Meritage CEO flying high on bullish outlook for Scottsdale homebuilder

28 | 07 | 2020

Steve Hilton is flying high.

Not only did the share price of Meritage Homes Corp. (NYSE: MTH) briefly reach its all-time high on Thursday, but the Scottsdale homebuilder’s chairman and CEO can’t build houses fast enough to meet demand for potential buyers armed with record low mortgage interest rates ready to buy their first entry-level home.

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“It feels really good, let me tell you,” Meritage told the Phoenix Business Journal.

Buoyed by the company’s stellar second quarter results, Meritage shares surpassed the previous high of $95.75 set in July 2005. After reaching $98 early in Thursday’s session, the stock closed at $89.50, basically flat for the day, amid a gloomy overall day on Wall Street. Track the stock here.

“Almost 15 years to the date we’ve eclipsed the stock price,” he said. “To me, it’s been a 15-year journey to build this company and get it to surpass where it was in the last real estate cycle in Arizona. That’s really gratifying for me as a co-founder and CEO of the company to experience that.”

Hilton said he’s on track to have 300 communities open nationwide by the end of 2021 or the first part of 2022. Of those, 50 or 60 will be in Arizona.

“We have several new communities in West Phoenix on the southwest side of Goodyear and we are approved for a few new communities in Tucson,” he said. “Our Arizona pipeline continues to expand.”

Arizona’s economy is very strong, he said, especially as people from other states consider moving here to get away from their dense housing environments.

Even after hitting the pause button on land buys during the early part of the coronavirus pandemic in early to mid-April, Meritage still spent more on land and development during the second quarter 2020, with a total $214 million spend, than it did during the same quarter in 2019, at $175 million.

“We paused for a little bit like everybody did but we were one of the first to get back into it and really cement the land deals we had and try to pick up some more from others,” he said.

Future expansion

Plus, Hilton is eying additional markets across the country for future expansions.

While he said he won’t be ready to provide more details until the third quarter, Hilton said he would like to enter some markets in the Southeast and the West.

As the supply of existing homes remains low nationwide and in Arizona, homebuilders have an opportunity to sell more units. And with that demand comes the ability for homebuilders to raise prices.

Hilton said he’s been experiencing cost increase in lumber, which means he’ll raise home prices to balance production and demand.

“That only causes more demand,” he said. “People know prices are going to go up so they want to buy sooner rather than later.”

While Hilton said he won’t be as aggressive as other builders on price increases because he wants to keep up Meritage’s strong absorption levels, there are certain markets, including Phoenix, where there is such strong demand that price increases are warranted.

Meritage’s business model is driven by pace more than price, he said.

Because he wasn’t sure how strong demand would be once states started opening back up, he didn’t really raise prices much in May.

“We did start to push price more in June but we left some dollars on the table,” Hilton told analysts in his Q2 earnings call on July 23. “We could have done more on price. But as we’ve gone into early July, we’ve hit the price button a little harder. But that said, we’re still going to have robust order growth and we’re probably not going to be as aggressive on price as other builders are.”

With strong second quarter earnings — net income was $90.6 million in Q2 compared to $50.8 million a year earlier — Meritage released full-year guidance, saying the company expects to close on between 10,850 and 11,350 homes during fiscal 2020 and generate between $4 billion and $4.3 billion in home-closing revenue.

In a note to investors on Thursday, Kenneth Leon, an equities analyst with CFRA Research in New York City, said his firm has raised its target price on the shares by $30 to $98 as a result of the company’s “remarkable turnaround.”

“MTH’s speculative model (build partly without contracts) enabled it to capture strong demand from millennials seeking more affordable, entry-level homes from expensive high-rise living. Arizona and California were key turnaround markets in the quarter that we expected to slow down because of Covid-19 impact,” the note said.

As a result, CFRA has raised its 2020 earnings per share estimate for Meritage by $3 to $9 and the 2021 earnings estimate by $3.35 to $9.25.

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