Meritage Homes Corporation (MTH) Q4 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Fourth Quarter 2025 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead.

Thank you, operator. Good morning, and welcome to our analyst call to discuss our fourth quarter 2025 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2024 annual report on Form 10-K and Form 10-Q for subsequent quarters. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. Share and per share amounts have been retroactively restated to reflect our January 2, 2025, stock split for all prior periods. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve?

Thank you, Emily. Welcome to everyone listening in on our call. Today, I'll begin with a brief overview of market trends and highlight our fourth quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. The fourth quarter of 2025 ended the year marked by much softer-than-anticipated market conditions as affordability challenges persisted and buyer confidence deteriorated. Our fourth quarter 2025 sales orders totaled 3,224 and our average absorption pace was 3.2 net sales per month, reflecting Q4 sales seasonality, a pullback in buyer urgency and a strategic decision to hold the line on incentives. Despite the tougher conditions, our 60-day closing guarantee and healthy supply of nearly completed spec inventory contributed to another quarter with an exceptional backlog conversion rate of 221%. We delivered 3,755 homes and home closing revenue of $1.4 billion this quarter, which led to an adjusted home closing gross margin of 19.3% and adjusted diluted EPS of $1.67, both in line with our guidance range. We also increased our book value per share 7% year-over-year and completed $150 million of stock of share buybacks, returning nearly $180 million in total capital to shareholders this quarter via repurchases and dividends. Our full year 2025 sales volume of 14,650 homes was essentially flat compared to prior year as we grew ending community count 15% year-over-year to 336 communities, offsetting slower demand. On a full year basis, we achieved an average absorption pace of 3.9, which we believe was better than the broader market trends, demonstrating the benefit of our strategic focus, including our strong realtor engagement. We anticipate that in the near term, market conditions will continue to be impacted by elevated mortgage interest rates, job security concerns and greater macroeconomic geopolitical uncertainties. However, long-term housing demand remains supported by favorable demographics and undersupply of affordable homes in the United States. We believe our strategy allows us to effectively compete with existing home sales, which will continue to create a market differentiator for us. With that, I'll turn it over to Phillippe.

Thank you, Steve. First, I want to thank our Meritage team for their hard work and dedication this year. Through challenging conditions, they never wavered from our vision to positively impact the lives of our customers as evidenced by our industry-leading customer satisfaction scores for 2025, while still focused on generating value for our shareholders. I would like to emphasize our balanced approach to capital allocation. We strategically terminate certain land deals to redeploy our capital towards repurchasing additional shares and acquiring new land that will enhance our long-term portfolio. These decisions were influenced by several factors: our market outlook, the land market, growth targets, our current stock valuation and the evolving macroeconomic landscape. The resulting changes stem from a thorough review of our controlled asset pool, allowing us to make informed decisions about which deals to exit to better position ourselves for the future. While we always encounter a few deals that don't meet our criteria after due diligence, we do not anticipate this level of deal terminations to reoccur, assuming the current economic environment remains stable. The recent slowing demand environment has presented opportunities to enhance our land portfolio in specific submarkets. We observed land deals returning to the market, sometimes in more strategic locations and with more favorable structures. Although land prices have not significantly declined, we believe these alternatives will positively impact our long-term profitability in the coming years. Consequently, we have unwound some existing land contracts to reallocate capital towards additional share repurchases and new and future land deals. Based on our current view of our overhead this quarter, building on a multiyear technology initiative focused on automation and process efficiencies, we are now able to achieve improved back office productivity aligned with our move-in ready all-spec strategy. Our goal is to remain highly efficient and drive increased operating leverage of near-term macroeconomic conditions. Finally, as announced in Q4, we are committed to redeploying $400 million towards share buybacks in 2026, highlighting our view that the stock remains significantly undervalued. We repurchased approximately 2.2 million shares this quarter at an average discount of 12% to 2025 year-end book value per share. For full year 2025, we repurchased 6% of our outstanding shares. Our decisions have been thoughtful and intentional considering the current environment, and we believe the actions we are taking today position Meritage to continue to generate continued long-term value creation. Now turning to Slide 4. Fourth quarter 2025 orders were 2% lower year-over-year, primarily due to an 18% decline in average absorption pace, which was mostly offset by an 18% increase in average community count. The cancellation rate ticked up to 14% this quarter, but remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our fourth quarter 2025 ending community count of 336 was an all-time high, up 15% year-over-year compared to 292 at December 31, 2024, and up 1% sequentially compared to 334 at September 30, 2025. During the quarter, we brought 35 new communities online throughout all of our regions. For full year 2025, we opened over 160 communities. In addition, we are expecting another 5% to 10% community count growth in 2026. Given our robust growth in 2025 and further expansion in 2026, we believe Meritage is well positioned to gain market share, both near term and as macro conditions improve. Our fourth quarter 2025 average absorption pace was 3.2 compared to 3.9 in the prior year as we intentionally elected to not further lean into incentives where we experienced market inelasticity from weakened demand in order to balance margin and velocity. We remain committed to maximizing the value of every asset in our land book. Long term, we continue to target 4 net sales per month on average, the pace at which we are able to operate most efficiently and leverage our fixed cost. However, we are willing to temporarily moderate slightly from this target to optimize our business in the current demand environment. ASP on orders this quarter of $374,000 was down 6% from prior year due to an increased use of incentives and discounts as well as geographic mix. We don't yet know how the spring selling season will unfold, but we are encouraged by improved selling conditions in January when compared to the more difficult demand dynamics we experienced in December. We are also hopeful that lower mortgage rates will unwind some of the lock-in effect for existing homeowners who are looking to move up. Now moving to the regional level trends. In Q4, demand patterns were highly localized by market with a generally tougher selling environment nationwide. Across all regions, incentive utilization increased to get buyers off the fence. In our most favorable markets, Dallas, Houston, North and South Carolina, we maintained a strong absorption pace supported by resilient local economic conditions. Conversely, our teams faced lower demand and aggressive local competition in Austin, San Antonio, parts of Florida, Northern California and Colorado. We deliberately chose to hold our ground in these markets and accept lower sales volumes as we look to the spring selling season to work through our excess home inventory. Now turning to Slide 6. In Q4, to align with our current sales pace, we moderated starts, which totaled approximately 2,700 homes. 24% less than last year's Q4 and 12% lower than Q3. As our spec targets are a function of expected demand, our reduced cycle times allow us to quickly flex and ramp up starts pace if demand picks up in the spring selling season or slow it down if conditions were to erode further. With 63% of Q4 closings also sold during the quarter, our backlog conversion rate was yet another all-time high for the company of 221%, reflecting the benefit of our 60-day closing rate guarantee. As a result, our ending backlog declined 24% year-over-year from approximately 1,500 as of December 31, 2024, to approximately 1,200 homes as of December 31, 2025. With our improved cycle times, we are able to maintain lower inventory levels without compromising our 60-day closing commitment as labor availability and supply chains are stable and predictable. We reiterate our long-term backlog conversion target of 175% to 200%. We believe the most meaningful view of our inventory is the combined total of our specs and backlog as more than 50% of our deliveries consistently come from intra-quarter sales for the last 5 quarters. We had approximately 7,000 specs and backlog units at December 31, 2025, compared to about 8,600 units at December 31, 2024. We ended the quarter with approximately 5,800 spec homes, down 17% from approximately 7,000 specs in the prior year and down 8% sequentially from Q3. The spec count reduction was deliberate and intentional as it is not a constraint on our closing potential for 2026, given our faster construction cycle times and ample available spec inventory. The 17 specs per store this quarter was our lowest level since mid-2023. This translated to 5-month supply in line with our target of 4 to 6 months supply of specs on the ground and intentionally skewed slightly higher as we prepare for the spring selling season. In the fourth quarter of 2024, we had 24 specs per store or 6 months of supply. Our completed specs comprised 50% of our total spec count at December 31, 2025. This level is slightly above our target of approximately 1/3 completed specs, and we intend to bring this ratio down during the spring selling season. With that, I will now turn it over to Hilla to walk through our financial results.

Thank you, Phillippe. Let's turn to Slide 7 and detail. Fourth quarter 2025 home closing revenue of $1.4 billion was 12% lower than prior year as a result of both 7% lower home closing volume and a 5% decrease in ASP on closings to $375,000 per home. Our affordability focus is evident as our ASP was notably below the $411,000 median ASP on 2025 closings in the U.S. Our closing and revenue were slightly below our guidance range as we intentionally slowed our pace by limiting the layering of multiple incentives and preserving margin in markets with inelastic demand. Despite an increased focus on price and margin, overall ASP on closings was impacted by the increased take rate of incentives as compared to prior year and geographic mix shift as the West region with our highest ASPs comprised a smaller portion of closings this quarter. We anticipate elevated incentive levels will continue near term, although the cost of financing incentives is starting to moderate. Home closing gross margin was 16.5% for the quarter, and adjusted gross margin was 19.3%, excluding $27.9 million in terminated land deal walkaway charges, $7.8 million of real estate inventory impairments and $3.2 million in severance costs in the fourth quarter of 2025. This compared to fourth quarter 2024 home closing gross margin of 23.2% and adjusted gross margin of 23.3%, excluding $2.8 million in comparable terminated land deal walkaway charges. As Phillippe mentioned, we elected to terminate certain option land positions to release capital and topgrade our land portfolio as better opportunities become available. We exited land deals across all regions with approximately 2/3 of the $27.9 million in walkaway charges coming from the East region. Our impairment assessments are conducted minimally on an annual basis or quarterly during declining market conditions as we're currently experiencing. We evaluate the recoverability of all of our real estate assets, both owned and controlled as part of this review. In addition to terminating over 3,400 lots resulting in the walkaway charges, we also recorded $7.8 million in impairments this quarter on owned inventory as we adjusted pricing to local market conditions. Adjusted home closing gross margin was 400 bps lower in Q4 as compared to prior year due to greater utilization of incentives and discounts, higher lot costs and loss leverage, all of which were partially offset by improved direct costs and shorter cycle times. Our land basis in 2025 included elevated land development costs from work completed over the past several years, which will continue to impact our margins in 2026. However, we are hopeful that starting in late 2027, our lot costs as a percentage of ASP should start to return to historical averages and we reflect renegotiated land development costs and the lower land basis we expect to be able to acquire over the next several quarters. During the quarter, we had direct cost savings of nearly 4% per square foot on a year-over-year basis. More recent starts have lower direct costs, although the benefits will not be visible until later in 2026 as we continue to work through our existing spec inventory that was built earlier in the year. Our cycle times held to a sub 110-day calendar schedule, in line with Q3, but an improvement compared to prior year. Our long-term gross margin target remains at 22.5% to 23.5%. We expect to reach the target once incentive levels return to historical averages and market conditions normalize. SG&A as a percentage of home closing revenue in the fourth quarter of 2025 was 10.6% compared to 10.8% in the fourth quarter of 2024, primarily due to lower performance-based compensation, which was partially offset by lost leverage as well as higher external commissions and technology costs. Q4 external commission costs were higher year-over-year to help secure volume in a tougher selling environment. Our co-broke percentage remained similar to the first 9 months of this year in the low 90s percentage capture rate, which we believe is at or near the top of our peer group. We also continue to see an increase in repeat business from realtors, underscoring the strength of our broker relationships. Fourth quarter 2025 SG&A included $2.4 million of severance costs with no similar charges in the prior year. We maintain our long-term SG&A target of 9.5%, which we expect to achieve at higher closing volumes. The fourth quarter's effective income tax rate was 18.5% this year compared to 22.1% for the fourth quarter of 2024. The 2025 tax rate reflected our purchase of below-market 45Z transferable clean fuel production tax credits that reduced income tax expense this quarter. This was partially offset by fewer homes qualifying for energy tax credits under the Inflation Reduction Act, giving the new higher construction threshold required to earn tax credits this year. We expect a minimal impact in 2026 from the complete elimination of the energy tax credit by June 30 as we were not eligible for such credits in most of our markets throughout 2025. Overall, lower home closing revenue and gross profit led to a 30% year-over-year decrease in fourth quarter 2025 adjusted diluted EPS to $1.67 from $2.39 in 2024. There were $42.9 million in nonrecurring charges this quarter and $2.8 million in the prior year. As for full year 2025 results compared to prior year, orders were flat, closings were down 4% and our home closing revenue decreased 9% to $5.8 billion. Excluding $60.2 million in nonrecurring charges compared to $6.7 million in 2024, our full year adjusted gross margin of 20.8% was 420 bps lower than 25.0% last year, primarily due to greater use of incentives, higher lot costs and loss leverage. SG&A as a percentage of home closing revenue was 10.7% in 2025 versus 10.1% in 2024 as a result of loss leverage as well as higher external commissions, spec maintenance costs and spend on technology. Excluding $66.4 million in nonrecurring charges compared to $6.7 million in 2024, adjusted diluted EPS for 2025 was $7.05 compared to $10.79 in 2024. Before we move on to the balance sheet, I wanted to quickly cover our customers' fourth quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain relatively consistent with our historical averages. While the financial strength of our customers has not materially changed, buyer psychology is driving the demand for higher incentives and discounts. On to Slide 8. Our balance sheet remained healthy at December 31, 2025, with cash of $775 million, nothing drawn on our credit facility and net debt to cap of 16.9%. As a reminder, our net debt-to-cap ceiling remains in the mid-20% range. Based on market opportunities to topgrade our land book that we already covered, we walked away from certain land positions this quarter. Further, in response to slower demand, we experienced fewer community closeouts, allowing us to phase land development into smaller parcels and conserve cash. These combined efforts translated to $416 million in land spend this quarter, 40% less than last year. Given current market conditions, we are forecasting land acquisition and development spend of up to $2 billion in 2026. We returned $179 million of capital to shareholders via buybacks and dividends this quarter, up from $67 million in the same period last year. In Q4, we accelerated share repurchases to over 2.2 million shares, spending almost 4x more than prior year in the same quarter. For full year 2025, we bought back a company record of $295 million worth of shares, reducing our outstanding share count by 6%. We ended the year with $514 million still available under the repurchase program. We have now repurchased nearly $836 million or 22% of our outstanding common stock since implementing our share buyback program in mid-2018. And as we shared in our November press release, we plan to programmatically buy back $100 million of shares in each quarter in 2026, assuming no material additional market shifts. We increased our quarterly dividend 15% year-over-year to $0.43 per share in 2025 from $0.375 per share in 2024. Our cash dividend totaled $29 million in the fourth quarter of 2025 and $121 million for the full year. We have returned nearly $270 million to shareholders in the form of dividends since we initiated this program 3 years ago. We will be evaluating the 2026 quarterly cash dividend amount next month, and we'll share the update publicly when available. In 2025, we returned a total of $416 million of capital to shareholders or 92% of this year's total earnings. On a cumulative basis, since mid-2018, we have returned over $1.1 billion in total capital to shareholders through both buybacks and dividends. Turning to Slide 9. Our net lot activity was a decrease of about 500 lots this quarter as our approximate 3,400 lot terminations exceeded new lots put under control. In the fourth quarter of 2024, we put nearly 14,400 net new lots under control. As of December 31, 2025, we owned or controlled a total of about 77,600 lots, equating to 5.2 years supply of the last 12 months closings. We also had nearly 14,600 lots that were still undergoing diligence at the end of the quarter. We remain focused on utilizing more off-balance sheet financing vehicles and target a mix of about 60% owned and 40% option lots, although we look to balance margin and IRR from such initiatives. About 72% of our total lot inventory at December 31, 2025, was owned and 28% was optioned compared to prior year where we had a 62% owned inventory and a 38% option lot position. Since our 3,400 lot terminations this quarter were all off-book controlled lots, our ratios are temporarily disproportionately skewed to owned at year-end. Finally, I'll direct you to Slide 10. I want to emphasize that our guidance is based on current market conditions. We're guiding to full year 2026 closings in line with our 2025 performance in both units and home closing revenue, assuming no changes in market conditions. For Q1 2026, we are projecting total home closings between 3,000 and 3,300 units, home closing revenue of $1.13 billion to $1.24 billion, home closing gross margin of 18% to 19%, an effective tax rate of about 24% and diluted EPS in the range of $0.87 to $1.13. With that, I'll turn it back over to Phillippe.

Thank you, Hilla. In closing, please turn to Slide 11. As we look to 2026 and beyond, I want to remind everyone about who Meritage has chosen to be, a top 5 builder focused on spec building with move-in ready inventory, streamlined operations, a diverse geographic footprint and a differentiated ability to compete against retail given our 60-day closing ready guarantee and realtor engagement. All of these attributes give us a clear competitive advantage to operate efficiently under all market environments. When combined with our community count growth and improved cycle times, I believe Meritage is well positioned to continue to capture market share when demand dynamics improve. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

[Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research.

First one is on your 2026 outlook. You mentioned historically, you saw that 4 absorption pace per month. Near term, you're willing to dip a bit below that level. I think the incentive environment has been challenging for a while now. So what drove the change in your approach here? And then what is the temporary new level of absorption we should expect you to operate in the current environment?

Thanks, Trevor. So let me just talk about what drove the temporary refocus on margin and not chasing incentives. As we rolled into Q4, we saw a lot of builders clearing the decks with aged inventory. And so we knew that incentives were going to be elevated in Q4 and intentionally chose at least for that quarter to not chase additional sales and operate at a slightly slower volume. As we look into Q1, I think there's still some noise in the system. There's still some builders out there, including ourselves, who are clearing inventory. So we'll see how it goes. But we do expect the spring selling season to be better, so we see opportunities for improved returns, both in the form of absorptions and margins in Q1 and Q2. So our goal is to try to do 4 a month throughout the year. But right now, we're hedging a little bit based on what the builder competition is doing and waiting to see exactly how the spring selling season will materialize.

Yes. We've not reset a different target. It's community by community, week by week. The goal is still an average of 4 net sales per store, which we achieved in 2025. We were just a share shy of it at 3.9%.

For the full year. Yes.

Okay. Okay. That's a really helpful clarification. And I think also a very smart approach in the current environment. The second question is related to specs. You've done a really good job of working down your specs per community. I think you mentioned they were down to 17 versus 24 a year ago. With that in mind, are you -- do you have those where you want them now? Do you expect a further reduction here moving forward? And then I think you may have mentioned it, but can you remind us what portion of those specs are finished? And where do you target finished specs per community in the coming quarters?

Yes. Thanks for the question. I think we're not quite where we want to be. We still have about 50% of our specs are nearing finished or finished. We'd like that to be more around 1/3. We like to have about 1/3 that can move in, in 30 days and about 1/3 that can move in 60 days and then the other 1/3, we're just starting. So we're getting close to that, but we have -- still have some areas where we're whittling down our finished inventory. As far as the 17 specs per community, that's pretty close to our target. It might go down a little bit if the market doesn't cooperate in certain places, but that's pretty reasonable. And we always like to carry a little bit more specs right now because we expect the spring selling season to be the strongest part of the year. And then we carry a little bit less specs in the back half of the year when seasonality were to occur.

We'll take our next question from Alan Ratner with Zelman.

First question, I just want to clarify, the community count guidance of 5% to 10%, your community count ramps pretty meaningfully throughout '25. So is that growth off of your year-end count? Or is that on an average for the year, which I think if it's the latter, I guess, would imply more like a flatlining from here. Can you just clarify that?

It's the growth off our current year-end. So it's not we'll have 5% to 10% incremental community count growth this year.

Got you. Okay. Great. And then on the margin guidance, I think if I'm looking at this correctly, adjusting for the kind of charges this quarter, it implies about maybe 70 basis points of sequential pressure on an apples-to-apples basis in 1Q. And I think that's pretty in line with like your typical seasonal pullback in 1Q. Maybe Hilla, you could just refresh my memory. I believe there is some seasonality in your margins. So should I interpret that guide as kind of a flattish guide adjusting for seasonality?

Yes, you're exactly right. So when you look at the midpoint of our closing units versus where we were in Q4 for closings, we've typically said there's up to 100 bps of loss leverage in margins. So you're seeing that in the guidance for Q1. Maybe a little bit of an incentive environment in Q4, still closing in Q1, maybe some of the December noise. But for the most part, what we're seeing right now is holding steady with some hopeful green shoots from the spring selling season.

Got you. So that seems pretty encouraging, I guess, just given the trends that we saw through '25, it feels like maybe things are firming up a little bit. And I'm sure a lot of that has to do with the gentle pivot you guys are making, maybe a little bit more balance between pace and price. But as we think about the remainder of '26, recognizing you don't give guidance, can you just kind of talk through what the potential headwinds and tailwinds could be, assuming you do solve for that flattish volume outlook, which feels more conservative than certainly the expectations you had coming into this year?

Yes. And absolutely. I think the biggest tailwind is our starting backlog. As we said, we intentionally chose not to chase the incentives in Q4 during a time of seasonality, consumer confidence fell weak. We saw a lot of builders trying to clear out old inventory, and we felt like we have a better return on our inventory in Q1 than we did in Q4. So that starting backlog is really what we're trying to overcome, even though we have higher community count growth, and we still expect to, on average, sell around 4 a month, trying to overcome that starting backlog is going to be the big goal. So if the spring selling season is better than we think and the incentive environment moderates and some of the competition stabilizes, I think that's the tailwind. The headwind is the higher rates that are still out there. Obviously, that's pressuring the entry-level buyer more than the move-up buyer. And then certain regional nuances as we look for better performance in Florida, better performance out West. So it's just a lot of still unknowns right now. And then the #1 headwind that everyone knows about is consumer confidence, which is ultimately, I think, a bigger deal than affordability right now. And hopefully, the consumer starts to feel better about things as we move throughout the year.

So I'll add 2 other points. And Alan, as you know, we don't guide full year margin at this point, so we can't give any specifics. But 2 things to consider, we've mentioned that we're already seeing some moderating in the cost, how expensive it is for us to buy rate lock. So assuming that trend continues, there's a potential improvement during the year. We can't sit here on the 29th of January and predict what rates are going to do. But if the trend holds or improves, I think that's an opportunity for margin. And then the other item we mentioned in our prepared remarks, we've seen some pretty fantastic savings on direct costs, 4% year-over-year as we close out the year. So as you guys know, we have quite a nice volume of existing inventory that we're going to go ahead and sell through Q1 and part of Q2. But as you see some of those newer homes coming through, their direct cost should be at the lower basis. So even holding everything else even, there should be some savings coming through on the lower direct. So again, there's no specific numbers that we're providing at this time. But directionally, those are 2 things that we can look to as we look to the rest of 2026.

And we'll take our next question from Michael Rehaut with JPMorgan.

I wanted to first delve in a little bit to your statement earlier, Phillippe, where you said you were encouraged in January, maybe around demand trends. And you also kind of said that you hope or expect the spring selling season to be better. When you say better, I guess, I was just wondering if that's better than the fourth quarter, so in line with normal seasonality or better versus the spring selling season from a year ago? And also, what signs or data points are out there that give you that encouragement in terms of what's happened so far in January?

Sure. I think better than Q4. I'm not sure if it's going to be better than last spring selling season. last spring selling season wasn't too bad. We were selling well over 4 a month in Q1 and Q2 of last year. So I'm optimistic that we can get back to 4 a month here in Q1 and Q2. Why am I optimistic? I think Q4 was really bad, I would say that to start out with. But generally, as the year slipped, we started to see better prospects throughout our funnel. The realtor community indicated to us that more buyers were out. They had more people that they were working with. The first couple of weeks of January were much better than the first couple of weeks of November and December. And so for all those reasons, we felt pretty good. The incentive utilization out there seem to start moderating. We saw less discounting by builders. So there was a lot of good things that we saw out there that give us hope and optimism about the spring selling season. But it's just a little too early to tell if that's structural or temporary because people pulled out of the market so hard in Q4 and they're reentering in Q1. And obviously, the storm has really shut down a big part of the country as well. So we're -- it's hard to exactly see what's happening with that as well.

Okay. No, I appreciate that. I guess, secondly, I'd love your thoughts around some of the administration's comments with regards to share repurchase. I'm sure you've obviously seen the comments by Bill Pulte around share repurchase versus core investment. And if you have any additional color, if you have any contact with administration officials or any thoughts around those comments, specifically as it relates to your intention for a higher level of share repurchase in '26?

Yes. We obviously take the federal government very seriously. We want to partner and collaborate with them. Our whole strategy as a company is around affordability. We have one of the lowest ASPs in the industry. 90% of our product is below FHA. We carry a bunch of specs to solve the void of the lack of affordable housing. So we are all in on whatever we can do with the federal government to continue to unlock the buyers that are basically priced out of the market. But we also believe that buybacks are a big part of our balanced approach to investing in operational growth and returning capital to our shareholders. So we balance those things out. We're still growing our business. We're still carrying specs, but we also have the ability to return more capital to our shareholders, which is the responsible thing to do. When our stock is trading at a significant discount to intrinsic value, the best investment I can make for our shareholders is to buy our existing enterprise at a discount, and we're going to do that as long as the support is there and there's no unintended consequences, which currently I don't see. So that's what I know today. We're learning more each and every day. We're working with the federal government when they ask for our input and our perspective, and we'll continue to navigate it as best we can.

And we'll take our next question from John Lovallo with UBS.

So the delivery outlook for the full year is essentially flat year-over-year. The first quarter is down about 8%, which seems to imply that we return to year-over-year growth in the second quarter through the fourth quarter. So I guess the question is, is it fair to assume that sort of the newer strategy of driving the highest volume and margins in the first quarter and the second quarter may be pushed out a bit maybe into 2027 rather than this year?

We'll see, right? I think we're going to see how the incentive environment evolves here over the next 5 quarters, if it stabilizes and we're able to go out and get 4 a month in a profitable way and not compromise our land book, we're going to go do that as quickly as we can. So we'll just see how things go. The real challenge with our 2026 outlook versus 2025 is just how we're starting out the year. The backlog is down. We just came off a pretty slow Q4, and we're intentionally thinking about Q1 a little bit more conservatively until we understand that incentive environment. But at the end of the day, we're looking to optimize our business at 4 a month in almost every scenario, except where it becomes so inelastic that the cost of that incremental demand on a community-by-community basis is too material.

I just want to clarify, there's a difference between sales and closings, obviously. So the spring selling season, that doesn't change. That's going to be the healthiest volume of sales per community. Again, community count is distorting the discussion a little bit. But per community, we should see the kickoff of the spring selling season in February kind of winding down in May. So you're going to see a healthy volume of sales in Q1 and Q2. Now when those sales convert into closings, that's typically Q2, Q3, right? So our sales in April and May are going to close partially in Q2, but also in Q3. So I think that you're going to see some of the volume from the spring selling season closing out in Q1, but more materially so in Q2 and Q3, although the sales volume should be coming through in those 2 first quarters. So hopefully, that helps.

Okay. Great. And then I guess the next question is I just wanted to talk about the community count growth, which has been you're very strong here for some time. And I'm curious if you're seeing what we would typically expect to be stronger kind of conversions within those newer communities than you are in kind of the existing communities. Is the absorption pace better as we would expect?

Modestly. I mean, probably not what we would see in a traditional housing environment with stable consumer confidence, reasonable affordability. I think we always expect to sell more houses when we first open a community, there's a certain fresh and new opportunity for people to own a home. People like to be the first in the community. But I would say over the last couple of quarters, it has been much more modest than we would traditionally see out of our new stores. So as we look at the new community openings in 2026, we're not modeling them with elevated absorptions to start out at the inception of the community.

And we'll take our next question from Rafe Jadrosich with Bank of America.

I just -- I wanted to ask on the SG&A. Can you talk a little bit about the potential cost savings from the cuts you made in the fourth quarter? What's the annualized -- how do we think about like the annualized benefit from those cost reductions?

Yes. So we're not providing a full annualized benefit yet as part of it is a function of the performance in 2026. You can see that we mentioned that we had severance as a component of both SG&A and in margin depending on what type of employee was impacted. So we have a fairly material impact on a go-forward basis from those savings, although a lot of those savings are also just going to be coming from other opportunities. You've heard us talk about increased technology spend for the last several quarters, and we're starting to see the benefits of that technology spend on a go-forward basis as well, not just in lower spend, but in improved efficiencies in our back-office operations. So on top of all the regular things that most folks are also doing, we've cut any excess events or any SG&A that was more discretionary. The overhead count saves should definitely translate into some year-over-year SG&A leverage lift, even though we're guiding to the same-ish revenue, we are looking to see a saving in our SG&A leverage for full year 2026, but we're not providing specific guidance.

Okay. That's very helpful. And then just how do you think about the -- it's obviously good to see the step-up in share repurchase that you announced during the quarter. How do you think longer term about the right level of debt to cap? And is there an opportunity to increase off-balance sheet from where we are today?

Yes. So we're pretty comfortable with the low 20% net debt to cap as a long-term target. We've said if there's anything unique or unusual that temporarily takes us above that, and we can see a very clear path to coming back below it in a quick time line, we would consider it, although we're not all that close to it right now. So we're not contemplating going above that threshold. We definitely are looking at more off-balance sheet vehicles. We appreciate that there's an ability to continue to both reinvest back in Meritage and in shareholder returns. with an increased utilization of off-balance sheet vehicles. So it's something that we're very, very focused on and are looking to dig into deeper. Unfortunately, the ratio got a little bit off balance this quarter because of our intentional 3,400 unit lot termination. So our relative ratio at the end of the year looks a little bit skewed, but it's definitely our intent to double down on off-balance sheet partnerships and relationships, and you should see that percentage increase throughout 2026.

We will take our next question from Stephen Kim with Evercore.

First question, I'm curious about the margin impact we might be able to expect purely from volume deleverage if your closings per community move below 4x, 4 per community per month this year, which I think you said earlier in the call that you would do that on a temporary basis. So like if we assume that there's no change in incentives, is there a decremental margin on a per community basis or some other kind of rule of thumb that would help us quantify what the margin impact from sales per community moving below 4, let's say, they moved to like 3.5 from 4 or something. Is there some rule of thumb that we can think about that would quantify a margin impact from that deleverage?

Unfortunately, it's not that easy. Many of our communities share superintendents and there's some leveraging that can be picked up, especially with our cross-selling initiatives that we have some multiple folks working across several communities. I wouldn't expect a small pullback to have an impact. But if it was a larger pullback in your example from 4% to 3.5%, there would be some impact. I don't think it would be more than 20, 30, 40 bps if that was consistent for the entire year, but I don't know that there's a rule of thumb kind of like what we do for the leveraging between the first and the fourth quarters.

Got you. Okay. That's a helpful framework. I guess the second question is sort of a broader one. It relates to the move-in ready strategy, the 60-day guarantee close and the reliance on realtors. I sort of think about that as a strategy, which was born out of an environment when there was an extreme scarcity of existing homes for sale. But if we were to see existing home inventory rise and let's say, return to sort of historically normal levels, in your view, would that diminish the attractiveness of the move-in ready strategy? And would you be open to changing it?

Well, we're open to changing anything if it makes sense. But I think it was less about what was happening over the last 5 years with the existing home market being locked in and more about the fact that other than location, why do people ever buy a used home versus a new home. And ultimately, when new homes are at such a great value to existing homes, even more so today than they've ever been before, you can get homeowners insurance, your warranty cost is lower, they live better, they are more energy efficiency. The idea that anyone could convince someone to buy a used home versus a new home just doesn't make any sense to the folks over at Meritage Homes. So our strategy is built around when that existing home market comes back, you have a compelling option to buy a new home with no compromise other than whether it's not in the school district you want to live. And so that is what the strategy is based on. It's not based on the lock-in effect.

Yes. I mean, you said it better, but it was designed for when the resale market returns, not for when it was not in place.

Got you. Yes, it's more like saying that you can compete better against resales. So why not accentuate that? That's really the emphasis, right, basically?

That's correct. And that's the whole realtor piece because the realtor really influences that buying decision. And they're a big influencer of why people buy used homes instead of new homes, and we're trying to partner with them in a way where they would consider buying a new home over buying a used home and it's in the best interest of everybody.

And we'll take our next question from Jade Rahmani with KBW.

This is Jason Sabshon on for Jade. When mortgage rates have dipped in the last few months, have you seen builders maintain mortgage buydown levels or reduce them in concert with rate? And do you think builders will pass along savings to customers or try to get better margins?

So as rates have ticked down a little bit, the cost of rate buydowns have definitely shrunk moderately. Some builders have chosen to buy rates down further when that happened, while other builders have maintained the rate buydown where it was, and therefore, that cost has shrunk. I think some builders have reallocated those incentive dollars to other incentives to continue to try to overcome consumer confidence. I believe if consumer confidence were to come back, I believe that builders would pull that back into either margin or additional savings for their customers depending on their particular community and their particular market. So I'm not sure I answered your question because the answer is probably all of the above, depending on who you are and what your strategy is and where your community is.

I would say if you look at margin guidance from the peer group for everyone that's already released, I don't think most folks are taking it back to margin, right? Most folks have guided to lower margins in Q1 with a moderating interest rate environment. So I think the expectation is to continue the status quo until we see a stabilization in demand and then you can make decisions.

Got it. That's helpful. Then separately, what drove higher other income during the quarter because we were expecting a dip due to lower rates.

Yes. It was actually a little bit of a combination of a higher-than-expected cash balance, and we were actually earning interest a little bit longer. And then we had some pickups in legal settlement. There's always ups and downs. It's a tough to model line item, which is why we kind of usually stay silent on it.

And we'll take our last question from Alex Barron with Housing Research Center. Alex Barrón: I think I heard you say that the percentage of homes that are bringing in or using a broker is like 90%. If that's accurate, are you guys paying just the standard commission? Or do you guys use some type of incentive structure, bonuses or anything like that?

Yes. We pay market rate commissions. So depending on which market we're in, whatever everyone else is paying, we pay the same. We do have some incremental loyalty programs if you sold more than 1 home or 2 home or 3 homes, so that's -- but those are pretty small dollars. So generally, the increase in our cost is just the fact that we're at 90% versus whatever other builders are at. Otherwise, it's pretty much market.

Interesting data point we can share. 40% of our volume is repeat volume. So it's not a one and done. So I think that the benefit of our loyalty program and our intentional pivot towards a stronger relationship with the realtor community is definitely paying off since we're seeing very high volume of those realtors come back with customers more than one time. Alex Barrón: So what's the feedback they're providing to you as to why it's that high? Is it mainly the 60-day guarantee and the fact they get paid faster than build-to-order or something like that?

Yes, I don't want to give out all of our secrets over here. But I think, obviously, the #1 factor is that we're able to meet their customer on their time line, right? So when they commit to their customer being able to move, they're able to move at that point, and there's no negotiation there. The home is going to be done, done, done, you're going to move in. I think that realtors generally feel that, that's the same with realtor with existing homes. But the second is also just the transparency. The price is the price, and you're getting a good deal, and you can work with us in a way that feels like working with the existing home market. But yes, I mean, you nailed it. A big part of it is just delivering the home on time and guaranteeing that. Alex Barrón: That's great. If I could also ask on incentives that you guys did this quarter versus the previous quarter, like what percentage of ASP do they comprise?

Yes. Since we're 100% spec builders, we don't provide incentive detail. There is no base price and then you have some incentive off of that price. We just have an all-in price because our homes are sold to complete. So we don't provide that, although we'll share the same commentary that we've shared the last couple of quarters. We're running more than a couple of hundred bps above historical averages, which is why we have a good level of confidence that once things return to normal, our target gross margin of 22.5% to 23.5% is very realistic because that reflects -- the current numbers reflect that elevated incentive market.

Thank you, operator. I'd like to thank everyone who joined the call today for your continued interest in Meritage Homes. We hope you have a wonderful day and a wonderful weekend. Thank you.

Thank you. This concludes today's Meritage Homes Fourth Quarter 2025 Analyst Call. Please disconnect your line at this time, and have a wonderful day.