Operator:
Greetings, and welcome to the First Quarter 2026 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead.

Emily Tadano:
Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K. 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 Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve?

Steven Hilton:
Thank you, Emily, and welcome to everyone joining today's call. Today, I'll begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we are cautiously optimistic that lower interest rates and tenant demand will translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks in the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost phase of sales, military operations in Iran commenced at the end of February, increasing interest rates, price -- gas prices and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled 3,664, 5% below last year's first quarter as our slower absorption pace was almost fully offset by our increasing community count. While we still believe the long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher-than-anticipated use of incentives. Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31, 2026, our book value per share increased 6% year-over-year. And with that, I'll now turn it over to Phillippe.

Phillippe Lord:
Thank you, Steve. Given the current under in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities which we then grew to 345 by March 31, another company record. In the near term, we expect total volume and top line results will largely be driven by increased community count, not higher per store absorptions. Our first quarter 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31, 2025, and up 3% sequentially compared to 336 at December 31, 2025. During the quarter, we brought on 40 new communities throughout all of our regions. We reiterate our expectations of 5% to 10% full year community count growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that you've mentioned, we believe that long-term demand remains supported by favorable demographics and undersupply of affordable homes in the U.S. and when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.40 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to Slide 4. First quarter 2026 orders were 5% lower year-over-year, primarily due to an 18% decline in average resort space, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue 4 net sales per month where community level market dynamics would not support it. While other long-term -- while over the long term, we strive to be a 4 net sales per month in all markets as we believe we best leverage our fixed cost at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive attention, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts as well as geographical mix shifting from the higher ASP West region into lower ASP each region. We saw a nice uptick in March. [indiscernible] quite as strong as typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on Slide 5. As always, sales performance was driven by local market conditions in the first quarter. All markets require additional incentives in some markets such as Dallas, Houston and Phoenix, consumer demand is comparatively more elastic where incremental volume is achievable with only small incremental incentives. New other markets such as Austin, parts of Florida and Charlotte continue to be tougher selling environment. Turning to Slide 6. We've been rightsizing our start pace, and we have inventory to align with our faster cycle times. We maintained a sub-110 calendar day instruction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated start to approximately 2,500 homes. 30% less than last year's Q1 and 6% lower than Q4. We traditionally align our starts pace with our sales pace, but due to faster cycle times and you need to work through from inventory in certain locations, we reduced our start pace this quarter. We expect our go-forward start pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year-over-year from approximately $2,000 as of March 31, 2025, to approximately 1,900 homes as of March 31, 2026. We reiterate our long-term backlog conversion target of 175% to 200% as respect to carry fewer fair specs in the future. Internally, we look at our inventory as a combined total specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy 6 quarters ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 90% sequentially from Q4. The 14 specs per store this quarter was a huge level -- lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under 4 months of intentionally at the low end of target of 4 to 6 months supply specs due to the slower demand expectations and improved cycle comps. Comparatively, in the first quarter of 2025, we had 23 specs per store or 5 months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the fourth quarter of 2025. Still above our target of approximately 1/3 complete specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results.

Hilla Sferruzza:
Thank you, Phillippe. Let's turn to Slide 7 and cover our Q1 results in more detail. First quarter 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting a tougher demand environment this quarter. As Phillippe noted, with nearly 70% closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L, while our closings and revenue reflects our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP and closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. For closing gross margin of 17.5% for the quarter was 400 bps lower than prior year's 22% as a result of the increased use of incentives, higher lot costs and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense and faster cycle times. First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairment and $1.4 million in terminated land a walkaway charges compared to no impairment and $1.4 million in terminated land deal walkaway charges in the prior year, coupled with about 20 bps from lost leverage unanticipated higher closing revenue. These impairments also impacted margins by about 30 bps. Our current land basis is primarily from 2022 through 2024 and will continue to negatively impact margins in 2026. Based on what we're seeing in the market today, we expect some margin relief will start at the tail end of 2027, and due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per square foot on a year-over-year basis as we were able to flow to the income statement, the lower costs from our extensive vendor negotiations, However, lumber costs have started to trend higher this quarter, and as a result of the Iron conflict, we are monitoring any potential long-term inflationary impact on oil prices. Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in the first quarter of 2026 was 11.8% compared to 11.3% for the first quarter of 2025 despite curtailing discretionary spend. Although SG&A dollars declined year-over-year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key digger to our success. Our broker relationships remain strong with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year-over-year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year compared to 23.3% for the first quarter of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credit was significantly reduced starting in 2025 when the higher construction threshold went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before I move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain consistent with our historical averages. Despite market volatility, we haven't seen much movement in these metrics over the last year or 2, validating our belief the hesitation in the market is at least partially a psychological decision versus a purely financial one. On to Slide 8. Our balance sheet remains healthy at March 31, 2026, with cash of $767 million, nothing drawn under our credit facility and a net debt to cap of 17.4%. As a reminder, the ceiling for net debt-to-cap ratio remains in the mid-20% range. As we've been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter or 2.7% of shares outstanding at the beginning of the year for $130 million, nearly 3x more than Q1 of 2025 as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value. With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buying back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shifts. 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 $32 million. For the first quarter of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide 9. In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31, 2026, we owned or controlled a total of about 75,500 lots, equating to 5.2 year supply of the last 12 months closings. In today's market conditions, we believe that this is the right amount of the needed year supply of lots to meet our growth targets. We also had approximately 14,600 lots, though we're still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31, 2026 was owned and 30% options compared to prior year, where we had a 62% owned inventory and then 38% option lot position. As we shift more land to off balance sheet, we are doing so very slowly and cautiously remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional costs as we do not believe that all or most land today belongs off book. While we have set 40% of our initial off-book target, our actual percentage will be solely turned higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I'll direct you to Slide 10. Based on current market conditions, we are updating our guidance for full year 2026 on closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, pump closing gross margin around 18%, an effective tax rate of 24.5% to 25% and diluted EPS in the range of $1.18 to $1.46. With that, I'll turn it back over to Phillippe.

Phillippe Lord:
Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it's worth reinforcing what sets Meritage apart. We are a top 5 homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differences from peers and is anchored on 3 tenants, our 60-day closing guarantee, moving ready inventory and strong realtor engagement together, who we are and how we operate, give us a competitive advantage in the intel space to provide homebuyers, certainty and consistency. Amid today's market backdrop, our priorities are central on balance sheet strength and disciplined capital allocation. We are maintaining a to cap construction land deals off balance sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. . We incur our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage is well positioned to capture incremental market share as demand conditions improve and normalize and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?

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

Trevor Allinson:
First one is on your spec count, which you noted a little lost it's been in several years. I think we've heard other builders talk about a reduction in specs across the industry helping take some pressure off of margins here. So appreciating you guys operate a spec model. Are you seeing both your lower spec count and also kind of industry lower spec count is the market pressure here? And is that something you expect the support of the margins moving forward even if demand makes choppy?

Phillippe Lord:
Yes. Thanks, Trevor. I think that's absolutely the condition we're seeing. A lot of builders are either pivoting away from carrying as much inventory -- finished inventory as they did before during COVID and supply chain environment and they're moving to reduce finished inventory, selling loans earlier in cycle. And then some folks are pivoting more to a BPO model, which is clearing out a lot of inventory in the market. So I think we saw across all of our markets, less finished inventory that we were competing with and we're optimistic as we move throughout the year, that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage.

Trevor Allinson:
Okay. That's really very helpful. And then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures. And then any detail on how those agreements are structured with an eye on your ability to walk away? And then just generally, your view on use of land bankers moving forward for your off-balance sheet needs.

Hilla Sferruzza:
Yes, I can take that one. So about 38% of our total inventory control is off book. Of that, about 1/3 is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don't cost collateralize. So we always have the ability, if any deal go sideways to walkaway from that deal without maybe some other hooks and implications that would make us state in a transaction that doesn't structurally work or financially work any longer. So we're very cautious from that perspective. So the only thing at risk for us would be the deposit and any other ancillary costs.

Phillippe Lord:
And the only thing I would add is, as Hilla said, it's a very small percentage with true lot financing. But because it's not cross collateralized, I think working through those deals on a one-by-one basis is much easier. We have had some scenarios that have gone back to our land bank finances and asked for some more time to stabilize the market, stabilize our inventory levels. And again, working on one deal creates more of an opportunity to do so.

Hilla Sferruzza:
Yes. And I think we addressed this in our prepared remarks, because we're very selective at the get-go as to what deals even go off book, they typically have a little bit of breathing room on the margin versus having arbitrary targets where we're forcing deals off book to hit a percentage. So for us, the ability to work with our partners, our off book partners is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them.

Operator:
Our next question comes from Stephen Kim with Evercore ISI.

Stephen Kim:
If I could follow up on the land bank question. Can you give us a sense for roughly what percent of your land bank deals you've been -- you've extended your takedown schedules. And am I right in thinking that in a typical land bank deal, any individual land bank dealers to extend, let's say, 6 months that, that might drive roughly 100 basis point lower gross margin on the remaining loss versus the initial expected lot price?

Phillippe Lord:
Thanks, Stephen. So first part, again, we have such a -- such a small percentage of our land book is land banker lot financing. So even as you look at what percent of our deals required us to restructure. And when I see restructure, maybe we needed a quarter delay in the next take to buy sometimes to get to do some inventory or stabilize kind of margins or what not, for the most part, that was very small as well. Most of our deals are performing fine. We're continuing to take back down, and we're moving through the inventory as we planned. As far as your other question, I think it's a little bit of an oversimplification. It really depends on the deal, how many lots are buying per quarter, the structure of the deal. In some cases, I think some land bankers are willing to actually give you a take for no carry just to keep you in the deal rather than taking back the lots and owning the loss. I think we're sort of in that environment today, at least with our folks. So it's just -- it's hard to answer. It really depends on your relationship, and it depends on the deal. I guess if all things being equal, they were going to charge you for those delays. Your math might be closed. I don't know, Hilla, if you want to add anything to it?

Hilla Sferruzza:
Yes. I mean, it depends what part of the cycle and how many assets you still have on book part of that math and, of course, what your interest rate is. But for us, when you look at it, good thing -- bad things don't get better with age. So if we're asking for sold, it's typically for us to rework a product lineup or to value engineer something we're not just holding and crossing our fingers and thinking something arbitrary is going to get better in 3 to 6 months. So again, that's kind of the [indiscernible] of being very selective as to what deals you're putting in an off-book structure in the first place. But yes, I mean, there's definitely -- if you can't work a free be, it's typically in to cost you whatever your interest burden is for that 6 months hold. So yes, there needs to be an implication, but 100 bps a little heavy.

Stephen Kim:
Okay. Appreciate that. Yes. And I also appreciate your comments about how there's a human component to this. It's not all just simply math. I think that's an important point to make. If I could also talk about your long-term gross margin target of 22.5% to 23.5%, which obviously is where you weren't that long ago and is but something that's quite above where you are currently. You've talked in the past, Hilla, about the importance of volume in achieving your level of gross margin. And so am I right to assume that, that long-term target is consistent with at least 4 per community absorption rate? Or do you think there's an opportunity to hit that gross margin level long term with a lower level of absorptions than you had envisioned in the past?

Phillippe Lord:
Steve, I'll take part of that question. This is Phillippe. So I think it's a lot easier to get to our long-term goal around 22.5% at 4 net sales per month. We're just way more efficient at that level we leverage our fixed and variable overhead much more meaningfully. We're able to navigate cost, the cost -- the vertical cost environment more effectively. So the path at 4 net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in margin, direct margin, which you might be able to hold on to your margins at a slower pace and try to drive it. So there is a path at [ 3.5 ], if you will, versus 4. But I think long term is the way to get there.

Hilla Sferruzza:
Yes. I think, Phillippe is exactly right. There's 2 components. The first is just absolute value -- absolute volume and the second is volume per store. We're much more efficient at 4-plus. So we definitely want that because costs at the local store level, the superintendent and the cost of running that location are leveraged better, but there's also costs at the division level that get better leverage period with volume. We think that there is an opportunity for both. Right now, the opportunity for us is at a higher store count. So hopefully, you'll see that improvement just between Q1 and Q2, right, the volume that we are guiding to on closing on Q2 is nicer than where we are today, and we guide to a higher margin than where we ended the quarter and part of that is going to be the incremental leverage. But once we get back to that for net sales per store average, there is another bump for us on incremental leveraging above that.

Phillippe Lord:
And we see our path from where we are to where we want to go both this year and the future years is really driven by the following things, but the volume, we have the higher store count, so we think we can get incremental volume, less inventory in the market to compete with, so a stronger pricing backdrop and then reducing our incentives over time, a lot of the incentives that are currently in the market are psychological. We're trying to convince folks that it's a good time to buy. It's part of affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, we can see a path there.

Operator:
Our next question comes from Alan Ratner with Selman.

Alan Ratner:
First question on the margin guide, and I think you, Phillippe, kind of touched on it in Steve's question, but I just want to dig a little deeper. So immutably I was pleasantly surprised to see that you expect to hold margins roughly steady quarter-over-quarter. I would have thought just given kind of what we're hearing from other builders, what we're seeing in the macro environment that there might have been some additional pressure there, at least flowing through in [ 2Q ]. So it sounds like some of that is top line leverage, but I'm curious if you feel like now that you've reset some of the absorption goals at least for the near term, whether the kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today.

Phillippe Lord:
Yes. A lot of questions in there that I'll answer all of them for you because they're all very good. I do think that -- there's a couple of things we see that feel like it's forming sort of a potential floor. Now this is, again, I don't know what's going to happen geopolitically. I don't know what's going to happen with a lot of things that are outside of my control that can impact this. But in the industry, we see a couple of things. Number one, we see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there's less inventory out there, I think consumers feel a little bit more urgency than when there's a lot out there. So I think that is helpful. . I think the volume is critical. We have the highest community count we've ever had. We're projecting more community count growth through the rest of this year. And even at these slower absorption paces, we think we can get there and not have to give up more margin to get there. So we're optimistic about that. And then look, in the beginning of this -- of Q1, we actually started feeling better about things, the weather kind of [indiscernible] off, February was okay. We had the war in Iran and people took a step back in certain markets. But March was pretty good. So we started feeling like we had some stability and some predictability in the market. It's just really hard to tell every week, whether that's going to be something that's maintained and sustainable? Or there's going to be something else that drove the consumer off their game. But I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we've opened and the opportunity those give us to gain volume throughout the year.

Hilla Sferruzza:
Two other points on margin, Alan, the first -- and we talked about it a little bit on our last earnings call that as we continue to improve on our direct costs, as we work through our finished spec inventory, you're going to start to see even better direct costs coming through. So that's a benefit that you'll see starting in Q2 and continuing through the latter part of the year, obviously, all new communities are all with the new cost. So the more volume we have from those, the better that piece is. And then just kind of doing math, if you look at our closings this quarter and what we're guiding to for next quarter, the back half of the year is going to be higher volume at our current projections. Even at the low point of the full year guidance that we provided. So again, that leveraging component that we're talking about is going to have an even more material impact for us through the back half of the year.

Alan Ratner:
Great. All right. Perfect. I appreciate all the detail there. Second question, I know you don't give specific cash flow guidance, but the last couple of years, cash has been a drag as you've been ramping the spec supply as you've been gearing up for this very significant community count growth it feels like both of those are kind of hitting an inflection point here where spec inventory is coming down a little bit. Community count is still going up, but not at the same rate it was. Pretty strong cash flow in the first quarter, at least seasonally speaking. So can you give any guidance or color on where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn period and maybe cash should start to improve even if earnings are under pressure on a year-over-year basis?

Hilla Sferruzza:
Yes. I mean we don't have specific cash flow guidance, as you noted, but the discipline to get down to $14 million specs per store is an incredible effort by the team, especially if you think that just a year ago, we were at 23 specs per store, that's relieved a lot of cash. That was kind of a more measured approach on land development while definitely increasing shareholder returns, but not by an equal offset is letting us kind of hold steady. So if you think about the fact that we have these faster cycle times and we're trying to time start with sales pace, you really shouldn't see something too detrimental occurring on the cash flows and any cash position where we are is probably a good place for us with the size of the balance sheet that we have. So I think that you're going to see this kind of maintenance of cash flow. The outsized return to shareholders for the balance of this year, as we've already articulated in our programmatic repurchase plan. But I think that you should see a more measured cash utilization as we're bringing stores online, but a lot of the spend has already been incurred, and we're definitely monitoring the WIP units and the stick some brick costs that were spending before we close the home.

Operator:
Our next question comes from Michael Rehaut with JPMorgan.

Michael Rehaut:
I wanted to start off with just kind of broader thoughts around the demand backdrop. So far, this earnings season, we've heard slightly different narratives across the spectrum. Some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. Also incentives and levels maybe also kind of stabilize and you kind of noted also a little bit about maybe inventory coming down somewhat, which has been helpful. At the same time, you've kind of highlighted some choppiness across your footprint, notwithstanding perhaps March coming back a little bit stronger. But I was hoping to get a sense of with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I'm interpreting that correctly. Is it certain markets that you're exposed to? You highlighted parts of Florida, Charlotte, Austin, is it maybe the price point that you're offering or the fact that you're maybe still in kind of that spec area, which I think, by definition might cause a little bit more competition. Just trying to reconcile kind of where you are within the industry and how to better understand your positioning and how that relates to your commentary?

Phillippe Lord:
Yes. Thanks. I feel like you kind of answered your own question, but I'll try to add some more to it. I think we're more cautious than maybe the opposite of being cautious. I think a part of it is our buyer profile seems to be lacking the confidence that may other buyer profiles have. They're stressed more from an affordability standpoint, cost of living. So it does feel like the procurement of those sales is very high, which makes us there cautious. I think the other thing is our footprint, we're in the Sunbelt states, primarily those were the states where prices got the most stretched during the last 5 years. Affordability got the most stretched. There's probably higher levels of inventory that we compete with. We're going to head-to-head with a line of other entry-level builders that do similar things to us. So for all those reasons, I think when you look at our buyer profile and our geographical footprint, we feel cautious right now.

Michael Rehaut:
Right, right. No, understood. Secondly, there was a question earlier about cash flow and community count. And obviously, we reiterated your outlook for this year and you still have very strong growth kind of flowing through in 2026. How should we think about '27, '28 given your current land position, particularly since with volumes being such a big driver of leverage and maybe you're a little less confident at least in the near term around getting significant improvements in absorption? How should we think about community count growth over the near to medium term, 2 to 3 years out?

Phillippe Lord:
Yes. Great question. I feel really good about 2027. I mean, as I indicated in the script, we will have 5% to 10% community count growth this year over last year. So we're going to 2027 with that, I feel like we'll be able to hold or grow that incrementally in 2027, really hard to pin that down just yet until schedules are dialed in and whatnot. So I don't want to commit to anything in 2027, but we have the ability to grow our community count in 2027, if it makes sense. We're obviously rationalizing all new land or as Hilla said, we're phasing developments a lot more slowly these days. So we'll have to see how that all plays out in the back half of this year. 2028 is pretty far out there. We have 75,000 lots. So we have the ability to grow in 2020 as well. We're being very conservative on new land deals, although land prices have stabilized in some places come down, terms are better, they're still somewhat difficult to underwrite in the turn incentive environment. So we've been very slow to ramp up new land, and I think we'll continue to do so. We have enough land to get where we need to go. And I think if we need to do things to plus up 2028, I think the opportunities will be there. So I don't have a lot of visibility in 2028 right now, but I feel good about on 2027.

Hilla Sferruzza:
The goal is not to shrink right? We have the ability to maintain or grow and we'll take our cues from the market.

Operator:
Our next question comes from Susan Maklari with Goldman Sachs.

Susan Maklari:
My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers even though they are seeing -- you are seeing a lot more caution in there and how that came through in that cancellation rate this quarter?

Phillippe Lord:
I mean it's really low. So until it rises, we're not getting to kind of tension to it. I think a lot of the cancellations that are happening have a lot more to do with the buyer stepping away and just [indiscernible] a good time. But again, it's a very low amount because we have such a quick sale to close. We got a closing ready guarantee because homes are ready to go. So as you buy it, you're picking up your furniture our can rate is extremely low, and we expect it to remain that way given our strategy. I think when people can start to imagine moving into the house 60 days, they start planning their lives. And so it's extremely low. We expect it to remain very low. I'm not sure I'm answering your question. If there's another question, let me know.

Hilla Sferruzza:
Just Susan, I think, everything we said is dead on pretty much the amount of time that it takes them to the time we enter into the sales contracts until the time they close the house, they spend getting documents to the mortgage company. There's not a lot of time rethink and tour other homes that maybe get convinced away from the commitment that they already made. So they're so hyper focused on just getting everything to the finish line that that's really helpful for us and a cancellation rate perspective. And even though our commitment is 60 days, it actually happening much faster than that at 254% backlog conversion, we're getting folks from sales to movement in less than 60 days. So they literally don't have any time to second guess decision to fall out is typically an event outside of not watching the home that's causing them to have a cancellation. It's something that occurred either in their financial position or in their personal life. That's causing the cancellation rate. It's very rarely that they still continue to tour homes thinking they're moving at that house in 40 days. And they fall along with something else and walks away from the deposit. Hopefully, that's helpful.

Susan Maklari:
Yes. No, that is helpful. That gets to my question. You're not seeing any change there. Obviously, the strategy of that quick close is helping you keep those people engaged and get them through that process, which is great to hear. So that's good. My second question is on the SG&A. You mentioned that obviously, there was some impact of less leverage overhead leverage that you saw this quarter. I guess, as you think about the back half of this year, how are you expecting that to come through to -- or what will that address SG&A? And then as we think over time, can you talk a bit more about the back office automation and other savings that you're implementing?

Hilla Sferruzza:
Yes. So we definitely -- typically, Q1 is our high watermark for SG&A, we have some certain retirement compensation triggers that disproportionately skew expenses into the first quarter anyway. And based on our full year guidance for closings, it's going to be our lowest level quarter on closings. So definitely some lower leverage opportunities for us on SG&A costs in Q1. So you should definitely see an improvement in that target for the balance of the year in every one of the upcoming quarters. As far as the back-office automation, there's a tremendous amount that that's still done in homebuilding, taking one piece of paper and typing it into another system, whether it's a closing document, something for title, escrow, mortgage, a lot of people doing things that are not their job decryption, right, their job is an analyst, it's not a typist. So we're finding ways for AI and technology to interpret documents and auto feed, a lot of data into our systems, which should help us gain efficiencies and is part of the path for us on getting to that 9.5% SG&A target in the future. Obviously, those numbers become being more meaningful at higher volumes, it would require -- would have required more manhours to do some of those tasks. It helps you not just with cost, but also with accuracy and rework. So we're pretty excited about [indiscernible] initiatives. There's also a lot of customer-facing initiatives, whether -- it's something that we'll be rolling out. I don't want to steal the thunder from our sales and marketing teams so stay tuned for some fun announcements about some of our customer-facing solutions that we have, both back-office and customer-facing tools. that should both drive SG&A leverage benefits in the very near term.

Operator:
Our next question comes from John Lovallo with UBS.

John Lovallo:
So you opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption just given higher levels of interest and wait lists and things of that nature. So the question is, I mean, did you experience higher absorption in these new communities and then how many more communities should we expect as we move through the year?

Phillippe Lord:
Thanks, John. I think most of the communities we opened up in Q1, a lot of them opened up the last month of the quarter. They kind of hit what we bought and met our expectations, that would they exceeded our expectations. I wouldn't say they underperformed, they kind of did what we thought they were going to do. Probably Q2 will tell us more about whether they're hitting their stride, but they've seen -- they're all very good locations, strong position, strong margins, strong pricing. So I think we feel really good about them. And then as we said on the script, we expect 5% to 10% range of growth year-over-year. So I think you can expect a little bit more here in the back half of this year to get us to that number. We'll see how everything goes around opening those up. But we're committed to a 5% to 10% year-over-year growth in our community count this year.

John Lovallo:
Okay. That's helpful. And then in the prepared remarks and I think in the press release, you guys called out some storm impact in the first quarter, which makes sense. Curious if those deliveries were actually captured in the quarter? Or do you expect those to be captured in the second quarter? And if there's any way to quantify the number of units?

Phillippe Lord:
Yes. I mean, January was softer than we thought. And I think the primary reason for that, given what we saw in February and March was the storm there were multiple markets that were impacted by that storm. In some cases, mobility was impacted. And so we just didn't see the traffic that we would have thought we would have saw towards the end of January. And as you can see from our guidance, we missed our guidance, and we think that was why. I think that incremental volume that we thought we were going to see in January didn't materialize and if we would have closed an extra 200 to 300 homes, we probably would have been a lot closer to what we thought we were going to do. Those buyers are March depending. And so they'll probably close in into Q2, but our business doesn't really work that way. And we later -- so whether we got that buyer or not, it can either happen next month or the month after that, and we're really just a just-in-time business at this point. So hopefully, that's helpful and answers your question.

Hilla Sferruzza:
Yes. I mean it's lost days of sale. You don't double up when the stores open back up and you capture 2 days of sale in 1. So there are basically 3, 4, 5 lost days of sale in a large portion of our markets in January. And that -- those are sales that are -- we're not somehow recaptured in the next month. So we were trying to press on the gas and figure out a way to accelerate that. And then as we mentioned, the kind of consumer confidence, maybe put a little bit of a damper when inflation and interest rates and gas prices increase. So we view those as true lost days. Now we're working to catch up. You see our projections for Q2 are a lot healthier than Q1, but I don't know that they were like somehow recaptured in February.

Operator:
Our next question comes from Jay McCanless with Citizens.

Jay McCanless:
First question I had, Hilla, in script, I think you talked about land vintages mostly being 2022 to '24. But I missed some of your other comments around that. I guess how much of either total lots now or owned lots running at that vintage or in that vintage area?

Hilla Sferruzza:
That's pretty granular. So I mean we always have like some long-term communities that we're in Phase 6, and we have some new communities and we're probably buying 25 that we're selling at right now. So we're not giving that level of breakout, but for the most part, it was only just commentary as to why the lot cost is running a little bit hotter. We tend to have community sizes between 100 and 150 and at about [ 3.5 ], [ 4.5 ] net sales per store, you can do the math as to how quickly we burn through those. So for the most part for us, everything is live. I think was the intensive that comment, what we're experiencing and what we have been experiencing at the elevated land development cost burden, that's running through our numbers currently, but hopefully, we should be a tail end of that by the end of '27.

Jay McCanless:
Okay. That's great. And then the second question I had on the West segment, a fifth quarter in a row were orders down year-over-year and kind of stuck at this mid-80s community count maybe what's the strategy near term? Are there some older dated communities you have to sell through there before you can start to grow that again? Just maybe a quick take on what you're doing in the West segment.

Phillippe Lord:
Yes. I think you talked about the Western region, which is California, in Colorado and Utah, those are certainly some of the more challenged markets. I think the narrative on Denver is pretty clear. The narrative on what's been happening in Northern California is pretty clear. Arizona is kind of what it is, Sokol's been okay and you take a pretty strong market. But just in general, the West region has been in a tougher place to do business. The affordability has been a lot of pressure on the buyers. There's a lot of competition. land prices are super sticky. Regulatory environment is really high. So we've been intentionally trying to reallocate a significant part of our business to the east of the West region. It doesn't mean we're not in those markets. We don't believe in those markets, but we're being much more strategic. The value of your land book is high and it's very irreplaceable. So we're willing to run that region at a slower pace and try to maximize the margin. of that land book because it took a long time to put together. And so you'll continue to see the West region be a smaller part of our business long term.

Jay McCanless:
Okay. Great. And if I could sneak one more in. Phillippe, I was encouraged to hear what you're saying about external inventories. I mean if we think about time, whether it's 12, 18 months, any commentary you have on when you think external expect inventories to be down to a level that will give you guys some better pricing power?

Phillippe Lord:
Yes. Great question. I think the builder group in general did a great job these last quarters navigating some of their aged inventory. I think there's still a little bit of overhang out there. Even our numbers were still a little high on the finished spec that we're carrying like to carry a little bit less. I think there's still some other folks that are navigating as well, but the effort was significant. So I already feel better in general, as we go into Q2 that the environment is less competitive. But I do think there's still some more to go. But I think as we work to got the rest of this year, I can see going into 2027, but a much different sort of competitive inventory environment. I think the other thing I mentioned is important is just there's a pivot away from specs in general in our industry for a lot of reasons, depending on who your consumer segment is and the markets you're in. So I think that's helpful for us because we're not hitting away from stacks. That's our business. And so less competition in the spec entry-level business, move-in ready business, it creates a better and competitive environment for our products specifically.

Operator:
And our final question comes from Jade Rahmani with KBW.

Jason Sabshon:
This is Jason Sabshon on for Jade. I wanted to ask you about AI across various surveys, the construction industry ranks quite low in terms of the expected AI impact. And you commented on deployment opportunities in back office automation potentially customer acquisition. But are you seeing any other areas of the business where it could potentially make a difference, be that supply chain management or construction management?

Hilla Sferruzza:
I mean, AI is going to have a place in every sector of every business. I think it's just deployment and low-hanging fruit. So I think we're starting off with some very easy pieces and hopefully making the mistakes and things that are easily -- easily fixable as we grow a new muscle in our skill set. But yes, eventually, it's going to be a component of everything, everything that we do, the more that we manage our data and are able to use AI on -- in a holistic way in all of our data. We try to also look at things as limited by a system. So if you think about your data and a data warehouse and then you can clearly everything in AI from that perspective, then there is no limit as to what functional area is benefiting for your AI initiatives. So yes, it's definitely something that we're hyper focused on the opportunities for savings on the cost side are massive when you're thinking about it from that perspective. But we're going to walk -- or crawl walk run, right? So we got to take the easy steps first and then advance on to beyond that.

Jason Sabshon:
Got it. And then just as a final question. Is there a certain level of mortgage rates or the tenure that you'd expect to drive an inflection in buyer activity?

Phillippe Lord:
Good question. It feels like as being sort of moved that to [ 6 ] or slightly below [ 6 ]. We really see buyer psychology change below that level. And I think anything below that on your way to [ 5 ] will just be really unleashed demand because of the affordability piece. So that's kind of how we yield about it [ 6 ]. It's sort of lower is good for our business. Below that just provides more tailwind for our industry. Thank you operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you.

Operator:
This concludes today's Meritage Homes First Quarter 2026 Analyst Call. Please disconnect your line at this time, and have a wonderful day.