Meritage Homes is a leading designer and builder of single-family attached and detached homes based on the number of home closings. We operate in the historically high-growth southern and western United States. We offer a variety of homes that are designed to appeal to a wide range of homebuyers, including first-time, move-up, luxury and active adult buyers, although our current emphasis is on the first-time and first-time move-up segment as we believe they represent the largest demographic of buyers. We have operations in three regions: West, Central and East, which are comprised of 12 metropolitan areas in six states: Arizona, California, Nevada, Texas, Colorado and Florida.
These three regions are our principal business segments. Please refer to Note 14 of the consolidated financial statements for information regarding our operating and reporting segments.
Our homebuilding and marketing activities are conducted primarily under the Meritage Homes brand, except for Arizona where we also operate under the name Monterey Homes and Texas where we operate under the names Monterey Homes and Legacy Homes. At December 31, 2009, we were actively selling homes in 153 communities, with base prices ranging from approximately $99,900 to $971,990.
Available Information; Corporate Governance
Meritage Homes Corporation was incorporated in 1988 as a real estate investment trust in the State of Maryland. On December 31, 1996, through a merger, we acquired the homebuilding operations of our predecessor company. We currently focus exclusively on homebuilding and related activities and no longer operate as a real estate investment trust.
Information about our company and communities is provided on our Internet website at www.meritagehomes.com. The information contained on our website is not considered part of this Annual Report on Form 10-K. Our periodic and current reports, including any amendments, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) are available, free of charge, on our website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).
Meritage operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities and setting high standards for ethical conduct. Our Board of Directors has established an audit committee, executive compensation committee and nominating/governance committee. The charter of each of these committees is available on our website, along with our Code of Ethics and our Corporate Governance Principles and Practices. Our committee charters, Code of Ethics and Corporate Governance Principles and Practices are also available in print, free of charge, to any stockholder who requests any of them by calling us or by writing to us at our principal executive offices at the following address: Meritage Homes Corporation, 17851 North 85th Street, Suite 300, Scottsdale, Arizona 85255, Attention: Legal Department. Our telephone number is (480) 515-8100.
All facets of Meritage Homes’ operations are governed by the principles of our strategic model, Meritage Forward. Meritage Forward defines our Company’s culture and operational parameters, to ensure that all actions are aligned around the achievement of our goals. It combines our entrepreneurial spirit and organizational agility to drive industry-leading results in all of our functional areas, including: management, land acquisition and development, finance, marketing, sales, purchasing, construction and customer care. The main tenets of Meritage Forward are to:
Maximize our state-of-the-art research tools to make informed decisions about land purchases; Utilize our knowledge of customer preferences to align our product offerings with market expectations; Customize our sales techniques for today’s buyers and educate our sales team on the availability of mortgage products;
Continuously improve our construction process by working with our vendors to find mutual efficiencies; Re-engineer and simplify our product while incorporating our environmental initiatives into routine construction practices; Shorten sales to close cycle time by refining our practices and streamlining scheduling and production; Provide the highest level of customer service and care by working closely with our buyers throughout the sales and construction process and monitoring their satisfaction routinely after delivery of their home; and Ensure that we have the best team available by hiring and nurturing top talent, expecting top level performance and allocating proper resources to drive execution of the business plan.
We believe all of these directives are focused on our key priority, returning to and sustaining profitability as quickly as possible.
We recently launched several new initiatives reflecting the Meritage Forward principles. Our Simply Smart Series ™ is a collection of homes that market a low monthly payment and are specifically designed for the renter and first-time buyer demographic. These homes benchmark favorably in our submarkets where low prices are the key determinant for sales activity. The Simply Smart Series™ offers a solid range of standard features while allowing buyers to customize their purchase with options and upgrades that are important to them.
To address the influx of available existing home inventory, we have initiated our “Your Home. Your Way. 99 Days Guaranteed” promise in many of our communities. This program affords our buyers all the benefits of new home construction, including customization and a warranty, and delivery in 99 days or less from the date the buyer signs the sales contract to the close of their new home. This allows us to effectively compete with the typical closing cycles for resale homes. The expedited timeline is consistent with our streamlined processes.
We also recently announced that every home we construct beginning in 2010 will meet ENERGY STAR ® standards. The “green” construction not only aligns with our corporate goal of being a responsible steward of the environment, but also provides our buyers with additional value including: (i) generating higher home appraisal values (ii) allowing them to qualify for “green” mortgages (iii) reducing their energy and water use expenses and (iv) creating a more “green” living environment. We believe our Green Strategy effectively differentiates our product in the marketplace. By building ENERGY STAR ® homes, we will be exceeding the current government standards for environmental construction thresholds. Incorporating these energy standards into all of our homes has resulted in our achievement of design, purchasing and production efficiencies that allow us to offer these features to our home buyers for either nominal or no additional cost as compared to homes without such features.
We believe our Meritage Forward philosophy provides us with a unique competitive advantage and will drive our success in attaining our key objectives of returning to profitability and maintaining a strong and liquid balance sheet—which will help us weather any additional instability in the homebuilding and financial markets and will allow us to take advantage of opportunities as they arise.
The 18% reduction in our homesites controlled as of December 31, 2009 as compared to the prior year reflects our efforts to execute on our strategy to decrease our lot position in non-key markets. During the past several years, we have exited under-performing markets, sold excess owned lots, terminated lot contracts in less successful subdivisions, purchased and contracted for new projects with smaller lot positions and recalibrated our holdings to be more in line with our current operation volumes.
The average closing price decline in 2009 versus 2008 highlights our successful efforts to roll out the Simply Smart Series™, offering products at a lower price point to target the first-time and first-time move-up demographic, as well as some price deterioration during the year as the homebuilding industry continued to experience difficulties in many of the geographical markets we serve. Looking to 2010, we continue to plan for lower average closing and sales prices than we have historically produced as we have re-designed our products to a lower price point to attract more of the first-time and first move-up demographic.
Recent Industry and Company Developments
During 2009, our operations continued to be impacted by the homebuilding industry downturn and economic recession resulting in difficult year-over-year comparisons of our operational results. Competition for home buyers remained intense due to an excess supply of re-sale and foreclosure homes on the market, as well as aggressive discounting for new homes by many of our competitors. In addition, the type of mortgage financing products is still limited and underwriting standards are restrictive. Therefore, even though home affordability has significantly improved over the past several years, benefiting from both low prices and low interest rates, we have not yet seen a significant market recovery, although we believe we are beginning to see signs of stabilization in many of our markets as evidenced by the stabilization of average home prices in the U.S. and declines in months’ supply of homes inventory during the latter part of 2009, as reported by Realty Trac and the Case-Shiller Index, although some of the improvements may have also been aided by the government tax incentives that were originally scheduled to expire in November 2009. Our sales pace strengthened over 2008 in the final quarters of 2009, also an early indicator of a potential shift in consumer confidence. Furthermore, our home orders increased 24% in the fourth quarter of 2009 as compared to the same period in the prior year and our absorptions per active community increased, with 3.9 sales per community for 2009 as compared to 2.6 in 2008. We believe the improvements may signal the bottoming of the housing market.
We reduced our active community count by 14%, or 25 communities, over a year ago. Therefore, although our average sales per community during 2009 was 23.3, in line with 23.2 for the prior comparable period, our home orders declined 17% for 2009 as compared to the prior year.
During 2009, we continued to focus on our goals to return to profitability, generate positive cash flow and strengthen our balance sheet. We grew our cash, cash equivalents and restricted cash balance to $391 million at December 31, 2009. We also increased gross margins excluding impairments to 14.9% in the fourth quarter of 2009, the highest in the past eight quarters. Our gross margins including impairments were 6.2% for the same period. Additionally, in the last half of the year we began to rebuild our lot positions with well-located, low-cost lots to supplement and replace our older communities as they close out. We believe our strategy provides us with flexibility given the current difficult market conditions, and also allows us to take advantage of unique opportunities to continue to purchase well-positioned lots in select markets.
During this downturn and in line with our Meritage Forward principles, we have conducted an in-depth market review of each one of our submarkets and have repositioned and redesigned much of our product to increase affordability to appeal to customers at lower price points. Our lower cost structure is enabling us, in certain communities, to decrease the selling price of these new homes below the FHA pricing cap, and compete successfully with foreclosures and distressed re-sales. We are designing smaller and more efficient floor plans, reducing or eliminating certain standard features from our base home models to re-align them with current market demands and reducing the number of floor plans offered, while continuing to provide an ample selection of options and upgrades, allowing our customers to personalize their new homes with the features they consider most important. Our divisions have been working with their subcontractors to achieve additional price concessions through both materials and labor bid renegotiations, but also through reviews of our entire construction cycle, including even-flow scheduling and process improvement initiatives.
To appeal to the quicker move-in expectations of our target customers in the first-time and first-time move-up demographic, and to ensure sufficient on-hand inventory to meet the extended home buyer tax credit deadline of June 30, 2010, we are temporarily increasing our spec starts. Our unsold inventory consisted of 514 homes as of December 31, 2009, approximately half of which were complete. At December 31, 2008, we had 768 unsold homes, approximately two-thirds of which were complete. The decline in our unsold inventory was primarily due to our improved cycle times, which allowed us to maintain a lower level of inventory to meet demand as we were able to turn the inventory faster. At December 31, 2009, we averaged only 3.4 unsold homes per active community.
Land Acquisition and Development
As guided by our Meritage Forward objectives, our goal is to maintain an approximate three- to four-year supply of lots, which we believe provides an appropriate planning horizon to address regulatory matters and land development; although, during the current downturn in the homebuilding industry, we have limited additional purchases of land or lots to primarily finished lot positions with a two-three year life cycle. We are currently focused on expanding our market share in our key markets and their adjacent submarkets, as we grow the number of subdivisions in our pipeline, although we will explore exceptional opportunities outside of our existing markets if and when they arise. As of December 31, 2009 we have a 3.2 year supply of lots, based on 2009 orders. In the near term, we plan to acquire well-positioned finished lots in our key markets with short land positions while analyzing opportunities for partially developed land. We continually evaluate our markets, monitoring our lot supplies to ensure we have a sufficient pipeline, but are not over-committing to land acquisitions until the pace of home sales stabilizes and our sales pace begins to recover.