Meritage Homes Corp (MTH) 2010 Q1 法說會逐字稿

Greetings, and welcome to the Meritage Homes first-quarter 2010 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Brent Anderson, Vice President of Investor Relations for Meritage Homes. Thank you. Mr. Anderson, you may begin.

Thank you, Melissa. Good morning. I'd like to welcome everyone to the Meritage Homes first-quarter 2010 earnings call and webcast. Our quarter ended March 31st, and we issued our press release with the results for the quarter after the market closed yesterday.

If you need a copy of the release or the slides that accompany our webcast today, you can find them on our website at investors.meritagehomes.com, or by selecting the Investors link at the top of our home page.

Please refer to slide 2 of our presentation. Our statements during this call and the accompanying materials contain projections and forward-looking statements which are the current opinions of Management and subject to change. We undertake no obligation to update these projections or opinion.

Additionally, our actual results may be materially different than our expectations due to various risk factors. For information regarding these risk factors, please see our press release and most the recent filings with the Securities and Exchange Commission, specifically our 2009 annual report on Form 10-K.

Today's presentation also includes certain non-GAAP financial measures, as defined by the SEC. To comply with the SEC rules, we have provided a reconciliation of these non-GAAP measures in our earnings press release.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage Homes, and Larry Seay, our Executive Vice President and CFO. We expect our call to run 45 to 50 minutes this morning and a replay of this call should be available on our website within an hour or so after we conclude the call. It will remain active for 30 days.

I'll now turn it over to Mr. Hilton to review our first quarter-results. Steve?

Thank you, Brent. I'd like to welcome everyone to our call today. I'll begin with an overview of our first-quarter 2010 operating highlights, shown on Slide 4.

Our number one goal, as we've stated for the last couple of quarters, was to return to profitability in 2010. So we are pleased to report that we were profitable in the first quarter, without a large tax benefit and without having to add back impairments to get there. After three long years of fighting to return to profitability, it feels good to say we're operating in the black for the first time since the housing downturn began.

As our first-quarter results demonstrate, we've reduced our cost structure to a breakeven point of approximately 3,200 home closings, less than one-third of what we did in 2006. Accordingly, to the extent that we achieve closing volumes above that point, or continue to improve margins, greater profitability should follow.

Our profitability this quarter was largely driven by our improved margins on home closings. First-quarter home closing gross margin improved to 18.9% in 2010 from 7.5% in 2009, or 19.2% versus 12% if we exclude impairments of $0.5 million this year and $10 million last year. We generated $38 million in gross profit on homes closed in the first quarter 2010, more than double the $17 million of gross profit we reported last year.

We increased sales 8% year over year to 1,064 homes, which was 71% higher than the fourth quarter of 2009. Despite having fewer open communities we achieved 24% greater sales per community than in the first quarter of 2009. As a result, our ending backlog increased sequentially by 23% from the end of 2009.

These operating results highlight our successes in reducing costs, redesigning our homes, and positioning the right product in the right communities. We opened 16 new communities in the first quarter of 2010 and we expect to open more than 20 within the next six months. We also contracted for approximately 1,600 lots in 21 communities, which we believe will lead to continued improvements in our sales pace and margins.

We reported net earnings of $3 million, or $0.08 per diluted share for the first quarter of 2010, compared to a net loss of $18 million, or a negative $0.60 per diluted share in the first quarter of 2009. We had $10 million of pretax charges due to real estate impairments in the first quarter of 2009, and only about $0.5 million of impairments in 2010. Our first-quarter 2010 results included a $2.4 million gain from a legal settlement and our 2009 results included a $2.8 million gain on early extinguishment of debt.

Slide 5. First-quarter home closing gross margin improved significantly this quarter to 18.9%, or 19.2% excluding a minor amount of impairments, as shown on the slide. On a comparable basis, we increased it from 12% in the first quarter of 2009 and 14.9% in the fourth quarter, surpassing even the first quarter of 2007 margin of 18.7%.

As we've discussed over the past year, we've been replacing older, lower-margin communities with newer, higher-margin communities to drive this increased profitability. Our margins on homes closed in these new communities were more than 600 basis points higher this quarter than those we earned in our older communities with older home designs. The new communities that was opened on lower-cost lots with more value-oriented home designs since the beginning of 2009 account for 23% of our active selling communities and approximately 19% of our first-quarter 2010 home closings and related revenue, nearly double the level of two quarters ago. We expect that approximately 35% to 40% of our closings to come from our newer communities by the end of this year, even though we expect our total community count to remain relatively flat, as we replace older communities with newer ones.

Even in our older communities we achieved average margins, excluding impairments, that were 400 basis points higher this quarter than they were a year ago. We've reduced incentives, redesigned homes and made operational improvements that have lowered our construction costs. We expect to make further gains as we implement continuous improvement practices with our suppliers and contractors to increase our efficiencies and reduce both their costs and ours.

Slide 6. We have contracted for more than 5,500 new lots since the beginning of 2009 and now control approximately 13,000 total lots, equivalent to a 3.4 year supply based on trailing 12-month closings. We own 78% of our total lots and control the other 22% under option contracts, most of which are in Texas. A year ago at March 31st, 2009 we controlled approximately 15,000 lots and owned 55% of those. We now own a larger percentage of our lots than we ever have before, because there are fewer opportunities for option lots today and the economics are much better to purchase lots from banks or distressed owners than to option them through a third party.

We have successfully transitioned from more than 90% option lots at our peak to nearly 80% owned currently, and have already deployed the capital required to support this transition. Approximately 40% of those lots that we owned as of March 31st this year were put under contract within the last 15 months. Mostly our price is substantially lower than the lots we previously controlled, which is another indication of our potential to increase our future earnings.

I'll now turn it over to Larry Seay, our Chief Financial Officer, and I'll end our prepared remarks with a few closing thoughts before Q&A. Larry?

Thanks, Steve. I'll pick it up on Slide 7. Our first-quarter home closings and closings revenue declined 13% year over year, primarily due to the fact that we had 12% fewer active communities at the end of the first quarter of this year than we had last March 31st. However, we increased our community count during the quarter in all states but Texas and Nevada. As we've stated previously, we are actively working to regrow our markets outside of Texas that experienced significant reductions over the last couple of years.

Our average closing price was approximately $248,000 in the first quarters of both 2010 and 2009. More than 60% of our sales in Q1 were classified as entry level or first-time move-up buyers, consistent with our mix for the past several quarters. But many of these communities are located in more desirable areas, which have kept our average sales price up in recent quarters.

Our ending backlog at March 31, 2010 totaled 1,351 homes valued at $355 million, which was 24% greater than at the start of the first quarter. We converted 74% of our homes in beginning backlog into closings during the first quarter of 2010. Assuming a similar conversion rate going forward, which we expect due to our shortened cycle times, we believe we can continue to grow revenue and show positive year-over-year increases in the next couple of quarters.

Slide 8. First quarter of 2010 net orders increased by 8% year over year to 1,064 sales compared to 987 in 2009, led by gains of 113% in California, 39% in Arizona, and increases of 58% in Colorado and 18% in Florida. Our first-quarter cancellation rate fell to 18% in 2010 from 26% in 2009, as prices have stabilized and consumer confidence has risen.

Sales in Texas were 12% lower year over year, primarily due to 16% fewer actively-selling communities. We are actively looking at opportunities to add new lot positions in our key markets, including Texas, to replace our older communities and grow our market share.

Approximately 40% of our closings were from specs during the first quarter, and we ended the quarter with approximately 600 total specs, or 4 per community, which is a little higher than last year's 3.2, but within our desired range of 3 to 5, as we stated last quarter. We need to have a few specs either finished or in process in order to meet demand from those entry-level or first-time buyers who want a home ready for immediate move-in. However, our faster build times are allowing us to operate with a relatively low level of specs compared to some other builders.

Our average sales price on first-quarter orders was approximately $252,000 in 2010 compared to $235,000 in 2009. The increase was due to mix of sales in Texas, Arizona and Florida, where more sales came from communities with higher average prices. And a larger percent of our sales were in California and Colorado, which have higher average sales prices than the Company average.

Our average sales per community increased to 7 in the first quarter of 2010, 23% more than the same period last year, and almost 80% higher than the fourth quarter of 2009. The increased sales pace was primarily related to new communities and our successful sales incentives, as Steve discussed, as well as somewhat improved selling conditions in many of our markets.

While the overall housing market has improved nominally, we believe our success has been primarily driven by these new communities and the appeal of our Simply Smart series of efficiently designed homes, our fully Energy Star qualified homes, and our promise of a 99-day guaranteed completion of our buyer's home. We believe we are well positioned within our markets relative to both resells and new homes, and are excited about the advances we're making that allow us to offer our customers a more energy efficient home that fits their lifestyle at affordable and competitive prices.

Slide 9. Our balance sheet is strong and we believe we have an adequate supply of capital to replenish our lot supply and regrow the business as we bring on new communities and as market conditions improve.

We generated $44 million of cash flow from operations during the first quarter of 2010, driven by a $91 million tax refund we received in March, partially offset by $59 million used to purchase approximately 1,100 lots during the quarter, and ended the quarter with a total of $435 million in cash and short-term investments.

This increased cash position led to a decrease in our net debt to capital to total capital ratio to a Company low of 26% at March 31, 2010 compared to 35% at March 31, 2009. We recently announced a series of transactions to refinance our debt with the nearest-term maturities, effectively extending these maturities by five to six years. We issued $200 million of 7.15% senior notes due in 2020 to retire in full the $130 million outstanding principal amount of our notes due in 2014 and repurchase up to $65 million of our 2015 notes through tender offers that expire on May 3rd. We expect to recognize an estimated loss of about $3.2 million on early extinguishment of these debt amounts in the second quarter of 2010.

I will now turn it back over to Steve.

Thank you, Larry. It's satisfying to report that we returned to profitability this quarter after having made great strides in executing on the strategic initiatives we undertook last year. And our improved results are evidence of our successes. We have built a strong balance sheet that provides a solid foundation for future growth. We have reduced our direct costs, while maintaining our average prices, expanding our margins back to near normal levels. We have increased our sales velocity with redesigned homes in new communities and believe we can add significant volume without adding significantly to our overhead, with the potential to grow our bottom line faster than our top line.

With our new Simply Smart series of affordable homes, 100% Energy Star qualification in every home that we build, and our 99-day completion guarantee that is gaining traction with homebuyers and realtors, we can offer all the advantages of a new home, built to suit our buyer's lifestyle, at prices comparable to used homes and payments competitive with rents. I believe we're well positioned to grow profits going forward and I'm confident in our strategy and the determination of our people to make Meritage successful.

Thank you for your attention and we'll now open it up for questions. The operator will remind you of the instructions.

Thank you. We will now be conducting a question-and-answer session. (Operator instructions.) Joshua Pollard; Goldman Sachs.

If I do the math that 19% of your closings were newer communities and that roughly 600 basis points between new and old land closings, I estimate roughly 24% margins on new communities and 18% on old communities. Is that roughly right? And could you talk about the direction of each of those in the future? I'm guessing that older community margins could continue to march higher as incentives fade and newer communities could come down a bit as there's been a pretty significant hunt for land here in the most recent few quarters.

Larry, I'm going to let you field that one.

Sure. Josh, your math's pretty good. I won't say the numbers are exactly in that range, but they're pretty darn close. And I think what we're seeing in some cases, our newer communities are actually exceeding some of our expectations because we got very good buys on land over the last year or so. And I do think over the next two or three quarters, you'll continue to see margins improve as we continue the reloading process and continue to improve even in our older communities. I don't know if you'll see quite the same leap you saw this last quarter in margins, but we do expect them to continue to climb somewhat.

Okay, great. My second question is on Texas. Your community count there declined 16% and I get the sense that Texas is doing fairly better than that. You all get a lot of credit for hiding in Texas during the downturn. So I'd like to know if you are strategically moving your incremental community out of Texas or if you feel like Texas is a down 15%, 16% market?

I'll let my Texas guys know that you think we're hiding there, but -- they'll get a laugh out of that. But we've dramatically increased our market share in Texas and moved up in the ranks. We're now the third-largest builder in Dallas and the third-largest builder in Houston, according to RSI. And we had a handful of communities that were low absorption, doing one or two a month. And we decided to kind of refocus our efforts on more the higher volume communities. And that's why you see that community count drop.

But I would point out that we're very bullish on Texas. We think the markets are starting to recover there. Job growth is picking up. And 40% of the lots that we bought last quarter were actually in Texas. So we're very bullish about our franchise there and we think it's an opportunity to expand it.

On the same point, we would certainly like to expand our business elsewhere and rebalance our deliveries where Texas is a little bit smaller percentage of the total. But at the same time we don't want to retreat from the market share gains that we've gotten there. And we won't let that business shrink.

Okay, great. I really appreciate the questions and I like the new slide deck. Thanks.

Stephen East; Ticonderoga Securities.

Thanks. Congratulations, guys. Steve and Josh saved us the Texas conversation. So if we look at the first quarter and into April, if we're looking at demand with the tax credit, how do you -- what do you think your business did that was related to the tax credit, and how much you think was more organic recovery in the housing market and the consumer coming back, both in the first quarter and then what you're seeing in April?

You know, as most builders have said already, that they don't believe the tax credit has provided the impetus that we expected. And we believe the tax credit is sort of the icing on the cake. We believe there was some pent-up demand due to lack of affordability. And there's a lot of buyers that want to take advantage of these great low prices coupled with low interest rates. And the tax credit may have just sped up their decision a little bit. But we're just not seeing the surge and we're not expecting a letdown.

Our April sales are probably a touch less than March, very nominally less, but certainly more than we achieved in February. So --

Okay. Is there a way for you all to quantify what percentage you think were tax credit sales?

No. No. I mean, we've been talking to our buyers and trying to ascertain what their chief reason to buy has been. And we're just not getting crystal clear information on that. So we don't think it's that much.

Okay. And then, one other question on the gross margin. The big jump, both sequentially and year over year, I know a lot of it you've already pointed to, your new communities. But, are you also seeing anything going on from -- I'm thinking quarter over quarter -- from an incentive perspective? Are they coming off? Are you seeing a mix shift where -- toward a little bit more profitable product? What else are you seeing there?

Well, it's a combination of a lot of things. We've been able to pull back on some incentives in certain key locations. We've been able to continue to reduce our construction costs. Our sales people have gotten better with more training and creating more absorption per community allows us to leverage our overhead. Of course, the new communities we've talked about quite a bit. It's a lot of these things that are adding to the increase in margin.

Okay. And if I can sneak in one thing -- homes under construction right now?

Larry, do you have that?

Yes. Hold on here. I've got it here; just a second. Our WIP is -- well, our backlog is a little over 1,300 and our houses under construction is about the same, about 1,400 -- 1,500.

Okay. Thanks. Nice quarter, guys.

Nishu Sood; Deutsche Bank.

Thanks. I wanted to ask about the kind of mix shift in terms of your product. Obviously, in the past couple quarters you have emphasized the first-time buyer and kind of recast your product type. But looking at just some of the more recent trends, obviously you talked about the rising price environment, absent just obviously the lack of incentives, and as well the new lots you purchased, the $59 million, 1,100 lots. That implies a little over $50,000 per lot, which sounds a little more of a move-up type product. So I was just wondering if you could go into that in a little more detail. You touched on better locations. Maybe you're moving -- meaning closer in. I just wanted to get your thoughts on that and whether we could begin to see some shift back to the move-up type product.

You know, I wouldn't put a lot of stock in that $50,000 number, because certainly if that was the number in California and Colorado, that would be entry level. But the truth is that you can spend $60,000, $70,000, $80,000 for a lot in California and be entry level. And lots in Texas are $20,000 or $25,000 and they're entry level.

So I think we said 60% of our sales were first-time and first-time move-up. It's hard to distinguish a bright line between what's first-time and first-time move-up. I don't think we're going to be able to get down to become a pure play first-time builder. I think we're going to kind of be in between there, between first-time and first-time move-up.

And we're not saying we're completely vacating the move-up housing business. We still see opportunities there, but we see more opportunities certainly at the lower price points, because we're trying to convert renters into homeowners and they don't have the baggage of trying to sell a home right now. So I think you're going to continue to see us around that $50,000 average lot price as we continue to buy lots, certainly in California, that'll cost more, and in Texas, where a lot of them cost less.

Got it. No, that's helpful. And second question, Steve, you mentioned you would expect your community count to be kind of flattish as the year progresses. Now, obviously you folks were very early and that was obviously a great decision in terms of land purchases last year. So why we wouldn't we expect, with your growth stance and your kind of earliness into the market, why wouldn't community counts be growing? I mean, is that just a function of some delay in opening communities? Or do you have a lot of communities just have a handful of homes left? So why wouldn't that be growing?

Well, we still have a lot of communities to roll off that we have to replace with newer, high margins. And we've made a conscious decision not to move into any new markets and to redouble our efforts to grow market share in our existing markets. So I'm not saying we're going to be flat forever, but I'd say for the next couple quarters as we replace older communities with newer communities we'll probably be relatively flat. And then as we go into next year we'll start to increase community count again.

And also, we're focused on quality over quantity and there's just not as many great opportunities that we can produce higher margins on available today. And there's a lot of action, but the price is going up. And we're going to be judicious about sticking to our underwriting standards and be patient and chase return more than the top line.

Got it. So the communities that you're buying new here, the new lots that you're buying, these are still communities of the sort -- or lots of the sort where you can turn around and open them up pretty quickly, get a sales center going in, let's say, a month or two.

Yes, for the most part -- well, I'd say a few months. If we buy something today we're going to be selling on it in three or four months. And we've got to get our product approved, of course, and there might be some minor work to do there. We've got to get our models built. But within three or four months we could be open. And we are starting to buy some parcels we have to do a little bit of on-site development work and it may take a little bit longer. But generally, we're trying to put things into the pipeline very quickly.

Okay. Thanks a lot.

Carl Reichardt; Wells Fargo.

Hey, guys. How are you? I'm curious, Steve, during the course of the quarter if you could give me a sense what percentage of your communities or your floor plan count you bumped your base prices on? I realize obviously you're getting some margin enhancement from incentive production, but I'm curious about the base prices in general and if that's starting to help or you think it will help margins.

I wouldn't say there's a lot of -- we've had a lot of base price increases. I think it's more about us ratcheting back the incentives. I would say some of the newer communities that we opened, sales pace has been better than we expected. And in those situations, and they're relatively limited, because it's only around 20%, we've actually raised base prices. But across the board, older communities we're not really raising prices on a broad scale. We're just kind of dialing back the incentives a little bit.

Okay, thanks. And then, Larry, just a question for you. I wanted to clarify your cycle time comment. You'd mentioned that you thought that backlog conversion rate would improve. But I wasn't sure if you meant sequentially. Do you think you're going to be in the mid-70's for the course of the year except fourth quarter? Or are we looking at just a slight improvement year on year on conversion rate versus (multiple speakers).

Well, I think the conversion -- I don't think I said it would improve. I think I said it would stay about the same. And of course it's a little bit seasonal, so typically during the back half of the year you do close a little bit higher percentage of backlog than in the front half, so it could go up a little bit. But it's a pretty good conversion rate now, so I'm not expecting it to go up much. But --

Yes. I would say our conversion rate's kind of at a historically high level. But with that said, because we're building homes quicker -- we have our 99-day guarantee program and we do have probably a few more specs than we normally would have -- we expect the conversion rate to stay pretty close to where it's at right now.

Okay, good. That's how I was thinking about it. Thanks, guys. I appreciate it.

Dan Oppenheim; Credit Suisse.

I was wondering if you can talk about -- you talked about the spec levels being a little bit higher than you liked but within the range. Maybe you could talk about where that is at this time here at the end of April relative to where it was at the end of March?

I'm sorry? What'd you say Dan?

Just wondering where the spec count is here at the end of April, so as the tax credit comes to an end and to the specs -- you don't have the specs now but potentially next week -- you don't want the -- the specs aren't quite as desirable once the credit is over. Do you know where your spec count is here at the end of April?

You know, we don't have our numbers yet. I mean, Larry, do you have anything to share?

Yes. Well, I don't think it's come down that much from where it was at quarter end at 602. So it's probably come down a bit, but I don't think we have the number. But we're not worried by having 600. 600 is about four per community and that's a good number for us to have going forward. So it's certainly not an inflated number that we drove up in order to get closings for the tax credit. It's a number we're comfortable with going forward.

Got you. And then --

Particularly considering we're going after more of the entry-level buyer and as we're now selling to more renters, we need to have a few more specs than we traditionally had. Maybe we've traditionally been in that two to three range. Now we're at four and, as Larry said, we're very comfortable with that.

Sure. It makes sense, I guess. Second question -- I am wondering about the land buying. How aggressive do you want to be with that in terms of what's the goal in terms of your supply of land that you have at this time? Historically, your aim was to not have such a long supply of land. What's the thought on that right now? And is there any thought in terms of just what you would like your overall exposure to be on a regional basis?

You know, we don't manage our business based upon years' supply. We look at trying to achieve 15%, 20% growth rate. We look at community count. We look at strategic positions that we can support in A and B markets. It's more opportunity driven than it is years' supply driven. So that's just not one of the factors that we're focused on. Does that answer your question, Dan?

Thanks very much.

Okay.

Alan Ratner; Zelman & Associates.

Hey, good morning guys. Nice quarter. Steve, I was hoping that maybe you can expand a little bit on some of your comments you made about the land market. And I know you indicated that you're starting to purchase some lots that maybe require a little bit of development work. I was wondering if that's more a function of prices on finished lots maybe getting bid up beyond the point that you guys are comfortable paying? Or is that just more a function of the supply of finished lots in your market dwindling to low levels?

Well, I think you're on point. I mean, the prices are getting high. Opportunities are becoming fewer. And there's more upside if we're willing to do some development work. And the better bargains certainly are the lots that maybe have a little bit more hair on them. So not to say there still are not finished lots to buy. We've identified many of them over the quarter. We've identified even more here in April, going into May. And we'll continue to buy finished lots, but at the same time we realize the supply of finished lots is going to dwindle and we need to start looking at lots that we need to improve.

Great. And when I look --

It's not to imply there aren't finished lots now. They're -- the great, great majority, nearly all the lots we have purchased the last quarter, were finished. But we can look forward several quarters and see that that trend over a period of a year or so is going to have to start to switch to more development deals.

Got it. So when I kind of look at the pace that you've been acquiring lots, you've been kind of in the 1,000 to 2,000 range over the past three quarters. Is that something that you kind of shoot for going forward or is it really just a function of what comes to market?

It's what we shoot for, but it's also a function of what's out there. I still think there's quite a bit of supply. I think the banks are becoming more sellers than they were certainly a year ago as prices have come up. And certainly some of the margins on some of the deals we've bought are into the high 20's and those are not sustainable. And we're going to be underwriting things to more of a normal margin, of course. So I'm not worried that we're not going to be able to find lots. I think there's going to be opportunities there.

Okay, that's really helpful. And one just unrelated question, if I could, on the margin. Obviously you get some positive momentum as the mix to new communities increases. Are you concerned at all about rising commodity costs? And do you foresee that being any material headwind in the coming quarters?

Yes. I'm not that concerned. I mean, certainly, there's been some spikes in certain materials. But I think they're going to retreat here as we go into the later part of the summer. I mean, with building volume still at historically low levels and excess capacity in all the major components to go into building homes, I'm not worried about significantly rising commodity costs.

Okay, great. Nice quarter. Thanks a lot.

Josh Levin; Citigroup.

You said April sales were a touch less than March, but only nominally so. What percentage of April sales will close by the June 30th tax credit deadline?

It's just going to -- probably only the ones that were specs.

So basically everyone who bought homes in April, for the most part they knew, unless they were buying a spec, they knew that they are not going to get the tax credit?

Right. Unless they bought a spec. I mean, I'd say if you bought by the end of March and we're building you a house, we probably could get you in by end of June.

So what --

But, so our spec sales have been between one-third and one-half of our monthly and quarterly sales, so I'd say between one-third and one-half of the homes that we sold in April will -- we will deliver by June 30th.

So that means that 50% to two-thirds will not be delivered -- will not be closed by June 30th?

Correct.

Okay. And --

But go back to our backlog, what we had at March 31st and look at what our conversion rate was and you can try and extrapolate what our deliveries are going to be.

Okay. Thank you very much.

David Goldberg; UBS Securities.

The first question is to kind of follow up a little on the spec question. As opposed to thinking about it from the perspective of whether you're trying to bring your specs down, I wonder if you could talk about some of your competitors maybe who've built more spec and if you think you saw price discounting as you moved through April. How worried you are about there being excess spec in the market now? And what kind of possibility there is that there's going to be some price discounting that's going to kind of become a contagion for the rest of the builders?

Well, number one, we're not trying to bring our spec count down. Number two, we didn't see a lot of discounting. We saw the opposite of that. We see incentives tightening. So -- and that's what's helping our margins go up to some extent. And number three, we don't see a lot of builders building a lot of specs, except for maybe one, and you know who that is. And so that's the only builder that's out there kind of going aggressively building specs. And we're able to compete with that builder even though he's got more specs. So --

Maybe I need to clarify the question. The question wasn't so much a March-based question. It was an April-based question and beyond. Are you worried that that particular builder, or any other builders for that matter, are going to be out there trying to discount to try to gain market share?

No.

David, another thing, you know, 90% of the homes being sold are resells and foreclosures. And we really -- we don't really see ourselves competing against the other homebuilders. We're competing against the resell market and we've priced our homes to sell -- to compete head to head with foreclosures and resells. So as long as we're competing with that segment of the market, a few specs out there that a builders may have built aren't going to, in our mind, upset the market that much.

That builder, as big as he is, he can't sway the entire market. And our locations and our product and our salesmanship and our offering -- we're able to compete with that builder.

Got it. Actually, that brings up an interesting kind of follow-up question. I'm wondering -- we've been hearing a lot that with HAF in place now, you're starting to see more short sales as opposed to foreclosures, especially in some of the markets that have been really hard hit by foreclosures. You're starting to see banks start to shift towards doing short sales. And I'm wondering if you guys could comment on how you think that impacts the housing market. Do you think that's a benefit for price stability? And kind of maybe how that's affecting your business in terms of competition?

Well, the foreclosure/short sale situation is a challenge for us. And we're not building a lot of appreciation into our models going forward. And that's why we've got to be very disciplined about what land we buy and where we buy it and what we pay for it. And that's why we believe our research that really helps us localize the business and find those pockets where housing prices have stabilized -- and there are many -- and avoid those pockets where prices may have risk of falling even more, is key and is paramount to our strategy. So we've got to continue to improve our game and we've got to be able to compete against resales and used homes and drive our cost down and improve our product by building homes quicker and offering energy-saving features that differentiate us from resale and used homes. And we're going to compete.

So it's safe to say there's no difference in terms of whether it's a foreclosure or a short sale, though, in terms of the way it impacts the market?

I don't think so.

Okay. Thank you.

Thank you. Bose George; Keefe Bruyette & Woods;

This is Jade Rahmani on for Bose George from KBW. We wanted to ask about your capital deployment strategy and how you weigh the tradeoff between debt pay-down or debt issuance and land acquisition. Do you expect to use a balanced capital deployment strategy or would you consider increasing leverage as you make some of these land purchases?

Well, we don't expect to pay down any more debt than what we've previously announced. We've termed out our debt so it's pretty long term. We think we can do better by deploying our excess capital into buying land that we can get high margins and high return on assets on. And with the same token, with over $400 million of cash and old lots that we can still generate cash from, we don't expect that we'll need to be taking on any new debt for the foreseeable future. So I think our balance sheet's pretty much what you see what you get.

We will eventually foresee spending some of the cash on expanding the business, buying new lots, growing WIP as the market recovers. And we would expect the net debt to capital ratio to go back up to the kind of 40% range over time as that happens. But we don't plan to leverage up the company. We don't want to raise a lot of debt and take a really leveraged position going forward.

Okay, great. That's helpful. And then secondly, just going back to the Texas question, we wanted to find out if there's any sharper seasonality in Texas versus other states, or anything else driving the declining community count that you could speak to.

No, I think the declining community count is just, as I said earlier, us getting more efficient and rotating out of some of the low absorption, lower margin communities that we had on option and focusing on a less-is-more strategy with communities that we can get higher absorption rates. So I don't think there's anything else to it than that.

And no further seasonality in Texas?

No.

Okay. Great. Thanks a lot.

Thank you. Mr. Seay and Mr. Hilton, would you like to take one or two more questions from queue?

Sure. We'll take a couple more.

Jim Wilson; JMP Securities.

My questions are just really related to margins, particularly regionally. Larry, was there any meaningful difference in what you found in gross margins for the quarter? And kind of how pricing and margins are proceeding?

Yes. Well, most of it's being driven by where we've added the new communities. But there are still a couple of difficult markets, particularly Nevada where margins have been a little more depressed and remain depressed and where we haven't bought new communities. So I would point at Nevada as being still the toughest market we are in from a margin standpoint.

Okay. And then I guess on a go-forward basis as you look at these deals, is there any meaningful difference in the margins you're looking for in any given market, higher in California, for instance, or versus lower in Texas given the nature of the market? Or how would you characterize what you're seeing and what you're getting in (inaudible)?

No, we look at markets within markets. So some of our A-plus markets we may be willing to accept a little bit lower margin, because there's less risk than a B-minus market. So we don't ascribe a different margin or return to California versus Texas, because we see them all recovering. We're really looking more at the individual sub markets within the market and ascertaining the risk to those and having that drive what our margin's going to be.

Or, for example, like a finished lot deal would have less risk than a development deal, because of development risk. So we might have a slightly higher return requirement for a development deal than a finished lot deal.

Okay. All right. Great. Thanks.

Ken Leon; Standard & Poor's.

A couple questions on land acquisition and new communities. First a clarification -- the 20 communities to be built out, are they owned or still part of new acquisitions?

We already own those or control those. And they're just working through our system to bring them to market. Either we're building the models right now or we're waiting to get permits, but we already do own or control those.

Yes. And then, as you shift your acquisition to unfinished lots from finished and look at your targets, whether it be margins or returns, are you still looking to build out unfinished lots in 2010? Or do these become part of what you have in inventory for 2011, where the pricing environment might be very different?

Well, it's getting pretty late in the year for us to be able to buy raw land and finish it and deliver it in 2010, so those will be driven more towards 2011 and beyond. That said, there are still opportunities for us to buy finished lots this year, right now, and deliver homes on them this year. Because our cycle times have shrunk so much we can bring these communities to market very quickly and we can get WIP delivered very quickly.

So we still think we can improve the back half of the year or the last quarter of the year by taking advantage of certain opportunities that we're pursuing right now. But that said, there's a point here in the near future, our acquisitions are going to be benefiting 2011 more than 2010.

Okay. And Texas -- you're in most markets, but are there some markets other than the two that you mentioned where you feel it's worth taking a bigger stake and trying to get a bigger share of the market?

Well, we're very bullish about Austin and San Antonio. And we're trying to improve our market share there, of course, and are aggressively out looking for lot -- land opportunities in those markets as well.

Okay. Thank you.

Well, I think that wraps up all our questions for today. And I appreciate everybody's attention and support of Meritage. And we'll look forward to talking to you next quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.