Meritage Homes ends Q3 with $311 million cash, undrawn $135 million revolver

By Paul Deckelman

New York, Oct. 23 - Meritage Homes Corp. ended its 2013 third quarter with what its chief financial officer termed a "strong" balance sheet with "adequate capital and financing capacity to support additional growth."

CFO Larry W. Seay, who also serves as executive vice president of the Scottsdale, Ariz.-based homebuilder, told analysts on Wednesday's conference call following the release of the company's results that as of the end of the quarter on Sept. 30, Meritage had $311.3 million of cash and cash equivalents, restricted cash and securities - a gain of $16 million from the $295.5 million on the balance sheet at the end of the previous fiscal year on Dec. 31, 2012.

The company's ratio of net debt as a percentage of total capital stood at 38.1%, which he said was "consistent with our year-end ratio."

Meritage's liquidity also includes a $135 million revolving credit facility, which has no outstanding borrowings to date.

"We've managed a strong balance sheet, while improving our credit metrics, as we've grown and expanded our footprint," the company's president and chief executive officer, Steven J. Hilton, declared on the call.

Junk deal boosts debt

Debt at the end of the third quarter stood at $798.34 million, versus $722.80 million at Dec. 31. Calculating the company's cash and equivalents, net debt stood at $487 million on Sept. 30 versus $427.33 million at Dec. 31.

The third-quarter debt load was only marginally different than the $798.22 million of debt on the balance sheet debt at the end of the second quarter on June 30, according to the company's most recent 10-Q filing with the Securities and Exchange Commission.

As of June 30, the capital structure included $175 million of 4½% senior notes due 2018, $196.72 million of 7.15% senior notes due 2020, $300 million 7% senior notes due 2022 and $126.5 million 1.875% convertible senior notes due 2032.

The company showed no capital markets activity during the third quarter. Earlier in the year, it sold the $175 million of 2018 notes, pricing them at 4½% in a quick-to-market transaction on Feb. 27, after upsizing that junk deal from an originally announced $150 million.

Meritage then used most of the proceeds from the new deal to take out the $99,825,000 of 7.731% senior subordinated notes due 2017 outstanding on its balance sheet at the end of the year. It tendered for the notes in an offer that ended on March 26, with holders of $16.7 million of the notes tendering them to the company for total consideration of $1,033.75 per $1,000 principal amount tendered, which included a $30 per $1,000 principal amount payment for notes tendered prior to the March 12 early tender deadline.

The company then called the remaining $83,125,000 of the notes for redemption on April 12, paying a price of 102.9 for them.

The remaining proceeds from the February bond sale went to general corporate purposes.

The company also announced in an SEC filing on June 14 that two additional lenders had joined the lending syndicate for its senior revolving credit facility, thus increasing the total commitments to $135 million from $125 million. The facility was amended to extend the maturity date by two years, to increase the accordion feature to $75 million from $25 million, and to make changes in the formula for calculating the borrowing base.

Market gains lift earnings

For the third quarter, Meritage reported a 44% increase in home closing revenue, to $483.15 million from $334.88 million in the year-earlier quarter.

Net earnings rose more than five times to $38.19 million, or 99 cents per diluted share, from $6.78 million, or 19 cents per share, a year earlier.

The average order price of a Meritage home rose 20% to $365,000 from $305,000 a year before.

"We are pleased with the strong operating results we achieved again this quarter, including our highest level of home closings and closing revenue in the last five years, and our highest gross margin in more than seven years," CEO Hilton said.

"We are focused on delivering earnings growth by leveraging our operating structure in addition to growing our top line. This was our seventh consecutive quarter in which we increased net earnings year over year."

Hilton said that the pace of sales per community "slowed somewhat in the third quarter, reflecting the effects of home price inflation over the past year and the increase in interest rates we experienced just before and during the seasonally slower summer months, resulting in an 8% year-over-year increase in orders."

He added that "since the underlying demand drivers remain solidly positive amidst a shortage of homes on the market, we are confident that the housing market can continue to grow for the foreseeable future, though maybe not at the same rate we enjoyed last year and earlier this year."

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