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Text: We apologize for the technical difficulties just now.
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.
I'll start by giving a brief overview of our significant accomplishments in 2020 and current market trends.
Phillippe will cover our strategy and quarterly performance.
Hilla will provide a financial overview of the quarter and 2021 guidance.
Despite the gravity and impact of the pandemic that affected so many individuals across the globe, 2020 ended up being a great year for the homebuilding industry and for Meritage in particular.
We set the bar for new operational and financial records every quarter during the year, culminating in our all-time highest annual sales orders and home closings, and in turn our best average absorption pace of 5.2 per month since 2005.
We also delivered our greatest annual home closing revenue and homebuilding gross profit and the second strongest annual homebuilding gross margin in our company's history.
Even beyond the balance sheet and income statement, 2020 was quite a year.
We closed our 135,000th home.
And as the industry leader in energy efficiency, we were the first homebuilder to introduce MERV-13 nationwide, the most advanced air filtration system offered today for residential construction, which controls and improves air exchange within the home.
In keeping with our commitment to innovation and enhancing the customer experience, we rolled out 100% contactless selling to our customers.
Our homebuyers can begin their search online, qualify for mortgage through our models virtually, electronically remit their earnest money and earnest deposit, sign a sales agreement, and even close on home online and safety allow it.
We are driving digital enhancements to continuously improve the way customers, employees and trade partners interact with Meritage.
We'll have more to share with you on this initiative throughout 2021.
We pride ourselves on our reputation as a premium homebuilder focused on customer satisfaction.
2020 marked the eighth straight year of award-winning recognition for Meritage as we received various Avid Diamond, Gold and Benchmark awards across nine separate divisions.
In line with our dedication to fostering healthy communities in which we live and work, we donated over $0.5 million to our Meritage Care Foundation to nonprofits like Feeding America and Americares that are focused on helping those affected by COVID-19, fighting hunger and combating homelessness.
And to promote racial equity nationwide, we donated $200,000 to INROADS and the United Negro College Fund and began our multiyear partnership with these organizations.
Our Board of Directors and management are committed to drive DEI, diversity, equity and inclusion, throughout our organization and our industry.
We'll have more to share on DEI in 2021 as well.
And we were also one of the only three public homebuilders who Forbes recognized as one of America's Best Mid-size Companies.
Our employees accomplished all these milestones in 2020 while keeping the health and safety of our fellow team members, customers and trades front of mind during this difficult year.
As we turn to 2021 and beyond, we look to the favorable macroeconomic factors to provide some visibility into future demand.
The housing market remains robust with low mortgage interest rates, and undersupply of new and existing homes for sale and advantageous demographic trends in new home ownership for the millennial and baby boom generations.
The homebuilding industry has already experienced an uptick in demand prior to COVID-19.
And after a brief pause in late March and early April, 2020's unprecedented strength in the housing market was particularly focused on increased demand for healthier and safer homes at affordable price points.
We anticipate these fundamentals to continue into the foreseeable future, which aligned well with our strategic focus on entry-level and first move-up homes.
Since 2016, our strategy has centered around the entry-level and first move-up markets, offering customers affordable yet high-quality homes.
The strength in the housing market this past year enabled us to capture pricing power, which combined with our streamlined, more efficient operating model, produced growing sales volume, higher margins, improved SG&A leverage and our strong Q4 results.
The fourth quarter of 2020 was another record quarter for Meritage, which reflected the continued momentum of the first nine months of the year.
We sold 3,174 homes this quarter, which was 52% higher than the same quarter of 2019.
This represented the hot third highest quarterly orders only to be surpassed by Q2 and Q3 earlier this year.
Home closing revenue of $1.4 billion in the current quarter increased 28% year-over-year.
In the fourth quarter of 2020, we delivered our best quarterly home closing gross margins in 2006 by improving 420 bps to 24% from 19.8% in the prior year.
2020 lacks the normal cadence of seasonality.
The housing market remained robust during the traditionally quiet time of the year.
Capitalizing on the overall industry demand as well as the expansion of our community mix toward entry-level homes, which sell at a higher pace than our first move homes, our absorption of 5.3 per month for the quarter was up 87% year-over-year, even as we increased pricing in all of our geographies in line with strong local market demand.
The per store absorption accelerated faster than total order growth, demonstrating our capacity to generate significant sales volumes once we achieve our 300-community target.
five out of the nine states had absorptions increase over 100% year-over-year this quarter, despite a 19% decline in average active communities.
We continue to focus on growing our spec inventory for our entry-level communities as well as refining our offerings for the first move-up market, which has also experienced solid demand over the last two quarters.
Entry-level comprised almost 70% of total orders for the quarter, up from 55% in the fourth quarter last year.
Entry-level represents 67% of our average active communities during the current quarter compared to 45% a year ago.
As we have hit our relative product mix goal, we expect these ratios to sustain for the next -- for the near to midterm, although mix in individual geography is always adjusting with communities opening and closing.
Our first move communities also experienced improved demand year-over-year, with absorption 91% higher than a year ago.
All our regions reflected solid year-over-year performance in Q4.
The strength in the market was driven by low interest rates, limited supply and shifting buyer preferences for single-family, less densely populated homes.
Our East region led in terms of order growth, with a 76% improvement over the fourth quarter of 2019.
Absorption in the East region increased 118% year-over-year for the quarter, offset by a 20% decline in average community count.
64% of our average active communities in each region sold entry-level product during the quarter.
The East region performance and product mix are now in line with the rest of the company.
The shift to entry-level is nearly there had average absorptions exceeded five per month.
Our Central region, comprising our Texas market, increased orders by 46% over the fourth quarter of 2019, despite a 20% reduction in average community count.
Entry-level communities represented 71% of the Central region's average active community during the fourth quarter of 2020.
This region continues to see solid demand with shifting migration into the state, particularly in the tech sector, with Austin and Dallas Fort Worth seeing outsized demand even by today's standards.
Our fourth quarter 2020 orders in the West region were up 34% over the same quarter in the prior year, driven by a 65% increase in absorptions and partially offset by 18% fewer average communities.
Entry-level communities represented 67% of the West region's average active communities during the quarter.
Colorado had our highest first order absorption in the company this quarter, with an average of 6.4 homes per month in the fourth quarter of 2020 compared to 2.5 in the prior year.
This produced a 48% year-over-year growth in orders, reflecting the hard shift down to ASP price band over the last four to six quarters.
Turning to slide seven.
We closed 32% more homes in the fourth quarter of 2020 than prior year.
And our backlog was 4,672 units at the end of the fourth quarter, reflecting the high absorption pace we achieved this quarter.
Of the 3,744 home closings this quarter, 71% came from previously started spec inventory compared to 61% a year ago.
At December 31, 2020, less than 10% of total specs were completed versus 1/3, which is our typical run rate.
We are selling more specs in early stages of production to meet the surge in demand and are focusing our production efforts on completing our backlog inventory.
Our backlog conversion rates decreased to 71% in the fourth quarter this year compared to 80% last year, reflecting the early stages of construction in our sold homes.
We expect similar trends over the next couple of quarters as demand in the market absorbs our spec inventory at an accelerated pace.
Spec building is the core tenet of our entry-level market-focused strategy, which results in a higher spec inventory in these communities compared to first move-up communities.
We try to keep a four to six month supply of specs on the ground of our entry-level product.
We ended the fourth quarter of 2020 with a little over 2,500 spec homes in inventory or an average of 12.9 per community compared to approximately 3,000 or an average of 12.4 last year, reflecting the significant sales order growth during the fourth quarter.
While specs for community grew, our total staff count did not quite achieve our goal of 3,000 as these homes converted to backlog as quickly as we started them.
However, we are still focused on increasing our specs in January as we move into the spring selling season.
As Philippe noted, the 28% year-over-year closing revenue growth in the fourth quarter was the net impact of 32% increase in home closings and 4% decline in ASP.
While this ASP decline reflects the shift in product mix toward affordable entry-level homes, it also includes price increases throughout 2020 in all of our geographies from strong market demand.
We had our highest quarterly home closing gross revenue since 2006 this quarter, reaching 24%, a 420 bps improvement from the prior year.
The margin reflects our ASP increases achieved throughout the year, the additional leveraging of fixed costs from higher closing volumes as well as operational efficiencies.
We have our entry-level and first move-up construction processes really dialed in today.
We know all of the components of our home intimately and continue to focus on reducing our cost of materials.
Due to the consistent purchasing volumes on a limited number of SKUs, we're able to negotiate lower pricing in bulk purchasing discounts from our vendors.
This consistency and transparency also provide scheduling visibility to our trades and suppliers, allowing all of us to be more efficient and enabling us to attract local labor as we look to be the builder of choice for our contractors.
With this clarity, we have maintained a tight control over our production and gain confidence to start our spec homes on a structured cadence.
To date, we've not experienced elongated cycle times from shortages in the labor pool, but we continue to monitor the space for any changes.
Although lumber inflation has retreated a bit its highest earlier in the year, these costs still remain elevated.
We've been able to mitigate the cost inflation with price increases during 2020, although this is also an area that we are watching closely.
SG&A as a percentage of home closings revenue was 9.3% for the current quarter, which was our lowest quarterly percentage since 2007.
The 80 bps improvement over prior year reflects greater leverage of fixed expenses from efficiencies and higher closing revenue and ongoing permanent cost benefits from technology enhancements, particularly leading to our sales and marketing efforts.
We believe we can sustain strong margins in 2021 despite higher commodity costs, but we will incur a minimal negative impact to our SG&A leverage over the next several quarters.
As expected, we will have some additional costs relating to achieving our 300-community goal prior to the incremental closings and revenue from that new business.
However, we expect to improve our SG&A leverage beyond 2021 once our higher community count starts materially contributing to closing.
Included in our Q4 results are $20.3 million of impairment charges on land sales.
The impairment consists of two projects: one in California that is no longer in strategy for us as it is not an entry-level or first move-up product.
And another in our active adult market that we are looking to wind down.
We anticipate those sales will close in the first half of 2021.
The fourth quarter's effective income tax rate was 21.9% in 2020 compared to 6.3% in the prior year.
In 2019, the extension of the eligible energy tax credit on qualifying homes occurred in December, resulting in the beneficial impact for full year 2018 and '19 reflected in Q4 2019 generating the low tax rate.
With the extension of the 45L provisions into 2021, we expect to continue receiving energy tax credit in a significant percentage of our closings into this year.
Our fourth quarter diluted earnings per share was $3.97, increasing 50% year-over-year compared to 2.65% in the same quarter of 2019.
To highlight just a few items for the full year 2020 results: On a year-over-year basis, we generated a 70% increase in net earnings.
Orders were up 43%, and closings were up 28%.
We delivered $4.5 billion in full year home closing revenue, a 310 bps increase in home closing gross margin to 22%, and a 90 bps improvement in SG&A as a percentage of home closing revenue, ending the year at 10%.
The trends I just covered for Q4 were primarily in place for most of 2020, translating to these record results.
Moving on to slide nine.
We continue to focus on strengthening our balance sheet even as we push toward our 300-community goal.
We achieved several objectives this quarter.
Late in the quarter, we amended our revolving credit facility to extend the maturity date to 2025, changing our revolver to a five year maturity.
We opportunistically repurchased 100,000 shares for a total of $8.8 million in advance of the routine first quarter employee share issuance in 2021.
On November 13, 2020, our Board of Directors authorized an additional $100 million for share repurchases under the existing stock repurchase program.
And we also received two credit rating upgrades.
At December 31, 2020, our cash balance was $746 million, reflecting positive cash flow from operations of $530 million despite increased land acquisition and development spend.
Our net debt to cap reached an all-time low of 10.5%.
We previously noted that we've adjusted our maximum net debt-to-cap target to high 20s to low 30s range from our prior low to mid-40s range as our assets turn quicker with entry-level and first move-up offering.
We intend to use our excess cash on hand to aggressively pursue our community growth target, while also ensuring we do not overextend our balance sheet or liquidity.
On to slide 10.
We already control all the land we need to achieve our 300-community goal.
Our focus now is on developing the land to prepare the communities to open.
We also plan to increase our spend on additional land and development in order to sustain this growth level beyond 2022.
We spent $506 million on land and development this quarter, our highest spend in a single quarter in the company's history and over a 100% increase year-over-year.
For full year 2020, we invested nearly $1.3 billion in land and development.
We anticipate spending more than $1.5 billion annually in 2021 and beyond to sustain and replenish our 300 communities.
In the fourth quarter of 2020, we secured a quarterly record of approximately 11,200 new lots, which translates to 69 new communities.
We put nearly 29,500 gross new lots under control in 2020, a 62% increase as compared to about 18,000 lots in 2019.
Adjusting for land sales and termination, we secured approximately 27,200 net new lots in 2020, representing 192 new communities, of which approximately 81% are entry level.
At year-end with over 55,500 total lots under control, we had 4.7 years' supply of lots based on trailing 12-month closings, in line with our target of four to five years' supply of lots on hand.
We increased our land book by 34% from December 31, 2019.
We are using options or staggered purchasing terms where financially feasible, allowing us to preserve our liquidity.
About 59% of our total inventory at December 31, 2020, was owned and 41% was optioned, an improvement compared to the prior year of 63% owned and 37% optioned.
We've been putting larger land positions under contract several hundred lots at a time to address our accelerated sales pace.
Larger, higher-volume, entry-level communities reduce community level costs per lot and allow us to minimize the community count churn and inefficiencies associated with opening and closing out of communities.
For full year 2020, our new lots under control have an average community size of about 140 lots.
Finally, I'll direct you to slide 11.
We're encouraged by the continued strength in the housing market.
For full year 2021, we are projecting total closings to be between 11,500 and 12,500 units, total home closing revenue of $4.2 billion to $4.6 billion, home closing gross margin of 22% to 23%, and effective tax rate of about 23%, and diluted earnings per share in the range of $10.50 to $11.50.
We ended 2020 with 195 active communities, down from 244 in the prior year.
During the year, we opened up 105 communites, up 40% from 75% in 2019.
Since we anticipate continued strong sales demand in 2021, community count will remain plus-minus 200 for Q1 and Q2 as new community openings will be offset by community closings.
And our projected volume of closings between 11,500 and 12,500 for the full year, we expect to end 2021 with approximately 235 to 245 communities.
The community count growth will continue into Q1 and Q2 of '22 when we anticipate achieving our goal of operating 300 communities by June 2022.
As for Q1 2021, we are projecting total closings to be between 2,600 and 2,900 units, home closing revenue of $950 million to $1.05 billion, home closing gross margin of approximately 22.5%, and diluted earnings per share in the range of $2.25 to $2.50.
Moving on to slide 12.
Our results in 2020 validate that we have a solid strategy and are executing at a high level.
We are achieving strong closing revenue growth due to market strength combined with an increase in both pace and price.
While we are increasing prices in all of our geographies and in line with local market conditions, we are also optimizing sales volume.
Spec building has allowed us to sell at a greater pace and capture market share while not sacrificing profit.
Our efficiencies allowed us to accelerate 2020 closings into 2020, which in turn will let us redeploy the capital to fuel future growth.
Our balance sheet strength reflects increases in operating cash flow at our lowest levels of net debt to capital.
This in turn provides a long runway for growth as well as a safety net in the event of a market downturn.
Since the start of 2019, we have accelerated investments in land acquisition and development to support and sustain future growth levels.
In the fourth quarter, we spent a record $506 million on land and secured approximately 11,200 new lots.
We already control all the land necessary to achieve our 300 active community goal by mid-2022.
Our strong land position enables us to focus on developing lots to get those communities open and to continue to replenish the land pipeline beyond 2022.
To summarize on slide 13, we are entering 2021 with a heavy backlog of almost 4,700 sold homes and more than 2,500 specs completed or under construction, giving us some additional visibility in 2021.
With a solid strategy, strong balance sheet, a healthy land position and a great team that is executing at a high level, we are well positioned for growth.

user
compname reports q4 earnings per share $3.97.
compname reports record fourth quarter 2020 results including a 420 bps increase in home closing gross margin, 50% increase in diluted earnings per share and 52% increase in orders over prior year.
q4 earnings per share $3.97.
sales orders of 3,174 homes for quarter were 52% higher than q4 of 2019.
quarterly closings of 3,744 homes represented 914 additional units versus same quarter prior year.
for 2021, projecting 11,500 to 12,500 home closings with home closing revenue between $4.2 - 4.6 billion.
expect to close out 2021 with about 235-245 communities & to realize diluted earnings per share in range of $10.50 - 11.50.

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