principal		Estimated Fair Value		Aggregate Principal		Estimated Fair Value
6.00% senior notes due 2025	$	400,000	$	399,000	$	400,000	$	397,520
5.125% senior notes due 2027	$	300,000	$	287,040	$	300,000	$	283,500
3.875% senior notes due 2029	$	450,000	$	397,125	$	450,000	$	380,610

Due to the short-term nature of other financial assets and liabilities, including our Loans payable and other borrowings, we consider the carrying amounts of our other short-term financial instruments to approximate fair value.

Non-Financial Instruments: Our Real estate assets are Level 3 instruments that are required to be recorded at fair value on non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. Refer to Note 1 for information regarding the valuation of these assets.

NOTE 8 — EARNINGS PER SHARE

Basic and diluted earnings per common share were calculated as follows (in thousands, except per share amounts):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Basic weighted average number of shares outstanding	36,765		36,647		36,715		36,820
Effect of dilutive securities:

Unvested restricted stock	426		315		434		419
Diluted average shares outstanding	37,191		36,962		37,149		37,239
Net earnings	$	186,836	$	250,084	$	318,137	$	467,338


Basic earnings per share	$	5.08	$	6.82	$	8.67	$	12.69
Diluted earnings per share	$	5.02	$	6.77	$	8.56	$	12.55

NOTE 9 — ACQUISITIONS AND GOODWILL

Goodwill. In prior years, we have entered new markets through the acquisition of the homebuilding assets and operations of local/regional homebuilders in Georgia, South Carolina and Tennessee. As a result of these transactions, we recorded approximately $33.0 million of goodwill. Goodwill represents the excess purchase price of our acquisitions over the fair value of the net assets acquired. Our acquisitions were recorded in accordance with ASC 805, Business Combinations, and ASC 820, using the acquisition method of accounting. The purchase price for acquisitions was allocated based on estimated fair value of the assets and liabilities at the date of the acquisition. The combined excess purchase price of our acquisitions over the fair value of the net assets is classified as goodwill and is included in our unaudited consolidated balance sheets in Prepaids, other assets and goodwill. In accordance with ASC 350, we assess the recoverability of goodwill annually, or more frequently, if impairment indicators are present.

A summary of the carrying amount of goodwill follows (in thousands):


	West		Central		East		Financial Services		Corporate		Total
Balance at December 31, 2022	$	—	$	—	$	32,962	$	—	$	—	$	32,962
Additions	—		—		—		—		—		—

Balance at June 30, 2023	$	—	$	—	$	32,962	$	—	$	—	$	32,962

NOTE 10 — STOCKHOLDERS’ EQUITY

A summary of changes in stockholders’ equity is presented below (in thousands):


	Six Months Ended June 30, 2023
	(In thousands)
	Number of Shares	Common Stock		Additional Paid-In Capital		Retained Earnings		Total
Balance at December 31, 2022	36,571	$	366	$	327,878	$	3,621,367	$	3,949,611
Net earnings	—	—		—		131,301		131,301
Stock-based compensation expense	—	—		6,225		—		6,225
Issuance of stock	287	3		(3)		—		—
Dividends declared	—	—		—		(9,927)		(9,927)
Share repurchases	(93)	(1)		(9,999)		—		(10,000)
Balance at March 31, 2023	36,765	$	368	$	324,101	$	3,742,741	$	4,067,210
Net earnings	—	—		—		186,836		186,836
Stock-based compensation expense	—	—		4,176		—		4,176

Dividends declared	—	—		—		(9,927)		(9,927)

Balance at June 30, 2023	36,765	$	368	$	328,277	$	3,919,650	$	4,248,295


	Six Months Ended June 30, 2022
	(In thousands)
	Number of Shares	Common Stock		Additional Paid-In Capital		Retained Earnings		Total
Balance at December 31, 2021	37,341	$	373	$	414,841	$	2,629,175	$	3,044,389
Net earnings	—	—		—		217,254		217,254
Stock-based compensation expense	—	—		5,975		—		5,975
Issuance of stock	392	4		(4)		—		—

Share repurchases	(1,038)	(10)		(99,293)		—		(99,303)
Balance at March 31, 2022	36,695	$	367	$	321,519	$	2,846,429	$	3,168,315
Net earnings	—	—		—		250,084		250,084
Stock-based compensation expense	—	—		4,070		—		4,070


Share repurchases	(128)	(1)		(9,999)		—		(10,000)
Balance at June 30, 2022	36,567	366		315,590		3,096,513		3,412,469

During the three months ended June 30, 2023, our Board of Directors approved, and we paid, a quarterly cash dividend on common stock of $0.27 per share. Quarterly dividends declared and paid during the six months ended June 30, 2023 totaled $0.54 per share. There were no such transactions in the three and six months ended June 30, 2022.

NOTE 11 — STOCK BASED AND DEFERRED COMPENSATION

We have a stock compensation plan, the Meritage Homes Corporation 2018 Stock Incentive Plan (the “2018 Plan"), that was approved by our Board of Directors and our stockholders and adopted in May 2018. In May 2023, the Board of Directors and stockholders approved an amendment to the Plan to increase the number of shares available for issuance by 800,000. The 2018 Plan is administered by our Board of Directors and allows for the grant of stock appreciation rights, restricted stock awards, restricted stock units, performance share awards and performance-based awards in addition to non-qualified and incentive stock options. All available shares from expired, terminated, or forfeited awards that remained under prior plans were merged into and became available for grant under the 2018 Plan. The 2018 Plan authorizes awards to officers, key employees, non-employee directors and consultants. The 2018 Plan authorizes 7,400,000 shares of stock to be awarded, of which 1,308,894 shares remain available for grant at June 30, 2023. We believe that such awards provide a means of long-term compensation to attract and retain qualified employees and better align the interests of our employees with those of our stockholders. Non-vested stock awards are usually granted with a five-year ratable vesting period for employees, a three-year cliff vesting for both restricted stock and performance-based awards granted to senior executive officers and either a three-year cliff vesting or one-year vesting for non-employee directors, dependent on their start date.

Compensation cost related to time-based restricted stock awards is measured as of the closing price on the date of grant and is expensed, less forfeitures, on a straight-line basis over the vesting period of the award. Compensation cost related to performance-based restricted stock awards is also measured as of the closing price on the date of grant but is expensed in accordance with ASC 718-10-25-20, Compensation – Stock Compensation ("ASC 718"), which requires an assessment of probability of attainment of the performance target. As our performance targets are dependent on performance over a specified measurement period, once we determine that the performance target outcome is probable, the cumulative expense is recorded immediately with the remaining expense recorded on a straight-line basis through the end of the award vesting period. A portion of the performance-based restricted stock awards granted to our executive officers contain market conditions as defined by ASC 718. ASC 718 requires that compensation expense for stock awards with market conditions be expensed based on a derived grant date fair value and expensed over the service period. We engage a third party to perform a valuation analysis on the awards containing market conditions and our associated expense with those awards is based on the derived fair value from that analysis and is expensed straight-line over the service period of the awards. Below is a summary of stock-based compensation expense and stock award activity (dollars in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Stock-based compensation expense	$	4,176	$	4,070	$	10,401	$	10,045
Non-vested shares granted	2,100		—		180,412		264,862
Performance-based non-vested shares granted	—		—		42,964		40,004

Performance-based shares issued in excess of target shares granted (1)	—		—		26,167		37,146
Restricted stock awards vested (includes performance-based awards)	—		—		287,171		392,160

(1)Performance-based shares that vested and were issued as a result of performance achievement exceeding the originally established targeted number of shares related to respective performance metrics.

The following table includes additional information regarding our stock compensation plan (dollars in thousands):


	As of
	June 30, 2023		December 31, 2022
Unrecognized stock-based compensation cost	$	36,709	$	29,187
Weighted average years expense recognition period	2.12		1.98
Total equity awards outstanding (1)	739,109		803,769

(1)Includes unvested restricted stock awards, restricted stock units and performance-based awards (assuming 100%/target payout).

We also offer a non-qualified deferred compensation plan ("deferred compensation plan") to highly compensated employees in order to allow them additional pre-tax income deferrals above and beyond the limits that qualified plans, such as 401(k) plans, impose on highly compensated employees. We do not currently offer a contribution match on the deferred compensation plan. All contributions to the plan to date have been funded by the employees and, therefore, we have no associated expense related to the deferred compensation plan for the three and six months ended June 30, 2023 or 2022, other than minor administrative costs.

NOTE 12 — INCOME TAXES

Components of the income tax provision are as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Federal	$	41,831	$	67,118	$	68,271	$	123,463
State	10,857		14,493		18,419		26,777
Total	$	52,688	$	81,611	$	86,690	$	150,240

The effective tax rate for the three and six months ended June 30, 2023 was 22.0% and 21.4%, and for the three and six months ended June 30, 2022 was 24.6% and 24.3%, respectively. The lower tax rate for the three and six months ended June 30, 2023 reflects the increased §45L energy-efficient homes federal tax credit on qualifying homes under the Internal Revenue Code ("IRC") enacted in the Inflation Reduction Act ("IRA") in August 2022. There were no such credits available in the first six months of 2022.

The IRA retroactively extended the IRC §45L energy-efficient homes federal tax credit to homes delivered from January 1, 2022 through December 31, 2032, modified the energy standards required to qualify for the tax credit and increased the per-home credit amount starting in 2023. Among other provisions, the IRA also created a 15% corporate alternative minimum tax on certain profits and a 1% excise tax on net stock repurchases. The alternative minimum tax and excise tax were effective for us on January 1, 2023 and did not have a material impact on our consolidated financial statements for the three and six months ended June 30, 2023.

At June 30, 2023 and December 31, 2022, we have no unrecognized tax benefits. We believe our current income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change. Our policy is to accrue interest and penalties on unrecognized tax benefits and include them in the provision for income taxes.

We determine our deferred tax assets and liabilities in accordance with ASC 740, Income Taxes. We evaluate our deferred tax assets, including the benefit from net operating losses ("NOLs"), by jurisdiction to determine if a valuation allowance is required. This evaluation considers, among other matters, the nature, frequency and severity of cumulative losses, forecasts of future profitability, the length of statutory carry forward periods, experiences with operating losses and experiences of utilizing tax credit carry forwards and tax planning alternatives. We have no NOLs or credit carryovers, and determined that no valuation allowance on our deferred tax assets is necessary at June 30, 2023.

At June 30, 2023, we have $11.0 million in income taxes payable and no income taxes receivable. The income taxes payable primarily consists of current federal and state tax accruals, net of current energy tax credits and estimated tax payments and is recorded in Accrued liabilities on the accompanying unaudited consolidated balance sheets at June 30, 2023.

We conduct business and are subject to tax in the U.S. both federally and in several states. With few exceptions, we are no longer subject to U.S. federal, state, or local income tax examinations by taxing authorities for years prior to 2018. We have one state income tax examination covering various years pending resolution at this time.

NOTE 13 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following table presents certain supplemental cash flow information (in thousands):


	Six Months Ended June 30,
	2023		2022
Cash paid during the year for:
Interest, net of interest capitalized	$	(934)	$	(1,282)
Income taxes paid	$	86,587	$	168,464
Non-cash operating activities:

Real estate acquired through notes payable	$	6,356	$	9,861

NOTE 14 — OPERATING AND REPORTING SEGMENTS

We operate with two principal business segments: homebuilding and financial services. As defined in ASC 280-10, Segment Reporting, we have ten homebuilding operating segments. The homebuilding segments are engaged in the business of acquiring and developing land, constructing homes, marketing and selling those homes and providing warranty and customer services. We aggregate our homebuilding operating segments into reporting segments based on similar long-term economic characteristics and geographical proximity. Our three reportable homebuilding segments are as follows:


			West:			Arizona, California, Colorado and Utah
			Central:			Texas
			East:			Florida, Georgia, North Carolina, South Carolina and Tennessee

Management’s evaluation of segment performance is based on homebuilding segment operating income, which we define as home and land closing revenue less cost of home and land closings, including land development and other land sales costs, commissions and other sales costs, and other general and administrative costs incurred by or allocated to each segment, including impairments. Each reportable segment follows the same accounting policies described in Note 1, “Organization and Basis of Presentation.” Operating results for each segment may not be indicative of the results for such segment had it been an independent, stand-alone entity for the periods presented.

The following segment information is in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Homebuilding revenue (1):
West	$	528,977	$	487,803	$	963,114	$	982,309
Central	458,709		424,036		884,159		779,660
East	579,714		500,542		999,435		937,346
Consolidated total	$	1,567,400	$	1,412,381	$	2,846,708	$	2,699,315
Homebuilding segment operating income:
West	$	52,283	$	115,403	$	91,092	$	236,259
Central	83,491		100,203		148,782		175,463
East	103,517		119,395		164,393		212,943
Total homebuilding segment operating income	239,291		335,001		404,267		624,665
Financial services segment profit	(2,557)		4,079		366		7,413
Corporate and unallocated costs (2)	(10,072)		(6,927)		(21,512)		(13,684)
Interest expense	—		—		—		(41)
Other income/(expense), net	12,862		(458)		21,706		(775)

Earnings before income taxes	$	239,524	$	331,695	$	404,827	$	617,578

(1)Homebuilding revenue includes the following land closing revenue, by segment:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Land closing revenue:
West	$	9,760	$	1,725	$	26,575	$	32,807
Central	1,908		1,709		2,478		9,505
East	12,711		—		12,711		2,600
Total	$	24,379	$	3,434	$	41,764	$	44,912

(2)Balance consists primarily of corporate costs and shared service functions such as finance and treasury that are not allocated to the homebuilding or financial services reporting segments.


	At June 30, 2023
	West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	14,119		$	8,962		$	47,903		$	—	$	—		$	70,984
Real estate	1,708,328			1,204,692			1,435,580			—		—			4,348,600
Investments in unconsolidated entities	74			2,847			8,697			—		833			12,451
Other assets	52,887		(1)	223,378		(2)	105,512		(3)	1,821		1,250,008		(4)	1,633,606
Total assets	$	1,775,408		$	1,439,879		$	1,597,692		$	1,821	$	1,250,841		$	6,065,641

(1)Balance consists primarily of cash and cash equivalents, prepaids and other assets and property and equipment, net.

(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.

(3)Balance consists primarily of cash and cash equivalents, goodwill (see Note 9), prepaids and other assets and property and equipment, net.

(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.


	At December 31, 2022
	West			Central			East			Financial Services		Corporate and Unallocated			Total
Deposits on real estate under option or contract	$	21,599		$	8,992		$	46,138		$	—	$	—		$	76,729
Real estate	1,775,879			1,298,455			1,283,929			—		—			4,358,263
Investments in unconsolidated entities	110			2,866			7,503			—		1,274			11,753
Other assets	99,267		(1)	241,470		(2)	132,181		(3)	1,536		850,902		(4)	1,325,356
Total assets	$	1,896,855		$	1,551,783		$	1,469,751		$	1,536	$	852,176		$	5,772,101

(1)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and property and equipment, net.

(2)Balance consists primarily of cash and cash equivalents, development reimbursements from local municipalities and prepaids and other assets.

(3)Balance consists primarily of cash and cash equivalents, goodwill, prepaids and other assets and property and equipment, net.

(4)Balance consists primarily of cash and cash equivalents, deferred tax assets and prepaids and other assets.

NOTE 15 — COMMITMENTS AND CONTINGENCIES

We are involved in various routine legal and regulatory proceedings, including, without limitation, claims and litigation alleging construction defects. In general, the proceedings are incidental to our business, and most exposure is subject to and should be covered by warranty and indemnity obligations of our consultants and subcontractors. Additionally, some such claims are also covered by insurance. With respect to the majority of pending litigation matters, our ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential material losses related to these matters are not considered probable. Historically, most disputes regarding warranty claims are resolved prior to litigation. We believe there are no pending legal or warranty matters as of June 30, 2023 that could have a material adverse impact upon our consolidated financial condition, results of operations or cash flows that have not been sufficiently reserved.

As discussed in Note 1 under the heading “Warranty Reserves”, we have case specific reserves within our $36.2 million of total warranty reserves related to alleged stucco defects in certain homes we constructed predominantly between 2006 and 2017 and HVAC condensation issues in limited geographies for homes constructed and delivered in 2021 and the first half of 2022. Our review and handling of these matters is ongoing and our estimate of and reserves for resolving them is based on internal data, our judgment and various assumptions and estimates. Due to the degree of judgment and the potential for variability in our underlying assumptions and data, as we obtain additional information, we may revise our estimate and thus our related reserves. As of June 30, 2023, after considering potential recoveries from the consultants and contractors involved and their insurers and the potential recovery under our general liability insurance policies, we believe our reserves are sufficient to cover the above mentioned matter. See Note 1 for information related to our warranty obligations.

Special Note of Caution Regarding Forward-Looking Statements

In passing the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress encouraged public companies to make “forward-looking statements” by creating a safe-harbor to protect companies from securities law liability in connection with forward-looking statements. We intend to qualify both our written and oral forward-looking statements for protection under the PSLRA.

The words “believe,” “expect,” “anticipate,” “forecast,” “plan,” “intend,” “may,” “will,” “should,” “could,” “estimate,” "target," and “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All statements we make other than statements of historical fact are forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements in this Annual Report include statements concerning our belief that we have ample liquidity; our goals, strategies and strategic initiatives including our all-spec strategy and the anticipated benefits relating thereto; our intentions and the expected benefits and advantages of our product and land positioning strategies, including with respect to our focus on the first-time and first move-up home buyer and housing demand for affordable homes; the benefits of and our intentions to use options to acquire land; our positions and our expected outcome relating to litigation and regulatory proceedings in general; our intentions to pay quarterly dividends; the sustainability of our tax positions; that we may repurchase our debt and equity securities; our non-use of derivative financial instruments; expectations regarding our industry and our business for the remainder of 2023 and beyond; the demand for and the pricing of our homes; our land and lot acquisition strategy (including that we will redeploy cash to acquire well-positioned finished lots and that we may participate in joint ventures or opportunities outside of our existing markets if opportunities arise and the benefits relating thereto); that we may expand into new markets; the availability of labor and materials for our operations; that we may seek additional debt or equity capital; our expectation that existing guarantees, letters of credit and performance and surety bonds will not be drawn on; the sufficiency of our insurance coverage and legal and warranty reserves; the outcome of pending litigation; the sources and sufficiency of our capital resources to support our business strategy; the sufficiency of our land pipeline; the impact of new accounting standards and changes in accounting estimates; trends and expectations concerning future demand for homes, home construction cycle times, sales prices, sales orders, cancellations, construction and materials costs and availability, gross margins, land costs, community counts and profitability and future home supply and inventories; our future cash needs and sources, and the impact of seasonality.

Important factors that could cause actual results to differ materially from those in forward-looking statements, and that could negatively affect our business include, but are not limited to, the following: increases in mortgage interest rates and the availability and pricing of residential mortgages; inflation in the cost of materials used to develop communities and construct homes; cancellation rates; supply chain and labor constraints; the ability of our potential buyers to sell their existing homes; our ability to acquire and develop lots may be negatively impacted if we are unable to obtain performance and surety bonds; the adverse effect of slow absorption rates; legislation related to tariffs; impairments of our real estate inventory; competition; home warranty and construction defect claims; failures in health and safety performance; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our potential exposure to and impacts from natural disasters or severe weather conditions; the availability and cost of finished lots and undeveloped land; the success of our strategy to offer and market entry-level and first move-up homes; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest money or option deposits; our limited geographic diversification; the replication of our energy-efficient technologies by our competitors; shortages in the availability and cost of subcontract labor; our exposure to information technology failures and security breaches and the impact thereof; the loss of key personnel; changes in tax laws that adversely impact us or our homebuyers; our inability to prevail on contested tax positions; failure of our employees and representatives to comply with laws and regulations; our compliance with government regulations related to our financial services operations; negative publicity that affects our reputation; potential disruptions to our business by an epidemic or pandemic (such as COVID-19), and measures that federal, state and local governments and/or health authorities implement to address it; 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, 2022 under the caption "Risk Factors."

Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain, as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, the investment community is urged not to place undue reliance on forward-looking statements. In addition, we disclaim and undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.


Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview and Outlook

The second quarter of 2023 continued to see increased new home demand similar with the first quarter of this year as compared to the latter half of 2022. Homebuyers have begun to acclimate to higher interest rates and their previous hesitancy to purchase a home during uncertain economic conditions has adjusted accordingly. Despite the normalization of higher interest rates, homebuyers are still looking for assistance with monthly mortgage affordability, primarily in the form of interest rate locks or buy-downs. While there is a continuing lack of visibility in the economy, demand has been healthy in 2023. We expect the housing undersupply in the resale market and favorable demographics to provide a strong long-term runway for future homebuying demand, particularly for affordable, quick move-in homes, and believe that our all-spec strategy with a commitment to finding the market price will allow us to meet the demand and continue to grow our market share.

Production costs continue to be elevated due to persistent inflation but have come down slightly from the second quarter of 2022. We expect that over the long term, costs will decline and cycle times will continue to shorten and stabilize as the homebuilding market returns to normal levels. We reduced our construction cycle time by over three weeks for new home starts in the second quarter of 2023 as compared to the first quarter, nearing our historical averages.

Summary Company Results

We achieved record second quarter home closing revenue and units volume of $1.5 billion on 3,490 homes, up from $1.4 billion on 3,221 homes closed in the second quarter of 2022. The 9.5% increase in home closing revenue year-over-year was driven primarily by the 8.4% higher volume and aided by a 1.1% increase in average sales price ("ASP") on closings. ASP on closings improved despite increased incentives due to a favorable mix of closings in higher-priced markets. Second quarter home closing gross margin declined to 24.4% for home closing gross profit of $377.0 million compared to 31.6% and $444.7 million, respectively, in the second quarter of 2022. The margin deterioration is due primarily to the increased incentives offered in response to the market slowdown that began in 2022. Financial services loss of $2.6 million in the second quarter of 2023, as compared to profit of $4.1 million in 2022, reflects $7.9 million of charges taken for unused prepaid interest rate locks that expired during the period. Commissions and other sales costs of $95.8 million in the three months ended June 30, 2023 increased $26.4 million due to higher home closing revenue and higher broker commission rates paid in response to current market conditions. General and administrative expenses of $52.1 million in the three months ended June 30, 2023 were 3.4% of home closing revenue, consistent with the same period in 2022. Other income, net of $12.9 million increased from a net expense of $0.5 million in the prior year primarily due to the higher interest rate earned on a larger cash balance. Earnings before income taxes for the second quarter of 2023 of $239.5 million decreased $92.2 million year over year from $331.7 million in 2022. The lower effective income tax rate of 22.0% compared to 24.6% in 2022 reflects the benefit from earned eligible energy tax credits on qualifying homes under the Inflation Reduction Act ("IRA") enacted in August 2022. The decrease in year-over-year profitability partially offset by a lower tax rate, resulted in net earnings of $186.8 million in the second quarter of 2023 versus $250.1 million in the second quarter of 2022.

Similar to the second quarter, 5.1% higher home closing volume led to a 5.7% improvement in home closing revenue for the six months ended June 20, 2023 versus 2022. Home closing gross margin of 23.5% declined 750 basis points year over year, for a $162.9 million decrease in home closing gross profit. Lower gross margin, profitability and a lower effective tax rate of 21.4% led to net income of $318.1 million for the six months ended June 30, 2023, compared to $467.3 million for the 2022 period.

Home orders of 3,340 for the quarter ended June 30, 2023 were 11.3% lower than the second quarter of 2022 on a relatively flat average active community count, reflecting an 11.4% decrease in orders pace to 3.9 per month compared to 4.4 in 2022. The lower orders pace in the second quarter of 2023 was primarily from the timing of community openings and closings with a disproportionate share of closings in the first month of the quarter and openings in the last month of the quarter. Home order value decreased 18.5% year-over-year, to $1.5 billion during the three months ended June 30, 2023, versus $1.8 billion in the same period of 2022, due to the lower volume as well as an 8.1% decrease in ASP on orders. The lower ASP on orders year over year is due to increased incentives to assist homebuyer affordability, primarily related to interest rates. Our cancellation rate returned to a more normalized 12% in the second quarter of 2023, down sequentially from 15% in the first quarter of 2023 and 13% in the second quarter of 2022.

Similar to the second quarter, for the six months ended June 30, 2023, home orders and home order value decreased 10.7% and 16.7%, respectively, over the prior year, with a cancellation rate of 13% compared to 11% for the prior year period. We ended the second quarter of 2023 with 3,772 homes in backlog valued at $1.7 billion, decreases of 47.9% and 50.9%,

respectively, from June 30, 2022. The decrease in backlog units is due to an 89.0% backlog conversion rate during the second quarter of 2023 combined with lower order volume.

We ended the second quarter of 2023 with 291 active communities, down from 303 at June 30, 2023 although up sequentially from 278 at March 31, 2023. We purchased approximately 5,700 lots for $241.6 million, spent $477.0 million on land development and started construction on 6,558 homes during the six months ended June 30, 2023.

Company Positioning

We believe that the investments in our new communities designed for the first-time and first move-up homebuyer, our commitment to being primarily an all-spec builder, and industry-leading innovation in energy-efficient product offerings and automation, create a differentiated strategy that has aided us in our growth in the highly competitive new home market.

Our focus on growing our community count and market share includes the following strategic initiatives:

•Achieving or maintaining a position of at least 5% market share in all of our markets;

•Delivering affordable homes on a shorter timeline through simplification of production processes and maintaining market-appropriate levels of spec inventory;

•Continuously improving the overall home buying experience through simplification and innovation;

•Maintaining our home closing gross profit by growing closing volume, allowing us to better leverage our overhead;

•Leveraging and expanding on technological solutions through digital offerings to our customers, such as our virtual home tours, interactive maps, digital financial services offerings and online warranty portal; and

•Increasing homeowner satisfaction by offering healthier, energy-efficient homes that come equipped with a suite of home automation standard features. Our efforts were recognized in the second quarter of 2023 with the 2023 ENERGY STAR® Residential New Construction Market Leader Award from the Environmental Protection Agency.

In addition to these strategic initiatives, we also remain committed to the following:

•Carefully managing our liquidity and a strong balance sheet; we ended the second quarter with a 21.4% debt-to-capital ratio and a (0.2)% net debt-to-capital ratio;

•Maximizing returns to our shareholders through improved financial performance, dividend payments and share repurchases;

•Managing construction efficiencies and costs through national and regional vendor relationships with a focus on timely, quality construction and warranty management;

•Promoting a positive environment for our employees through our commitment to foster diversity, equity, and inclusion ("DE&I") and providing market-competitive benefits in order to develop and motivate our employees and to minimize turnover and to maximize recruitment efforts;

•Maintaining a solid orders pace through the use of our consumer and market research to ensure that we build homes that offer our buyers their desired features and amenities; and

•Continuing to innovate and promote our energy efficiency program and our M.Connected® Automation Suite to create differentiation for the Meritage brand.

Critical Accounting Estimates

The critical accounting estimates that we deem to involve the most difficult, subjective or complex judgments include valuation of real estate and cost of home closings, warranty reserves and valuation of deferred tax assets. There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2023 compared to those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our 2022 Annual Report on Form 10-K.

Home Closing Revenue, Home Orders and Order Backlog

The composition of our closings, home orders and backlog is constantly changing and is based on a changing mix of communities with various price points between periods as new projects open and existing projects wind down and close-out. Further, individual homes within a community can range significantly in price due to differing square footage, option selections, lot sizes and quality and location of lots (e.g. cul-de-sac, view lots, greenbelt lots). These variations result in a lack of meaningful comparability between our home orders, closings and backlog due to the changing mix between periods. The tables on the following pages present operating and financial data that we consider most critical to managing our operations (dollars in thousands):


Home Closing Revenue	Three Months Ended June 30,				Quarter over Quarter
	2023		2022		Change $		Change %
Total
Dollars	$	1,543,021	$	1,408,947	$	134,074	9.5	%
Homes closed	3,490		3,221		269		8.4	%
Average sales price	$	442.1	$	437.4	$	4.7	1.1	%
West Region













Dollars	$	519,217	$	486,078	$	33,139	6.8	%
Homes closed	997		925		72		7.8	%
Average sales price	$	520.8	$	525.5	$	(4.7)	(0.9)	%
Central Region

Dollars	$	456,801	$	422,327	$	34,474	8.2	%
Homes closed	1,094		1,048		46		4.4	%
Average sales price	$	417.6	$	403.0	$	14.6	3.6	%
East Region





















Dollars	$	567,003	$	500,542	$	66,461	13.3	%
Homes closed	1,399		1,248		151		12.1	%
Average sales price	$	405.3	$	401.1	$	4.2	1.0	%


	Six Months Ended June 30,				Quarter over Quarter
	2023		2022		Change $		Change %
Total
Dollars	$	2,804,944	$	2,654,403	$	150,541	5.7	%
Homes closed	6,387		6,079		308		5.1	%
Average sales price	$	439.2	$	436.7	$	2.5	0.6	%
West Region













Dollars	$	936,539	$	949,502	$	(12,963)	(1.4)	%
Homes closed	1,782		1,789		(7)		(0.4)	%
Average sales price	$	525.6	$	530.7	$	(5.1)	(1.0)	%
Central Region

Dollars	$	881,681	$	770,155	$	111,526	14.5	%
Homes closed	2,142		1,921		221		11.5	%
Average sales price	$	411.6	$	400.9	$	10.7	2.7	%
East Region





















Dollars	$	986,724	$	934,746	$	51,978	5.6	%
Homes closed	2,463		2,369		94		4.0	%
Average sales price	$	400.6	$	394.6	$	6.0	1.5	%

Home Orders (1)

Three Months Ended June 30,

Quarter over Quarter

2023

2022

Change $

Change %

Total