Thursday, October 30, 2008

Sales at Meritage Homes Decline by 28% in Texas

For months, Meritage Homes Corp. has counted on Texas to carry it through the housing slump. But in its third quarter, the home builder paid the price for that strategy: Sales plummeted 28% in the Lone Star State, contributing to the company's sixth consecutive quarterly loss. Sales aroung texas may be down, but the markets around Charlotte Condos, Winston Salem Homes For Sale and Wilson NC Real Estate are all fine.

The Scottsdale, Ariz.-based builder said its loss widened because of write-downs on its real estate because of the housing market's continued weakness. Also, sales in Texas were affected by Hurricane Ike, not so much by direct physical damage but by delaying construction, closings and sales as the credit crisis widened. Arizona was the only state where the company saw gains.

As it waits for the housing market to hit bottom, Meritage has become dependent on Texas, which didn't become frenzied during the housing boom and, until now, had benefited from surging oil prices.

In its second quarter, Meritage said orders fell 28% outside of Texas, but slipped just 4% in the state, where it operates in Dallas/Ft. Worth, Austin, San Antonio and Houston. That's why, as of Sept. 30, more than half of its roughly 21,000 lots were in Texas, compared with 29% in Arizona and 1% in Colorado, with 28% owned. Earlier this year, a home-building consultant labeled the state a "lifeline."

Not any more. "Unlike prior quarters, sales volumes in Texas were down in line with the company average and, in turn, didn't offset weakness in harder-hit housing markets," noted UBS' David Goldberg. "We expect this trend to continue over the near term, given the impact the slowdown in the economy is having on buyer sentiment."

JMP Securities noted Texas's margins could come under pressure in a weaker job market. "The relatively low wage level and FICO scores in the Texas market have also slowed that market, although we see only modest price corrections likely," noted analyst James Wilson.

Even so, company executives said no strategy shift is imminent.

As the credit crisis seems to have pushed the world into a recession, the already battered home-building industry is feeling a deeper pain. The industry's confidence is at a record low and, after some homes sold below replacement cost, new construction has largely been halted. Earlier this month, the Commerce Department said new construction dropped 6.3% in September to the slowest pace since January 1991.

Major builders -- including Pulte Homes, Ryland Group Inc. and NVR -- recently detailed grim quarters.

Meritage, which had delivered one of the industry's best year-to-date returns, reported a wider net loss of $144 million, or $4.69 a share, compared with a loss of $118.6 million, or $4.52 a share, a year earlier.

The latest results included $55 million of pretax real-estate-related charges and a $106 million deferred tax asset valuation allowance. Credit Suisse estimates $305 million in further charges.

Meritage's impairments were elevated in the third quarter, but well below last year's third and fourth quarters. Of the latest impairments, $29 million were in Arizona -- fueled by four underperforming projects in Phoenix -- followed by $11 million in California. Nevada and Florida each had $4 million, while Texas came in at $2 million. As inventory and land prices have plummeted, the top public builders have written off more than $25 billion since 2006, according to Standard & Poor's Equity Research.

"While Hurricane Ike hurt our Houston operations in early September, the financial crisis and slowing economy have damaged buyers confidence and resulted in further decline in home sales and asset values which prompted us to record further real estate impairment in our third quarter," said Steven J. Hilton, chairman and chief executive officer, during the earnings conference call.

The builder said closing revenue dropped 35% to $374.8 million. Net orders fell 29%, while closings dropped 25%. As jittery buyers abandon deals, cancellations came in at 40%, up from this year's two previous quarters. Its September net sales were about 30% lower than the July/August pace -- the cancellation rate jumped to 45% that month alone, executives said during the call.


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