Meritage Homes' CEO Presents At 19th Annual Deutsche Bank Leveraged Finance Conference (Transcript)

Meritage Homes Corporation (MTH)

19th Annual Deutsche Bank Leveraged Finance Conference

October 12, 2011 11:55 a.m. ET


Larry Seay - EVP and CFO

Steven Davis - EVP, Chief Operating Officer

Brent Anderson - VP, Investor Relations


[unidentified analysts]


Unidentified Analyst

Thanks for coming out. You guys have the management team here, local guys business (ph) Scottsdale, hopefully you can get a good pitch from them how the housing market looks here, how the business is shaping up, and any thoughts they have, what the market looks like going forward, we’ll let them speak for themselves. Thanks a lot.

Larry Seay

Thank you. I would like to thank Deutsche Bank for hosting us. To my immediate right is – I guess my immediate left is Steve Davis, chief operating officer, and then Brent Anderson, our VP of Investor Relations. Moving along, obviously we are in our blackout for the quarter. So we’re not going to be talking about quarter end results at this point in time.

Meritage was founded in 1985, went public in 1996. We built over 70,000 homes. We’re the ninth largest builder based upon closings last year. We built about two-thirds of our houses as move-up, about a quarter is first-time and balance is a combination of active adult and semi-custom luxury homes. A couple years ago when the market started down, we did shift down to a little bit more starter homes for a bit. But as that market became more credit challenged, we moved back up into our more traditional two-thirds move-up range.

We do business in seven states. We are top 10 builder in seven markets, and our newest market is Raleigh Durham. We have a picture here of a new model. This is the first subdivision we’ve opened enrolling our first model home, and we have three or four more subdivisions in process ready to open in the next couple months. And then, we hope to have several more after that opening soon.

One thing I should note too is that Texas has been about half of our business. The last couple years, Texas held up better during the downturn than our other states that were challenged like California, Arizona and Florida. But we are rebalancing that a bit. As the other states start to recover, Texas will become a little less of our business going forward.

We were one of the first homebuilders to make money. We made money last year and we are kind of bouncing around at breakeven point right now. We have a very strong balance sheet, lots of cash, certainly ample cash and a low net debt to capital ratio. We are also one of the first builders to aggressively cut overhead, and that helped us get back to profitability too. We also redesigned our product early, made the product little smaller, little less-expensive to build, faster to build and also built a lot of green features into our homes. So that helped us get back to making little money and breaking even. And because of that, we are one of the better performing builders today.

We’re typically in the top half of most performance metrics and in many cases, the top third. And this is really a combination of all the things I just mentioned. We are able to cut overhead better. We were able to grow margins, because we reloaded with the new lots and better product. And we were able to achieve a lower interest cost because we are less leveraged than other builders.

And this is a slide that deals with our balance sheet. We have $177 million of cash and $199 million of investments for a total $377 million. We have about a 31-32% net debt to capital ratio, that's among the lowest within the industry. And we are certainly well positioned with this cash balance in this balance sheet to start to take advantage of the market as it stabilizes and continues to bounce along and eventually improve. We certainly have enough cash to invest in more land and grow our community count and grow our subdivision count and lot count as the market improves.

We are usually using cash that comes out of liquidation of older subdivisions to replenish our lots supply. Our older communities were typically bought more in the pre-downturn stakes, we have higher basis maybe aren’t as well located, where our newer communities are bought in closer-in areas with a lower basis. So the reloading process doesn't take a lot of cash. It usually is being generated from those older communities. So as we do grow community count a bit and grow lot count a bit, it uses some cash but most of the cash comes from those older communities.

Here's a picture of where our lot supply is today, a little under 16,000 lots, about 4.9 years supply. But if you exclude active adult, which by its nature is a very long-term supply of lots for those larger communities, we only have 4.2. 83% of those are on 17% option. This is a departure from before the downturn we optioned 90% of our lots. We don't do that today because the option strategy doesn’t protect our downside today. We are already bumping along the bottom, so to the extent we are buying lots today at bargain basement prices. There is not a lot of downside risk.

In addition, there is not a lot of people willing to sell an option today, you are also getting much better prices if you pay cash versus buying lots under option. So we’ve elected to go to more of an owned strategy, certainly have the cash to do that. And we’ve essentially completed conversion into a mainly owned model. Now we are still keeping a short lot supply of about four years or so. We don’t want to go long in land and have a 10 or greater year supply. So we are still a land light builder but we own most of our lots today.

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