管理層發言
Thank you for your continued patience. Your meeting will begin shortly. A member of our team will be happy to help you. Please standby, your meeting is about to begin. Greetings, and welcome to the Second Quarter 2026 Meritage Homes Analyst Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Emily Tadano, Vice President of Investor Relations and External Communications. Please go ahead.
Thank you, operator. Good morning, and welcome to our analyst call for our second quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we will 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 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 2025 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. With us today to discuss our results are Steven J. Hilton, Executive Chairman; Phillippe Lord, Chief Executive Officer; and Hilla Sferruzza, Executive Vice President and Chief Financial Officer of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I will now turn it over to Mr. Hilton. Steven?
Thank you, Emily. Welcome to everyone joining today's call. Today, I will begin with a brief overview of market conditions, and our second quarter results. Phillippe will then discuss our strategy and operational progress followed by Hilla's review of our financial performance and 2026 guidance. Consistent with what others have shared about the spring selling season, we also experienced slower than normal selling conditions driving quarterly sales orders of 3.58 thousand which were 9% below prior year. Demand remained relatively stable between Q1 and Q2 this year, with no meaningful sequential deterioration. Its average absorption pace of 3.5 net sales per month this quarter was in line with a 3.6 in the first quarter. Although prospective buyers continue to face affordability pressures and economic uncertainty, we remain confident in the long-term demand for housing at the entry-level and first-move-up price points. We believe that our strategy of having sufficient available home inventory combined with our growing community count positions us to quickly convert demand into sales during brief periods of rate relief. Operationally, we continue to focus on what is within our control: delivering a 200% backlog conversion rate, further improving cycle times, and working down our finished inventory levels. These efforts generated 3.73 thousand home closings and $1.4 billion of home closing revenue in the quarter. Adjusted home closing gross margin was 18.6% and adjusted diluted EPS was $1.42, excluding $3.9 million of real estate inventory impairments and terminated land deal walkaway charges. As of 06/30/2026, book value per share increased 5% year over year. And with that, I will now turn it over to Phillippe.
Thank you, Steven. Our strategy of pre-started inventory, streamlined operations, and go-to-market tenets enables us to be agile in our actions to the current market conditions. We leverage this strategy to generate additional direct cost savings to enhance our returns. As incentives remained elevated this quarter, our move-in-ready homes and strong realtor relationships help us compete in an environment where the homebuyer values a quick close through clarity and certainty in the home buying process. While market conditions remain softer than normal, we continue to position the business for improved financial metrics by managing our WIP inventory. We successfully reduced our finished home position by over 1.1 thousand homes year over year as we replace older inventory with an increased volume of new product with lower direct costs. At the same time, we have kept our cycle time sub-110 calendar days for the fifth consecutive quarter and even found a few more days of improvement allowing us to start homes later while still supporting our 60-day closing guarantee. These shorter cycle times benefit our carry cost burden and improve liquidity while allowing us to respond quickly if stronger demand materializes. Our active community count of 340 as of June 30, 2026, was up 9% year over year and 1% lower than the 345 in Q1 due to timing with a few early closeouts and some delayed openings since July. Despite the small dip, we are reiterating our expectation of a 5% to 10% full-year 2026 community count growth year over year. We also achieved another quarter of lower construction cost per foot, as our purchasing teams collaborated with our strategic trades to find incremental savings and efficiencies that benefited all parties. We believe these long-term partnerships based on pre-started homes and limited SKU counts set us apart from our competitors by also providing certainty to our vendors. All of these actions are aligned with our disciplined capital allocation strategy. Although we moderated land spend year over year to $357 million in the second quarter from $59 million last year, we continue to invest in our future communities including the development needed to get our scheduled openings in the second half of 2026 and into 2027. We also returned $131 million this quarter to shareholders through dividends and share repurchases. By maintaining our operational and financial discipline, we believe we are well positioned to navigate uncertainty today while preparing for growth and increased shareholder returns as market conditions improve. As part of that longer-term plan, we include an intentional shift of a portion of our business to first-move-up homes as we continue to serve one of our key buyer demographics, the millennial customer, as they begin to look for their next home purchase, while still continuing to offer our entry-level product for Gen-Z and move-down customers. This is a return to our long-term stated target of a diversified portfolio of offerings, which was temporarily on pause over the last couple of years to align with prevailing demand trends. Our goal is to be around a one-third, two-thirds mix of first-move-up and entry-level homes consistent with the demographics of the U.S. population. We are intentionally rebalancing our portfolio to achieve that over time starting with a heavier allocation to the acquisition of land for first-move-up customers. Second quarter 2026 orders were 9% lower year over year primarily due to a 19% decline in average absorption pace which was partially offset by a 14% increase in average community count. Cancellation rate of 13% was a little higher than the 11% in Q1 but still remained below typical industry averages as we benefit from a quick sale-to-close process. Our average absorption pace was 3.5 homes per community per month during the second quarter, compared to 4.3 a year ago and 3.6 in Q1. Importantly, we have a pragmatic approach to pace and price in the current environment, focusing on both volume and margin preservation. While our long-term objective remains an average of 4 net sales per month for the year, we will not sacrifice profitability or deplete irreplaceable lot positions by forcing absorptions through higher incentive usage in a highly competitive market where demand is relatively inelastic. ASP on orders this quarter of $385 thousand was down 3% from prior year due to geographic mix shifting from higher ASP West region into the lower ASP East region. Although our incentive utilization remained elevated this quarter, we were able to keep the impact neutral with lower per-home incentive costs. We grew our active communities 9% year over year from 312 in the prior year to 340 by June 30. Q2 was 1% lower than 345 active communities in Q1 as timing played a factor this quarter. Our early closeouts occurred as we took advantage of pockets of stronger demand and some anticipated June openings fell into Q3. We brought 27 new communities online across our regions during the quarter, and 67 year to date. In July, we have not seen a meaningful change in the underlying demand environment relative to what we were experiencing during Q2. Although a very recent increase in interest and mortgage rates may impact demand in the coming weeks if they do not pull back. We continue to see highly localized demand patterns with all regions encompassing markets of both strength and weakness in Q2. Although the needed volume incentives varied notably, parts of Texas, Southern California, Atlanta, Raleigh and Coastal Carolinas were our strongest performers demonstrating more market strength in geographies with limited inventory. We also saw stronger demand across the markets when interest rates temporarily receded, providing some visibility into a potential path for recovery longer term. In contrast, in locations where affordability pressures or competitive conditions warranted a more measured approach, we deliberately pulled back on sales pace. Demand trends were softer in Orlando, Denver, Salt Lake City and Northern California. Now turning to Slide 6. Q2 starts totaled approximately 3.9 thousand homes, down 4% year over year yet up around 1.4 thousand units sequentially from Q1, ending the quarter with sufficient supply for Q3 and replacing older inventory with newer production with improved cost structures. With nearly 60% of Q2 closings also sold during the quarter, our backlog conversion rate was 200%, reflecting our quick close strategy and within our targeted range of 175% to 200%. Our ending backlog was approximately 3.7 thousand homes as of 06/30/2026, compared to approximately 4.75 thousand homes as of 06/30/2025. As for the combined total of specs and backlog, we had around 6.8 thousand units at 06/30/2026, 22% less than the approximate 8.7 thousand units of specs and backlog we had at 06/30/2025, reflecting our intentional efforts to lower the inventory in light of current market conditions. We ended the quarter with approximately 5.1 thousand spec homes, down 27% from approximately 6.9 thousand specs in the prior year and up 7% sequentially from Q1. The 15 specs per store this quarter translated to about 4 months' supply intentionally near the lower end of our target 4 to 6 months' supply due to today's demand environment and our improved cycle times. Comparatively, in the second quarter of 2025, we had 22 specs per store or 5 months of supply. We reduced our completed specs to 1.5 thousand units in Q2, which was 42% lower than prior year and 30% of our total specs, our lowest percentage in 2 years and right around our target of one-third. This compared to 38% in the prior year and 46% in the first quarter. A balanced approach of reducing aged inventory and ramping up starts allowed us to end the quarter with the appropriate supply of homes per store. Although we are starting Q3 with lower backlog, we believe the spec home inventory provides us the path to achieve our Q3 guidance. With that, I will now turn it over to Hilla to walk through our financial results. Hilla?
Thank you, Phillippe. Let's turn to Slide 7 and cover our Q2 results in more detail. Second quarter 2026 home closing revenue of $1.4 billion was 14% lower than prior year due to 11% lower home closing volume and a 4% decrease in ASP on closings to $373 thousand. While both our closing volume and ASPs reflected our intentional decision to manage margin and pace, the decline in ASP was primarily due to geographic mix. To a lesser extent, product mix within our communities also impacted ASP, with lower priced homes outselling higher priced ones, and in certain markets where we had a greater amount of aged spec inventory, we used incremental incentive this quarter to sell those homes. With nearly 60% of our closings generated from intra-quarter sales, our results reflect real-time demand and incentive trends. During the temporary dip in rates this quarter, we sold and closed homes with lower cost incentives which reduced our per-home incentive burden. Looking ahead, incentive costs and utilization will continue to be inversely correlated to interest and mortgage rates which remain highly volatile and move on both domestic and international political developments. Home closing gross margin of 18.3% in the second quarter of 2026 was 280 basis points lower than prior year's 21.1% as a result of lost leverage on lower home closing revenue and higher lot costs both of which were partially offset by improved direct costs and faster cycle times. Second quarter 2026 home closing gross margin included $3.6 million of real estate inventory impairment and about $300 thousand in terminated land deal walkaway charges, compared to no impairment and $4.2 million in terminated land deal walkaway charges in the prior year. Excluding these charges, adjusted home closing gross margin was 18.6% and 21.4% for the second quarters of 2026 and 2025, respectively. We are encouraged that the volume of impairments remains relatively limited and we are able to work through homes in most of our communities in slower demand markets at a lower but not impaired sales price. Our current land basis is primarily comprised of higher cost land vintages from the 2022 to 2025 time frame. Although this higher basis will continue to be a margin headwind in the near term we anticipate some margin relief will start at the tail end of 2027 or early into 2028 as lower basis land begins to roll through our P&L, assuming the current impact from oil and gas price increases is not prolonged. In Q2, direct costs per square foot were down nearly 6% year over year, reflecting the disciplined purchasing and vendor negotiations Phillippe already covered with savings generated by both labor and materials. As we have noted, our newer starts should benefit from this lower cost basis and will be reflected in our margins in the second half of this year. Sequentially, adjusted gross margin improved 80 basis points to 18.6% from 17.8% in Q1, driven primarily by better leverage on home closing revenue and improved direct costs from newer inventory. While we do not anticipate a significant gross margin recovery this year, our long-term target remains 22.5% to 23.5% under normalized market conditions where incentive and interest rates are more in line with historical averages. Selling, general and administrative expenses as a percentage of second quarter 2026 home closing revenue were 10.4% compared to 10.2% in the second quarter of 2025 as decreased compensation expense and an intentional reduction in discretionary costs nearly offset the lost leverage on lower home closing revenue. Despite the tougher sales environment, we did not increase sales and marketing spend on a per sale basis. Our long-standing realtor relationships continue to provide a competitive advantage, generating a consistent level of repeat business from our broker network. External commissions remain stable both year over year and sequentially, while our core book percentage continues to run in the low-90% range. We remain committed to growing our annual closing volume which should drive operating leverage and support our longer-term SG&A target of 9.5%. The second quarter's effective income tax rate was 24.8% this year, compared to 23.9% for the second quarter of 2025 due to higher state income taxes. As a reminder, we expect only a limited impact from the June 2025 expiration of the energy tax credit for the balance of this year and into the future as the higher construction requirements implemented in 2025 had already significantly reduced our eligible credit. Overall, lower home closing revenue and gross profit led to a 33% year over year decrease in second quarter 2026 diluted EPS to $1.37 from $2.04 in 2025. Adjusted diluted EPS for the current quarter was $1.42, excluding impairments and walkaway charges. To highlight the key results for the first half of 2026, on a year over year basis, orders were down 7%, closings were down 12% and our home closing revenue decreased 16% to $2.5 billion. Adjusted home closing margin of 18.2% was 350 basis points lower than 2025, SG&A as a percentage of home closing revenue was 11%, and net earnings decreased 46% to $146 million. Adjusted diluted EPS was $2.24 for the first six months of 2026 excluding impairments and walkaway charges. Before we turn to the balance sheet, it is worth noting that our customer credit metrics remain healthy and unchanged during the second quarter: FICO scores, DTIs and LTVs all track closely with historical averages, continuing a trend we have seen for several years. Lack of deterioration in customer credit quality validates that in ongoing market volatility, consumer psychology continues to play a strong role alongside affordability concerns and home buying decisions. On to Slide 8. As of 06/30/2026, we maintained a healthy balance sheet supported by $87 million in cash, no outstanding borrowing under our credit facility and a net debt to cap ratio of 17.1%. Additionally, in June, we refinanced our revolving credit facility to increase the facility size to $980 million, extend the maturity from 2030 to 2031 and increase the accordion feature to permit a facility size of up to $1.47 billion. We are committed to supporting our long-term growth trajectory while prudently managing our capital and maintaining our investment grade credit rating. As such, our net debt to cap ceiling remains in the mid-20s range. Our capital allocation strategy looks to balance both growth and shareholder returns. As we have been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $357 million in Q2. With slower demand, we are focused only on the most attractive land opportunities, increasing our land spend for first-time move-up communities and optimizing development schedules. Our forecasted land acquisition and development spend is expected to be between $1.7 billion and $2.0 billion for full-year 2026. We returned $131 million to shareholders via buybacks and dividends this quarter, up 74% from $76 million in the same period last year. We bought back over 1.5 million shares, or 2.3% of shares outstanding at the beginning of the quarter for $100 million. We repurchased the shares this quarter at an average 16% discount to book. To date, in 2026, we have spent $230 million on buybacks, reducing our 12/31/2025 outstanding share count by nearly 5%. As of 06/30/2026, $284 million was available under the repurchase program. Given the instability of the current environment and with the path for interest rate trends remaining uncertain, we will continue to execute on our share repurchase commitment, but pair it back slightly to a minimum of $55 million per quarter for the balance of the year while continuing to increase that opportunistically, repurchasing incremental shares on cash flows and dips in our stock price. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $31 million and $63 million year to date. For the first half of 2026, we returned $292 million of capital to shareholders or 201% of our total earnings to date this year. Slide 9. In the second quarter of 2026, we secured nearly 1.7 thousand net new lots under control which is inclusive of the impact of about 300 terminated lots. These lots primarily reflect communities for 2028 and beyond as the owner-controlled most of the lots we need to meet our community count targets through 2027. In the second quarter of 2025, we put nearly 1.8 thousand net new lots under control. As of 06/30/2026, we owned or controlled a total of about 73.2 thousand lots, equating to a 5.2-year supply based on the last 12 months' closings—slightly above our target of 4- to 5-year supply but reflective of the upcoming community count growth we expect over the next 18 months. We also had approximately 15.3 thousand lots that were still undergoing diligence at the end of the quarter, which is another potential one year supply in the pipeline that we can choose to control. We continue to target around a 40% optioned lot ratio; about 69% of our total lot inventory at 06/30/2026 was owned and 31% was optioned. This is essentially consistent with Q1, but slightly lower than the 66% owned and 34% optioned lot position in the prior year, reflecting our terminated lots in late 2025. We review off-balance sheet opportunities on a deal-by-deal basis on their financial merits as we do not believe every land deal can absorb the incremental cost of an off-balance sheet structure. Finally, I will direct you to Slide 10. Based on current market conditions and year-to-date results, we are updating our guidance for full-year 2026 home closings and revenues to around 5% below full-year 2025 results although home closing revenue could trend a bit lower if market conditions require higher incentives. For Q3 2026, we are projecting total home closings between 3.3 thousand and 3.6 thousand units, home closing revenue of $1.26 billion to $1.35 billion, home closing gross margin of around 18% and an effective tax rate of 24.5% to 25%, and diluted EPS in the range of $1.10 to $1.30. With that, I will turn it back over to Phillippe.
Thank you, Hilla. In closing, we believe our second quarter results reflect solid execution in a softer demand environment. We also saw no meaningful deterioration in demand from the first quarter to the second quarter. Throughout this quarter, we remained focused on controlling what we can control, strategically reducing aged inventory as we target the right level of inventory per store, balancing pace and price, and allocating capital thoughtfully to maximize returns. Looking ahead, with community count expected to grow in the second half of 2026, we believe we have the units to achieve our full-year revenue guidance despite ongoing market challenges. Combined with our balanced approach to capital allocation, we believe Meritage is well positioned to navigate the current uncertain environment and deliver strong shareholder value long term. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?
分析師問答
Thank you. In the interest of time, we ask that you limit yourself so others can hear your questions clearly. We ask that you pick up your handset for best sound quality. And we will take our first question from Trevor Allinson with Wolfe Research. Please go ahead. Your line is open.
First one is on the better-than-expected gross margin in the quarter despite rates going higher. What drove the beat in the quarter? It sounds like maybe you are getting some better cost structure come through. Can you perhaps quantify those tailwinds in the quarter? And then should we expect incremental savings on the cost structure moving forward?
Thanks, Trevor. I will take the gross margin question. For us, it is a combination of a couple of things. The improved volume over Q1 obviously helped us leverage the fixed component in the gross margin composition, but we also had that 6% year-over-year improvement on direct costs, which is helpful. Because such a high percentage of our homes sell and close in the same period, there was a dip in interest rates in the middle of the quarter where we were able to sell homes at a lower incentive and still close them in the same quarter. So we saw all of those benefits come together despite the higher lot costs that are still rolling through the financials. We were able to harness all of those benefits together and deliver that 18.6% adjusted gross margin. On a go-forward basis, I am not modeling continuing improvement in direct costs, but the savings that we have had so far should continue to push through the financial statements. So the rest of the gross margin for the balance of the year and into next year is really a discussion of volume, incentives and overall volume of closings.
Okay. Makes sense. Thanks for that, Hilla. And the second question is on your shift back for a portion of your business toward more first-move-up. I think from a demographic outlook by age cohort, that makes a lot of sense. What is the timeline to make that shift? And is it still your expectation you are going to offer a 60-day guaranteed, fully spec model in those homes? Or any changes to your go-to-market strategy as you serve a slightly higher-end buyer?
Yes. Great question. It will take a little bit of time because we pivoted pretty meaningfully to entry level during the last five years. So as we pivot back to a more balanced 30% to 70%, it is really about sourcing some new land and bringing that land on the market. So more of a 2028 and beyond type of impact. As it relates to the operating strategy, it is going to be pretty aligned with what we do as it relates to not offering choice and options, but we are going to tweak the go-to-market when it comes to when we release the homes. We will probably be releasing the homes earlier because many of those folks have homes to sell. And so there will be some tweaks on our focus around the closing-ready guarantee as well as pieces of the realtor strategy. Thank you.
We will take our next question from Stephen Kim with Evercore ISI. Please go ahead. Your line is open.
Yes. Thanks a lot, guys. Just a follow-up on this shift. So I know you guys, when you first rolled out this significant shift to move-in-ready homes, it was something that you had spent a lot of time thinking about and preparing for. Just wanted to try to understand this pivot or tweak to move a third back to the first-move-up: Was this something that you always envisioned you would eventually do and maybe something you advanced a little earlier? Or is there something that fundamentally has changed your thinking about maybe being more in that segment? And if so, what was that change or what have you seen in the market?
Yes. It really was something we always intended to do. Even when we rolled out our strategy seven years ago and tweaked our strategy four years ago, we always believed that the second consumer segment for us was the first-move-up: someone still looking for a move-in-ready home, someone still looking for a home that they can move into quickly, but buying their second home, potentially buying their second new home. So it has always been part of our strategy. What has really changed is fundamentally the land market. As land has gotten more expensive, previously we could really underwrite a lot of entry-level land. Now there is a more balanced opportunity out there in the market, and we see more opportunities to source first-move-up land and that is really the change in the market. I think that has been happening over time. This has always been part of our strategy, and now the land market is really lending itself to that opportunity.
I would add one more thing. We talked a little bit about it in the prepared remarks, but the shift in the age of the population cohort in the U.S. Millennials are the largest population cohort that we were initially targeting with our efforts towards that group. As they were buying their first home, they were obviously an entry-level buyer. Here we are 10 years later and they are ready to buy their next home. So we are continuing to follow the same demographic groups across their homebuyer journey. As younger cohorts enter their home buying stage, they continue the entry-level push, but we are also following the millennial buyer and hope to be their first and second home provider.
Got you. Lots of interesting things there. So I guess following up: Phillippe, you said the land market has gotten a little looser perhaps at the first-move-up level and so you see some opportunities there. And you also indicated this is something you contemplated even years in advance. One of those sounds opportunistic and could change back. Next year the land market may become less favorable at first-move-up. How much of this is opportunistic in terms of the land strategy and opening up, and how much of it is something that regardless of land market stratification you think is the right time to move to that higher price point? You talked a lot about reduced cycle time enabling quicker builds. Could you elaborate on some of the tweaks to product if you are building bigger product that takes a little longer? I would think the customer may want more personalization. Could you elaborate on differences in going after the first-move-up customer again?
I hear multiple questions, but let me try to answer them. First, this is not opportunistic; it is intentional. It was a goal of our business, but the market has been very different for the last five years and we played in the market the way the land market supported. First-move-in land was less available and now that bifurcation is starting to close and first-move-up land is making more sense and is more underwritable. Can that change? Certainly. We will always balance the business between entry-level and first-move-up based on the inputs in the business. But long term, our strategy is to be one-third first-move-up and two-thirds entry-level. Certain markets will allow us to do more of it and others less; our regional and national footprint lets us play the market appropriately. Regarding tweaks to our operating model, it is largely a tweak or modification on the margin. We are not going to start design studios or offer a lot of personalization. We are going to build a nicer home—homes that are 50-foot-wide versus 40-foot-wide do not necessarily take longer to build. You just build in the same way but might offer nicer features: cabinets, countertops, flooring, and other items that will be tweaked to deliver the right value to that customer because they are looking for their second home. I do not see a big change in our core operational strategy, but some margin tweaks to deliver the right value to that customer segment.
We will take our next question from Alan Ratner with Zelman. Please go ahead. Your line is open.
Hey, guys. Good morning. Thanks for all the detail here. I will not beat the drum on the move-up pivot. But I will just ask one quick question on that front. It seems like M&A activity has accelerated a bit across the industry. I am curious if you would consider M&A as an avenue to accelerate that process toward building up first-move-up market share?
Yes. We are very encouraged to see well-respected and smart long-term investors investing in the homebuilding industry, reinforcing confidence in the sector and the value of scale and repeatable platforms. We look at M&A through a strategic lens; it's not just about scale at any cost. It's about acquiring assets that allow us to play in different markets or consumer channels. If we were to do any M&A at the local or private level, we would be looking for some type of move-up penetration or to get into markets that we are not in that are currently performing well. There are a number of Midwest markets that seem interesting right now. So for us, it is about a strategic add versus just incremental scale.
Got it. Makes sense. Second question: you mentioned intra-quarter where rates briefly dipped and that gave you an opportunity to pull back a little on incentives. I just wanted to clarify: did you actually reduce the incentives you were offering? Or were you maintaining the same mortgage rate buydown programs and it just cost less to buy down to that rate given market conditions? If we see further moderation of rates, is there ability to pull back more significantly on incentives or was it just a cost dynamic?
It is a tranche. When rates pull back a bit, it becomes a lower-cost offering. If we are offering 4.99% as the right stop, we do not immediately start offering 3.99%. It just costs us less to offer the same incentive because the differential to the market rate is still significant. We have seen that when rates drop a second tick, the utilization drops. So it comes in waves: first the cost per rate lock is lower and then utilization shifts to a different type of discount and more traditional discounting in our sector. It was good to see that when the market started to briefly return to normal, consumer behavior followed.
From a long-term perspective, with inventory levels being down, and BTO builders now pivoting back strongly to build-to-order and out of spec, we are seeing a general stability in the incentive environment. I cannot predict what will happen with the economy and consumer psychology, but at least we do not see incentive wars happening to the level they were last year and into this year.
We will take our next question from John Lovallo with UBS. Please go ahead. Your line is open.
The roughly 18% gross margin outlook for the third quarter has spooked some folks coming off the 18.6% in the second quarter. I do not want to get too cute here, but would you consider 18.3%, 18.4%, 18.5% to be around 18%? And if not, what, other than the lower quarter-over-quarter closings, would drive the gross margin down from the second quarter?
Yes. It is primarily leverage, and rates did increase through June. You saw incentive utilization and rate buydown utilization increase in June, which can push margin toward 18.0%. We are sitting around 18.0% depending on what rates do. Is it going to be slightly lower or slightly higher? It just depends on what happens intra-quarter. We guided to around 18% for Q3 and ended up at 18.6% in Q2 because rates were favorable. So it really depends on that factor.
I think the first part of Phillippe's response is important: it is leverage. You can look at the midpoint of our closings guidance and where we ended up in Q2 versus Q3 and see that there will be maybe 20 to 30 basis points that are just a function of leverage. Looking at our full-year guidance, you can extrapolate what you think Q4 will be; there is going to be a pickup and improvement where leverage will go the other direction. These intra-quarter discussions are tough, especially when so much of our sales volume is unknown to us and we are closing still 200% of our backlog. Visibility into the units and the incentives that will be part of those closing units is not as clear, which is why we have shifted our commentary from providing an exact number to staying around a number because there is still a lot of movement in the closing universe for Q3.
Yes. Rates have been increasing since mid-June, and they are probably the highest they have been as we roll into July, which is typically the lower seasonal period.
Okay. I think the fourth quarter comment was going to be my next question that we should see the reversal of that gross margin. The fourth quarter deliveries are implied to be up about 10% year-over-year. That seems to imply you are expecting a decent ramp in orders in Q3 or that you are willing to work the backlog down meaningfully as we move through the year. How should we think about this? And to be clear, you are not going to ramp incentives to drive orders to meet that full-year delivery, correct?
Again, everything we say is predicated on how this plays out economically and politically over the next six months. The key Q4 guide is mostly predicated on community count growth. We have material community count growth happening into Q3 and Q4, and that is driving incremental closings for Q4. We are not expecting the market to materially improve; we are conservative about what we think the back half will look like from an incentive and absorption standpoint. So it is 100% tied to the community count growth we expect in the back half of this year.
Remember, the way we count an active community is based on being sale-ready. For us, we do not sell until we are ready to close within 60 days. So an active community can start producing closings the same quarter it becomes active. We have quite a ramp of communities coming up. If you look at where we started the year and our 5% to 10% guide on ending community count, all of those will be delivering closings. Our starts were up because we were starting homes for these communities that we are getting ready to open, and we do not open communities until we can close homes.
We will take our next question from Susan Maklari with Goldman Sachs. Please go ahead. Your line is open.
Thank you. Good morning, everyone. Thanks for taking the question. Want to start on the cost side. The 6% savings that you have realized is impressive. Can you talk a bit more about what is driving that and how you are thinking about the ability to realize further incremental benefits in the coming quarters?
Yes. The 6% savings year over year and down 2% sequentially is both labor and materials. We saw it broad-based across categories. As Hilla noted in her prepared remarks, our lower-cost new starts are replacing aged inventory, which is being captured in the Q3 2026 gross margin guidance. I am not sure we are anticipating further sizable cost savings on new starts going out in Q3. We are seeing a little headwind in lumber that may play out over the next couple of quarters, so we are not modeling more improvements from here for now.
Okay. That is helpful. As we think out and you reiterated the longer-term target for the gross margin, and as you think about the mix shift that will come through as you integrate more of the move-up product, what does that mean in terms of the path for profitability? How should we think about the shift and how you can hit that target?
The long-term target of 22.5% to 23.5% is not primarily mix-related; it is based on the way we underwrite land. Right now, we are not achieving our underwriting because incentives are running extremely high. We typically underwrite land at a more normal incentive environment. So the bridge between where we are and where we want to be is 100% interest rate and incentive related. First-move-up land should typically be higher revenue and you should get more leverage from the higher ASP, but we do not underwrite first-move-up land at a higher margin than entry-level land. This will take time: we have about 10% of our business that is first-move-up right now, and there is some opportunity to pivot existing land to first-move-up because of location. Most impact will come from new land we are sourcing today, and that will not play out in our P&L until 2029 and beyond.
Okay. Thank you for the color. Good luck with the quarter.
We will take our next question from Rafe Jadrosich with Bank of America. Please go ahead. Your line is open.
Hilla, good morning. Thanks for taking my question. Following up on John's question earlier about second-half delivery guidance relative to the first half, I think it is about 1,000 more deliveries. If I look at the backlog and completed specs, it's sort of flattish. Do starts need to pick up further from here to hit the back-half delivery guidance? And can you give any color on community count cadence, Q3 versus Q4?
We do not give community count cadence because the timing can be affected by municipal approvals or other factors that change the specific timing between quarter-ends. We are comfortable with our 5% to 10% growth year over year. There is a ramp up in volume; as Phillippe mentioned, it is a function of community count. Starts volume increased quite a bit between Q1 and Q2 as we got inventory ready for these communities. That 4 to 6 months' supply of available inventory is something we are focused on. Between the inventory we are carrying into Q3 and Q4 and our sub-110-day cycle time, we feel confident that we have everything we need to hit our full-year guidance.
Okay. That is helpful. Can you remind us the lag time between when lumber prices move and when that starts to show up in your deliveries?
It is staggered. We do not hedge, but we have 30-, 60-, or 90-day locks at different points in time across the country, which creates natural hedges. Within 90 days you should start to see some of it flow through into our construction costs, and then you should see that reflected in our numbers in about a quarter. A couple of peers said about two quarters and I think that is probably the right number for us as well.
And we will take our last question from Jade Rahmani with KBW. Please go ahead. Your line is open.
Thank you. On the first-move-up strategy, have you considered broadening that beyond first-move-up to the broader move-up market?
No. We have had this strategy in place for a long time and with our operating model and where demographics are strongest we want to stay in that one-move-up price point. We do not want to expand into a two-move-up or luxury buyer segment. Those buyers typically want choice and customization, which we are not set up to offer based on the way we build homes. For those reasons, it is mostly a value-focused one-move-up consumer segment.
Thank you. And on land banking, what do you think the value is to a company like Meritage when the cost of debt is lower than what firms such as Blackstone are offering in the land banking space?
It is a good question and a reason we have not done a lot of land banking over the last five years. We sat on a lot of cash and the price of land banking was expensive and the optionality had changed. At some point, as a company of our size, we believe land banking allows us to control more land enabling us to grow the business at a better return on equity. At that point, it makes sense when our balance sheet reaches a point where the extension creates incremental value. That is how we think about it. It is why we have not done a lot of land banking and why we are trying to get to around 40% optioned lots over time as we grow from 15 thousand to 20 thousand units; we want to control more land with less of our balance sheet at play. Okay. Well, thank you, everybody. Thank you, operator. I want to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a wonderful rest of your day and a great weekend.
This concludes today's Meritage Homes second quarter 2026 analyst call. Please disconnect your lines at this time, and have a wonderful day.