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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.
He's done a great job representing the company to our investors and analysts and he will be sorely missed.
You have big shoes to fill and hope you are with us, at least 15 years like Brent.
Now, this is the last panel I'll address you as Chief Executive Officer of Meritage Homes on an earnings call.
As we have previously announced, effective January 1, Phillippe Lord will transition to the CEO role and I will retire after 35 years and become Executive Chairman of Meritage's Board.
I will continue to participate on these calls, but Phillippe will be taking the lead.
Phillippe and I have worked closely together for 12 years.
During the past five years as Chief Operating Officer Phillippe was the co-architect of our strategy to focus on the entry-level and first move-up markets while driving operational excellence and efficiencies throughout our organization.
I feel confident that Meritage will continue to be an innovative leader, provide exceptional quality and value to our customers and grow to new heights under Phillippe's leadership.
I look forward to partnering with him in our new roles.
So let's talk about the quarter ended September 30, 2020.
Meritage had many remarkable achievements.
We delivered our highest quarterly orders, our strongest absorption since 2005, record quarterly closing revenue and our best quarterly closing gross margins since 2014 despite record high lumber prices, while also achieving our lowest net debt to capital in our company's history.
These outstanding results are due to both solid market dynamics and our strategy.
So I'll start with slide 4.
We sold 3,851 homes this quarter, which was 71% more than the third quarter of 2019 and surpassed the quarterly record we had just set in the previous quarter this year.
Although we are still in a worldwide COVID pandemic, favorable macroeconomic factors for the new home industry that began last quarter continued in Q3 including historically low mortgage interest rates, increased demand for healthier and safer homes, limited supply of existing home listings and a decade long supplies toward new homes in the market.
All these dynamics create the advantageous backdrop, which combined with our strategy focused on affordable entry-level and first move-up homes translate into another record same quarter for Meritage.
Moving on to slide 5, we believe we have a solid strategy and have executed at a high level.
We are achieving strong closing revenue growth with an increase in both pace and price, while we are increasing prices in all our geographies and aligning with local market conditions.
We are not turning down sales where demand exists.
We can and will capture demand whenever possible because of our available spec homes.
Our spec homes strategy has allowed us to sell at a greater pace and take market share.
In Q3 of 2020 we accelerated our land investments by spending nearly $300 million and put a record 9,000 new lots under control.
Our balance sheet remains very strong, which provides a long runway for growth as well as a safety net in the event of another downturn.
We have maintained plenty of liquidity and a low debt leverage even as we invest significantly for additional growth in all our existing markets.
While the accelerated sales trend resulted in some early community closeouts this quarter we are still on pace to achieving 300 active communities by early to mid-2022.
And consistent with our strategy our new entry-level communities will have a high volume of spec inventory immediately available for sale at community openings which could be closed relatively quickly.
Steve's commitment to our employees, customers and shareholders as well as his vision and execution led us to the company's all-time records today.
I am deeply honored to have the opportunity to serve this organization and its employees as the upcoming CEO and to continue working together with Steve in this next chapter of Meritage Homes story.
Slide 6, now, we hit on all cylinders during the three months ended September 2020.
Our absorption pace for the quarter was up 94% year-over-year.
Five out of nine states had absorption increases over 100% year-over-year this quarter.
Much of this sales outperformance is due to the strength in the entry-level market.
Entry-level represents 60% of our average active communities during this quarter compared to 42% a year ago, which puts us near our target ratio of 65% to 35% between entry-level and first move-up.
Absorption in our entry-level communities were 75% higher than last year and nearly 1.5 times the pace of first move-up communities.
Entry-level comprised almost 70% of total orders for the third quarter, up from 54% in the third quarter last year.
Our first move-up communities also experienced improved demand year-over-year with absorptions 86% higher than a year ago.
Slide 7, the outsized demand in Q2 and Q3 of 2020 led to 23 early community closeouts this quarter.
These sellouts happened across all existing geographies.
We anticipate both continued strong sales demand and choppiness in our community count in the near future.
We have ramped up land investments and we'll continue to do so to replenish our pipeline to keep up with demand and grow our community count.
We have been aggressively securing new lots since mid-April following a pause due to COVID-19 related shutdowns.
During 2019 we put 17,000 new lots under control which translates to 134 new communities.
We put approximately 16,000 new lots under control in just the first nine months of 2020 almost as much as all of 2019 and nearly 80% more than 2018's 9,000 new lots.
This translates into about 123 new communities put under control during the first nine months of this year with dozens more to come in the fourth quarter.
At September 30, 2020 with nearly 48,000 total lots outstanding representing 4.4 years of lots supplied based on a trailing 12-month closings, we've increased our land book by almost 30% from September 30, 2019.
As part of our entry-level strategy, the average size of our communities has also expanded.
We've been putting larger land positions under contract often several hundred lots at a time targeting a three- to five-year community life even at an accelerated sales place.
Year-to-date September 30, 2020 our new lots under control were 81% entry-level with an average community size of 130 new lots.
We are scheduled to open up more than 150 communities in 2021 compared to opening 75 communities in all of 2019 and approximately 100 communities projected for full year 2020 after being shut down for six weeks due to COVID-19.
We believe that our aggressive pace of securing new lots and a strong pipeline of community openings will start to meaningfully show increase in community count in the latter half of next year.
At a pace of 50 sales per year and an average of 300 communities could reasonably produce 15,000 sales in 2022.
Slide 8, moving to the regional level trends on slide 8, all of our regions reflected solid year-over-year performance in Q3.
Our central region comprising Texas led in terms of order growth this quarter with an 82% increase in orders over the third quarter of 2019 despite a 14% decline in average community count.
The central region's absorption doubled to six per month compared to three per month in the third quarter of 2019.
Entry-level communities representing 63% of central region's average active communities during the third quarter of 2020.
Our orders in the West region were up 68% over the third quarter of 2019, driven by an 88% increase in absorption with 10% fewer average communities.
Entry-level communities represent 63% of the West region's average active communities during the quarter.
California produced the largest year-over-year growth in orders at 158% for the quarter and the highest absorptions of all nine states we operate in, selling an average of seven per month during the quarter of 2020, which was an increase of 137% in absorptions year-over-year.
Average community count in California also increased 9% year-over-year for the third quarter of 2020.
We are seeing the success of the shift to newer affordable entry-level communities in California come through in the community count and sales performance there.
Our each region experienced order growth of 63% on an 87% increase in absorptions year-over-year for the quarter, offsetting a 30% decline in average community count.
50% of our average active communities in the East region were entry-level during the quarter.
We generated 56% earnings growth year-over-year in the third quarter of 2020 compared to the same period in 2019 as we had significant growth across all key metrics with 21% closing revenue growth, 170 bps increase in home closing gross margin and a 70 bps improvement in SG&A as a percentage of home closing revenue.
This quarter's closings were up 24% year-over-year, with 71% of closings coming from previously started spec inventory.
At September 30, 2020 approximately 14% of total specs were completed, less than the last couple of quarters understandably as we're selling more specs in earlier stages of production.
Although this dynamic is also driving a decrease in our backlog conversion rate over the last several quarters, our backlog conversion rate for the third quarter was 68%, which is slightly up year-over-year evidence that our construction pace is keeping up with sales.
We generated over $1.1 billion of revenue in Q3 2020 as the year-over-year increases in closing volume reflecting our record high sales more than offset the decline in ASP home closings resulting from the shift in product mix toward entry-level.
Our closing gross margin improved 170 bps to 21.5% for the third quarter of 2020 from 19.8% a year ago.
Higher home prices more than offset record lumber costs.
The additional closing volume and the efficiencies achieved from our streamlined operations and national purchasing savings contributed to a 31% year-over-year increase in total closing profit.
As we have previously covered, we have been able to continue to harvest savings in our material cost by reducing SKU count to achieve preferred vendor pricing and bulk purchasing discounts, while taking advantage of pre-cut material where available.
Our streamlined production also allows us to obtain preferred labor pricing from our trade.
SG&A as a percentage of home closing revenue was 10.1% for the current quarter which was a 70 bps improvement over 10.8% in 2019 due to greater leverage of fixed expenses and efficiencies and higher closing volume as well as cost savings from technology enhancements particularly as related to sales and marketing efforts.
We also benefited from a lower tax rate with the extension of the energy tax credits into 2020 under the Taxpayer Certainty and Disaster Tax Relief Act enacted in December 2019, our effective tax rate was 19.5% for the third quarter this year versus 24.4% last year.
Our third quarter diluted earnings per share of $2.84 also benefited from our repurchase of 1 million shares in the first quarter of 2020.
To highlight just a few items for year-to-date results September 30, 2020, on a year-over-year basis we generated an 86% increase in net earnings, orders were up 40%, closings were up 26%.
We had a 250 bps increase in home closing gross margin and a 90 bps improvement in SG&A as a percentage of home closing revenue.
The strong start to 2020 and rapid recovery that started in mid-April more than offset any pullback experienced from COVID-related uncertainties in late Q1 and very early Q2.
Moving on to slide 10, our balance sheet continues to be very strong even as we step up investments in land acquisition and development, we have plenty of liquidity including $610 million of cash, nothing drawn on our credit facility and a lower net-debt-to-cap -- in the lowest net-debt-to-cap in our company's history at 15.7%.
We grew our spec inventory back to an average of 11.2 specs per communities this quarter after dipping in the second quarter to about 9.3.
We are committed to increasing our per store spec count by year-end with inventory on the ground available for a quick close.
We anticipate our heavy backlog and increased volume of available specs entering into 2021 would result in improved backlog conversions and solid closing into next year.
Slide 11, our land acquisition and development strategy is very nimble and we can aggressively increase our purchases when housing market is hot and also pull back quickly when the housing market slows.
We spent nearly $300 million on land and development this quarter our highest spend in a single quarter in our history.
For the first nine months of 2020 we spent nearly $760 million on land acquisition and development, which was more than 28% higher in the same period of last year.
We are using options or staggered purchasing terms to secure more lots, which allows us to preserve our liquidity.
About 58% of our total lot inventory at September 30, 2020 was owned and 42% was optioned which improved compared to September 30, 2019 with 66% owned and 34% optioned.
Finally, I'll direct you to the slide 12.
2020 will be a record year in spite of the pandemic.
We anticipate continued strength in Q4 but caution these results could be impacted by uncertainty surrounding the election, COVID-19 or financial market volatility.
Turning to slide 13, to summarize, Meritage Homes today is a different company than when I co-founded it in 1985.
Our culture and our strategic shift has been transformative.
I'm proud of the innovative product, energy efficiency, superior quality and affordability that we have delivered in every home that we build.
Now as one of the leading entry-level first move-up home builders, Meritage is well-positioned to capitalize on current market demand and deliver strong results into the future.
Demand is through the roof, pun intended.
Our closing revenue growth benefits from our focus on affordable product, which allows us to push both price and pace.
Layering the leverage of FC&A and streamline operations on top of closing revenue growth, we are seeing some of the strongest results in Meritage's history.
Our financial flexibility to grow comes from having a strong balance sheet with excess cash and the lowest net debt to capital we've ever had.
We are focused on growth by accelerating land investments to get to our goal of 300 community count by early to mid-2022.
We are driving an increase in ROE and creating value for our shareholders.
All this was the combination of the right strategy, ability to execute and the dedication of incredibly talented team.
I truly believe the opportunities for future growth and success are boundless for Meritage.
The executive team had a vision for this company and our people made it a reality.
After 91 quarters of your thoughtful and brilliant questions, I'm not sure how we'll close without the anxiety of the quarterly full body scan.
You know how much I will really miss all of you.

user
compname reports q3 earnings per share of $2.84.
compname reports record third quarter 2020 orders 71% higher than prior year; 56% increase in net earnings with 21% revenue growth and 21.5% gross margin.
q3 earnings per share $2.84.
qtrly home orders 3,851 units versus 2,258 units.
projecting about $4.2 billion-$4.4 billion total home closing revenue and home closing gross margin of 21.0-21.5% for full year 2020.

assistant