Meritage strengthens liquidity after posting $80 million of first-quarter cash flow from operations

By Jennifer Lanning Drey

Portland, Ore., April 29 - Meritage Homes Corp. generated first-quarter cash flow from operations of $80 million, representing a more than $160 million improvement from the same quarter in 2007 that was driven by net reductions in inventory and tax refunds in the 2008 period, Meritage chief financial officer Larry Seay said Tuesday during the company's first-quarter earnings conference call.

Meritage used the cash to reduce debt by $80 million from the Dec. 31 balance, leaving less than $2 million outstanding on the company's credit facility at the end of the first quarter.

The company also strengthened its liquidity through a common stock offering that raised $83 million of additional cash on April 25.

"Now that we've paid off the outstanding balance under the facility and have additional cash on our balance sheet from the equity offering, our liquidity will offer greater flexibility going forward," Seay said.

Meritage received $76 million of tax refunds during the first quarter and expects to receive an additional $40 million to $60 million of cash tax refunds in the first quarter of 2009.

The company had $377 million of available borrowing capacity under its $800 million revolving credit facility at the March 31 quarter end and a net debt-to-capital ratio of 47%.

"Our primary objectives to manage through this downturn have been to strengthen our balance sheet by reducing inventory and debt and to build liquidity to take advantage of future opportunities," Steven J. Hilton, chief executive officer of Meritage, said during the call.

Discount land opportunities expected

During the conference call, Meritage's management reiterated their previously stated expectation of eventually finding opportunities to redeploy the company's cash toward purchasing discounted lots.

Hilton said the company is not yet seeing a lot of deals but expects more to become available later in the year.

"We expect for the second half of this year to see a lot more deal flow as a lot of these private builders now are losing their land positions back to the banks, and the banks begin to dispose of those assets," Hilton said.

"We're very optimistic that we're going to be able to buy lots at lower prices going forward."

$45 million net loss

For the first quarter, Meritage reported a net loss of $45 million, compared with net earnings of $15 million in the 2007 first quarter. The current year's loss included $60 million of pretax charges resulting from lower home prices in some markets and greater incentives offered on unsold homes.

Meritage's first-quarter net sales were off 21% from the prior year's first quarter after a cancellation rate of 27% in both periods.

The company ended the quarter with 768 unsold homes in inventory after net sales of 339 homes from unsold inventory, putting Meritage within its target range of three to four spec homes per community, Hilton said.

Having reached its targeted levels for spec homes, Meritage plans to be less aggressive on pricing going forward, which the company believes will help reduce future impairments, he said.

Hilton also said he expects to begin to see improvements in the housing market in 2009.

"Stabilizing prices should help improve buyer confidence over the next several quarters and lead to improving demand in 2009 and beyond," Hilton said.

The company maintains the belief that its Texas franchise is a differentiating factor for the company, as Texas continues to outperform most other areas of the country.

Meritage is a Scottsdale, Ariz.-based builder of single-family homes.

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