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Text: 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 with a brief discussion about current market trends and provide an overview of our significant accomplishments in 2021.
Demand in the fourth quarter continued to demonstrate the strength we have seen all year.
Mortgage remained very affordable and home buying demand continued to outpace housing inventory, driven by favorable homeland activity from millennials and baby boomers.
As such, Meritage again broke several company records in the fourth quarter of 2021.
In the face of a prolonged supply chain constraints and a tightening labor market, we achieved our highest fourth-quarter sales orders and our second highest quarterly home closings while accelerating our spec starts.
Our fourth-quarter results include the highest quarterly home closing revenue, home closing gross profit, and diluted EPS, as well as the lowest quarterly SG&A as a percentage of home closing revenue in our company's history.
From a full year 2021 perspective, I couldn't be more proud of what our team has accomplished.
We achieved our highest annual sales orders of 13,808 homes and closing of 12,801 homes.
Our 2021 annual home closing revenue was also a record at $5.1 billion as was our full-year home closing gross margin of 27.8%.
Price increases due to sustained strong demand, coupled with our operational efficiency and the leveraging of our fixed cost over higher home closing revenue drove our lowest full-year SG&A rate of 9.2%, translating to our next full-year diluted earnings per share of $19.29.
Our community count grew 33% year over year.
We're earning the spring selling season with 259 active selling communities and forecasting continued double-digit community growth into '22.
We expect that our strategy capitalizing on the solid demand for the entry-level and first move of homes will produce increased volume coming from digital communities and will enable us to gain market share in all of our geographies.
In addition to delivering impressive financial results, we achieved numerous milestones related to our corporate social stewardship in the fourth quarter.
As the team organized around an ambition to Start with Heart, Meritage employees donated countless hours to deliver a new mortgage-free home to a deserving military veteran and his family on Veterans Day in Florida through Operation Homefront.
We also donated to various nonprofit organizations to further strengthen diversity, equity, and inclusion missions and to help families during the holiday season and the communities in which we do business, and to support tree planting programs to share our ongoing approach to long-term sustainability practices.
DE&I commitments and our ESG milestones, we issued our inaugural ESG report during the quarter.
We also joined more than 2,100 other companies by signing the CEO Action for diversity and inclusion pledge.
We'll have more to share about our ESG efforts with you throughout 2022.
We're excited about our employees, executive, and board-level commitments to these important issues.
I want to start by focusing on affordability, which with favorable pricing environment and the anticipated rate hikes coming this year is top of mind for everyone.
Affordability is at the heart of our business strategy that is centered around entry-level and first move-up home.
When we first shifted to this market segment more than five years ago, we did so knowing, eventually, interest rates would go up.
Continue to buy land for even lower ASP products has been our focus over the past two years to act as a counterbalance to the pricing strength all markets have experienced since mid-2020.
Although we have taken increases in line with the market conditions, we expect our new communities to come online at still attractive and affordable ASPs, especially in light of increased FHA limits in all of our markets.
To ensure our product remains affordable, we constantly evaluate the credit metrics of our buyers.
Our customers' FICO scores and DTIs remained stable in the fourth quarter and consistent with historical averages, demonstrating that they are not streaming financially to purchase our homes.
Given the recent interest rate increases, we will continue to monitor the overall affordability of our homes.
During the fourth quarter, we continued to meet our order base in most of our communities to manage margins through supply chain challenges and the tightening labor market and ensure we provide our customers a quality home buying experience.
By focusing on our construction and simplified product strategy, we still achieved record orders and closings in 2021, demonstrating our ability to navigate delays associated with supply materials, labor, entitlement and permitting.
In today's rising rate environment, we believe selling homes later in the construction cycle offers more favorable options to our buyers as they look to lock in their mortgage rate and close escrow, LIBOR rate lock expirations.
With these quarterly results in 2021, we also displayed our ability to achieve industry-leading gross margins.
This was a function of the favorable pricing environment first and foremost, but also our disciplined production approach to managing our construction costs.
As we have mentioned before, spec building typically provide us the opportunity to lock in costs before determining ASP.
However, in a rising cost environment riddled with supply chain issues, we went one step further to avoid cost risk and to better manage our margins.
In cases where cost increases such as lumber, continued path to start of construction, our delayed sales releases allowed us to manage this additional cost exposure.
Managing our order-pay helped generate the meaningful list we have experienced in our gross margins.
Although we are not forecasting any improvement in supply chain challenges, once they do unwind, we expect to remove our sales meeting -- metering and fully allow our community to capture true market demand while maintaining our margin profile.
Now, turning to Slide 5.
Given the long-range cycle times, our fourth quarter closings totaled 3,526 homes, which was down 6% over the challenging comps of prior year.
Entry-level comprised 81% of closings, up from 72% in the prior year.
Total orders of 3,367 for the fourth quarter of 2021 reflected an increase of 6% year over year, driven by a 24% increase in average active community count, which was partially offset by the decrease in average absorptions.
The decline from 5.3 per month in Q4 2020 to 4.5 per month in this current quarter was driven by the tightly metered order pace across most of our footprint, as well as our new community openings occurring late in the quarter.
We continue to reiterate that our sales metering is an intentional choice in order to maximize both our margins and the customer home buying process as we manage through the current supply chain issues in the market today.
Looking at our growing interest lift and the early month sellouts in our communities, we know that actual demand for our home is much greater than what we were seeing in our absorption pace.
Entry-level provided 80% of total orders up from 72% in the fourth quarter last year.
Entry-level also represented 79% of our average active communities, compared to 67% a year ago.
Moving to Slide 6.
The regional level trends we continue to experience strong demand in all of our regions.
Our Central region, comprised of Texas, led in terms of regional average absorption pace with 5.3 per month this quarter.
This 5% year-over-year decline was offset by 17% greater average asset communities, which together contributed to an 11% increase in order volume.
With the state's favorable economic development and growth environment, sustained home buying demand generated a 20% year-over-year increase in ASP orders, the highest increase in all three regions.
To address affordability challenges in the market, our East region continued to shift its product mix toward entry-level, which made up 81% of its average asset communities.
Out of our three regions, the East Region average community count increased the most by 34% year over year, which generated order volume growth of 6%.
The East region increase in community count was offset by a 21% decrease in average absorption pace.
The West Region's fourth quarter 2021 order volume increased 2% year over year mainly due to 19% more average communities, which was partially offset by 14% lower average absorption pace.
Overall, we had a solid performance from all our regions despite ongoing challenges with the supply chain.
As we accelerate spec protection in all of our regions, we expect total order volume to increase throughout 2022.
Turning to Slide 7.
Of our home closings this quarter, 77% came from previously started spec inventory, which increased from 71% a year ago.
We ended the period with nearly 3,200 spec home in inventory or an average of 12.3 per community as we push to get homes on the ground.
This compared to approximately 2,500 specs or an average of 12.9 in the fourth quarter of 2020.
At December 31, 2021, less than 5% of total stacks were completed versus our typical run rate of one-third due to sustained demand and supply constraints.
We accelerate starts to over 3,700 homes in the fourth quarter from approximately 3,400 homes in the third quarter and in line with approximately 3,800 homes in the second quarter, and we expect to continue ramping up-spec parts in 2022 as our community count increases.
Having available spec is not necessary for our 100% spec building strategy.
Despite improving our total spec home inventory year over year, maintaining a four- to six-month supply of entry-level spec has been challenging given the surge in demand and supply chain constraints, and we expect that trend to continue at least in the near term.
We ended the quarter with a backlog of over 5,600 units as our conversion rate declined from 71% last year to 60% this year, resulting from elongated cycle times.
However, it was a slight improvement from 57% in the third quarter.
As we look ahead into 2022, we aren't expecting any improvement in our backlog conversion since we do not anticipate any near-term improvements in the current supply chain.
Once the supply chain stabilizes, we expect our cycle times will shorten and backlog conversion rate will pick up again, while order growth will also reaccelerate as we unwind sales metering.
During the fourth quarter, ongoing supply chain disruptions lengthened construction time by about two weeks sequentially from Q3 to Q4 this year.
Despite these expanded timelines, we still believe our streamlined operations and 100% spec building strategy for entry-level homes has given us a competitive advantage in today's supply chain and labor market conditions by locking in volume and providing workable consistency to our traders.
Coupling these with our reduced SKU counts and streamlined product library has allowed us with some incremental cost advantages.
The benefits of pre-starting homes with simpler products to build up and our steady predictable and repeatable construction work make us a preferred builder of choice.
These strong vendor relationships helped us deliver over 12,800 homes in 2021 and are key to accelerating starts in 2022.
Since we have our facility processes dialed in, we've been able to give our partners more visibility into our business than ever before, so they can plan for what we need.
We provide our schedules to them well in advance to our dealers are preorder.
Our strong partnerships with our suppliers and our limited build-to-order options also allow us to pivot our product selections based on availability, if necessary, as we continue to stay nimble in these unusual times.
Our executive team has been meeting with our top vendors to short capacity commitments for 2022.
Given our significant increase in its big starts as we grow our community count this year, we have also backed up our supplier group with secondary alternative sources to help us with incremental needs should that become necessary.
The 6% year-over-year home closing revenue growth to $1.5 billion in the fourth quarter of 2021 was a result of a 13% increase in ASP due to strong market demand, even as we shifted our product mix toward entry-level homes.
This was partially offset by a 6% decline in home closing volume due to closing time being impacted by supply chain issues.
The 500-bps improvement in fourth quarter 2021 home closing gross margin to 29% from 24% a year ago was primarily driven by a full year of pricing power, which outweighed accelerated cost pressures in almost all cost categories.
We believe that despite volatility in lumber and generally higher commodity costs, we can sustain strong margins into 2022.
SG&A as a percentage of home closing revenue was 8.5% for the current quarter, an 80-bps improvement over prior year.
The higher revenue, lower broker commissions, and the benefits of technology on our sales and marketing efforts allowed us to better leverage our SG&A.
One-time items, including payments to our general counsel, who retired in December of 2021 and a change in the company's retirement vesting eligibility for equity awards totaled $5 million and impacted SG&A expenses by 30 bps in the third quarter of 2021.
We continue to pursue back-office automation and greater technological strides to drive incremental leverage of our SG&A.
The fourth quarter 2021 effective income tax rate was 23.8%, compared to 21.9% in the prior years.
Both years reflected reduced rates primarily from the eligible tax credit when qualifying energy-efficient home closed under the 2019 Taxpayer Certainty and Disaster Tax Release Act.
Increased profit in states with higher tax rates and the reduced benefit of the energy tax credit due to the greater overall profitability of the company, both contributed to the higher tax rate this year.
Since the energy tax rate has not yet been enacted for future periods, we're not assuming any such benefit beyond 2021 at this time.
Pricing power expanded gross margin and improved overhead leverage, combined with lower outstanding share count, all led to the 57% year-over-year increase in fourth-quarter diluted earnings per share to $6.25.
To highlight a few full year 2021 results on a year-over-year basis, we generated a 74% increase in net earnings order unit held steady at about 13,800 for both years.
Closings were up 8%.
We had a 580-bps expansion of our home closing gross margin to 27.8% in 2021, and SG&A as a percentage of home closing revenue improved 80 bps to 9.2%.
Diluted earnings per share was $19.29, a 75% increase from 2020.
Turning to Slide 9.
Our balance sheet remains strong even as we continued investing in land acquisition and development.
At December 31, 2021, our cash balance was $618 million, compared to $746 million at December 31, 2020, reflecting increased investments in real estate and development and inventory rose $956 million during the year, as well as for share repurchases.
During full year 2021, we repurchased about 640,000 shares of stock for $61 million, of which by 244,000 shares totaling $24 million were repurchased during the fourth quarter.
Our net debt-to-cap ratio was 15.1% at December 31, 2021, compared with 10.5% at December 31, 2020.
Our current maximum target for net debt-to-cap is still in the high 20s, which gives us the flexibility to manage liquidity and changing economic conditions.
In December, we extended the maturity date of our $780 million unsecured revolving credit facility to December 2026.
Given our strong balance sheet, we continue to focus our capital spend primarily on growth, concentrating on community counts and increased specs, both of which we expect will drive profitability and help us gain market share.
We also plan to continue routine share buybacks to offset new grants and keep our dilution neutral and they opportunistically repurchase incremental shares.
On to Slide 10.
At December 31, 2021, with over 75,000 total lots under control, our land book increased 35% from year-end 2020, and we had nearly 60 years supply of lots, based on trailing 12-month closing.
While this is slightly above our goal of four- to five-year supply of lots, since we're in growth mode, the calculation on prior year's closings is a bit misleading, based on our forward closing projection of about 15,000 homes for 2022, we have a five-year supply of lots.
We secured 9,000 net new lots this quarter compared to approximately 11,200 in the prior Q4.
This new loss will translate to an estimated 45 net new communities, of which 93% are entry-level.
To address the higher orders pace of entry-level product, the average community size we contracted for this quarter was nearly 200 lots, up from the fourth quarter of 2020 where the average lot size was about 150 lots.
During the fourth quarter of 2021, we navigated around municipal delays and supply and labor constructions to open 48 new communities.
We grew our community count by 23 net communities from 236 at the start of the quarter to 259 at year-end 2021.
On a year-over-year basis, we were up 33% or 64 net community.
During the full year, we opened 163 communities, up 55% from 105 in 2020.
We are already seeing increased volume from our higher community count and expect to continue to benefit from incremental orders and closings in 2022 and beyond.
We spent about $507 million unlaid acquisition and development this quarter, in line with last year's Q4 spend and our targeted quarterly run rate.
We expect land spend to be around $2 billion annually in 2022 and beyond as we get to and maintain our 300 communities.
To finance plan, we use options or staggered purchasing terms to preserve liquidity were financially feasible.
About 65% of our total lot inventory at December 31, 2021, was owned and 35% was optioned compared to prior year with 69% owned inventory and 41% options.
With over 80% of our own land currently actively under development and ready to open as a new community over the next several quarters, we believe we are nearing an inflection point on our owned versus option percentages due to our community ramp up stabilizing over the next several quarters.
At Meritage, we're dialed into our land playbook and our growth strategy.
We are disciplined in our approach to refilling our land pipeline, even with strong competition and land price appreciation.
We underwrite to normalized incentives and absorption.
Although we haven't changed our underwriting gross margin hurdle, most deals are penciling above that, giving us some breathing room to absorb cost increases in future incentives while still exceeding our minimum margin threshold.
We do not target an arbitrary percentage of option land, instead, we focus on managing our capital through balance sheet metrics and margin goals.
We believe the current market demand trends, particularly at the entry-level, will be sustainable at least for the midterm.
Once the supply chain stabilizes, the more communities we have, the great incremental market share we can gain in all of our geographies.
Additionally, our focus on affordability starts with our land strategy as Phillippe already covered.
Our future communities opening later 2022 and into 2023 are expected to have lower ASPs than what we're seeing in our existing active communities today.
Our land strategy focuses on larger parcels, which limit some competition to land lowers the per lot cost by spreading community-level overheads across more lot and reduces the churn of new community openings and closings.
Finally, turning to Slide 11.
2022 is off to a great start, pointing to a strong spring selling season, and we expect home buying demand to remain robust.
At the same time, we will continue to manage our orders pace to preserve margin and maintain a high level of customer experience.
We expect gross margins to remain elevated and SG&A rates to be at all-time lows.
For the full year 2022, we're projecting total closings to be between 14,500 and 15,500 units, home closing revenue of $6.1 billion to $6.5 billion, home closing gross margin around 27.75%, an effective tax rate of about 25%, and diluted earnings per share in the range of $23.15 to $24.65.
We expect full-year community count year-over-year growth of 15% to 20%.
As for Q1 2022, we're projecting total closings to be between 2,800 and 3,000 units home closing revenue of $1.2 billion to $1.3 billion, home closing gross margin of 28.25% to 28.5%, and diluted earnings per share in the range of $4.45 to $4.85.
To summarize on Slide 12, we enter 2022 with momentum and optimism.
We believe Meritage is poised to capitalize on market demand and drive sustainable long-term growth with our proven strategy and operating model, our healthy land position, and flexible balance sheet continued with solid execution.
We have already demonstrated our ability to grow community count.
I would like to extend our deepest gratitude hardworking employees and trade partners who contribute to Meritage's remarkable 2021.
Their leadership grow our significant order volume closing, as well as a 33% year-over-year ramp-up in community count growth while navigating challenging conditions.

user
33% increase in year-end community count to 259 and 57% increase in diluted earnings per share over prior year.
q4 earnings per share $6.25.
qtrly homes closed 3,526 versus 3,744.
qtrly sales orders of 3,367 homes were 6% higher than prior year.
qtrly total closing revenue $1.5 billion versus $1.41 billion.
expect to continue to benefit from incremental orders volume and closings in 2022 and beyond.
projecting 14,500 to 15,500 home closings for 2022, which we anticipate will generate $6.1 - 6.5 billion in home closing revenue.
with projected effective tax rate of 25%, we expect diluted earnings per share to be in the range of $23.15 - 24.65 for 2022.

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