Market Overview

Meritage Homes reports third quarter 2018 diluted EPS of $1.33; with a 13% increase in pre-tax earnings on 9% growth in home closing revenue; Continued expansion into entry-level market represents one-third of communities and 43% of third quarter orders

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SCOTTSDALE, Ariz., Oct. 24, 2018 (GLOBE NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH), a leading U.S. homebuilder, reported its third quarter results for the period ended September 30, 2018.

         
Summary Operating Results (unaudited)
(Dollars in thousands, except per share amounts)
         
    Three Months Ended September 30,   Nine Months Ended September 30,
    2018   2017   % Chg   2018   2017   % Chg
Homes closed (units)   2,162     1,969     10 %   6,026     5,456     10 %
Home closing revenue   $ 877,734     $ 805,008     9 %   $ 2,478,649     $ 2,263,405     10 %
Average sales price - closings   $ 406     $ 409     (1 )%   $ 411     $ 415     (1 )%
Home orders (units)   1,828     1,874     (2 )%   6,436     6,162     4 %
Home order value   $ 715,089     $ 765,027     (7 )%   $ 2,595,881     $ 2,536,448     2 %
Average sales price - orders   $ 391     $ 408     (4 )%   $ 403     $ 412     (2 )%
Ending backlog (units)               3,285     3,333     (1 )%
Ending backlog value               $ 1,367,006     $ 1,408,801     (3 )%
Average sales price - backlog               $ 416     $ 423     (2 )%
Earnings before income taxes   $ 71,409     $ 63,455     13 %   $ 191,478     $ 163,429     17 %
Net earnings   $ 54,135     $ 42,550     27 %   $ 151,847     $ 107,702     41 %
Diluted EPS   $ 1.33     $ 1.02     30 %   $ 3.69     $ 2.55     45 %

MANAGEMENT COMMENTS

"We delivered another quarter of strong earnings performance with a 13% increase in pre-tax earnings, largely due to the success of our shift into the entry-level market over the past couple of years," said Steven J. Hilton, chairman and chief executive officer of Meritage Homes. "That performance resulted from a 10% increase in our third quarter home closings -- the second highest number of homes we've delivered in more than a decade -- and our ability to hold margins through increased efficiencies that helped offset higher costs.

"The combination of higher home prices and interest rates have clearly impacted recent home buying activity, especially at higher price points, which we anticipated two years ago when we undertook our strategy to build more affordable homes to cater to the expanding entry-level and move-down markets," explained Mr. Hilton. "We've made tremendous progress in shifting toward more affordably-priced homes, which represented one-third of our communities and 43% of our total orders in the third quarter. The fact that these communities are selling at a faster pace than higher-end move-up communities reinforces our confidence and commitment to furthering that strategy."

He continued, "Underlying economic and housing market fundamentals remain strong. Employment is high, wages are growing, consumer confidence is high and inventories of affordable homes are low. These conditions offer opportunities for Meritage and the entry-level LiVE.NOW.® communities we have in our pipeline.

"We expect continued demand for entry-level homes will exceed that for move-up homes over the long term, though the next couple of quarters may be more challenging, and we have therefore adjusted our expectations for the remainder of 2018 based on the recent softness we've seen in the overall market," said Mr. Hilton. "We are now projecting approximately 8,300-8,500 home closings and total home closing revenue of $3.375-3.475 billion for the full year 2018. We also expect home closing gross margin for the full year to be approximately 18% and are projecting pre-tax earnings of $265-285 million for the year."

Mr. Hilton added, "We announced an authorization by our board last quarter to repurchase up to $100 million of Meritage Homes stock. We have purchased more than $29 million from cash on hand so far and we expect to complete additional repurchases over the coming quarters."

THIRD QUARTER RESULTS

  • Net earnings of $54.1 million ($1.33 per diluted share) for the third quarter of 2018, increased 27% and 30%, respectively, compared to $42.6 million ($1.02 per diluted share) for the third quarter of 2017. Earnings before income taxes were up 13% year-over-year, primarily due to increased home closing revenue.

  • Home closing revenue increased 9% with a 10% increase in closing volume, partially offset by a 1% decrease in average sales price compared to the third quarter of 2017, as demand continued to shift to entry-level homes. The increases in closings and revenue were led by the East region, which delivered a 31% increase in home closing revenue with 32% more home closings at an average sales price 1% lower than the third quarter of 2017. The Central region delivered home closings and revenue growth of 11% and 8%, respectively, with a 3% decrease in average price.  West region home closing revenue was 2% less than last year's third quarter, as a 5% decline in closing volume was partially offset by a 3% increase in average closing prices for the region.

  • Home closing gross margin for the third quarter of 2018 was 18.1%, or 18.4% excluding a $2.6 million charge to terminate a purchase agreement for land in California that is no longer consistent with the Company's strategy. That compared to 18.1% in the third quarter of 2017, or 18.3% excluding $1.8 million of charges incurred for asset write-offs.

  • Selling, general and administrative expenses totaled 11.0% of third quarter 2018 home closing revenue, in line with 10.9% in the prior year.

  • Interest expense declined $1.1 million for the third quarter of 2018 compared to 2017. The reduction was due to a greater percentage of interest capitalized to qualified assets under development.

  • Third quarter effective tax rate was approximately 24% in 2018, compared to 33% in 2017, reflecting lower corporate income tax rates enacted for 2018.

  • Total orders for the third quarter of 2018 were 2% below 2017's third quarter, primarily reflecting a 42% decrease in average active communities in California, which have produced among the highest absorptions over the past year. Though average active community count company-wide for the third quarter was 2% higher in 2018 than 2017, this included several communities near close-out with limited inventory, which contributed to a 4% decline in total orders pace year-over-year.

YEAR TO DATE RESULTS

  • Net earnings were $151.8 million for the first nine months of 2018, a 41% increase over $107.7 million for the first nine months of 2017, primarily driven by a 10% increase in home closing revenue, combined with a 40 basis point improvement in home closing gross margin and a lower effective tax rate for the first nine months of 2018 compared to 2017.

  • Home closings for the first nine months of the year increased 10% over 2017, driven by a 32% increase in the East region and 14% increase in the Central region.

  • Home closing gross profit increased 12% to $442.4 million in the first nine months of 2018 compared to $393.8 million in the first nine months of 2017, as year-to-date home closing gross margin improved to 17.8% in 2018 from 17.4% in 2017, or 18.0% compared to 17.6%, excluding $2.7 million and $3.6 million of charges incurred on asset write-offs in both years, respectively. East region home closing gross margins were the primary contributor, as they improved 210 basis points year-over-year for the first nine months of the year, or 120 basis points excluding the asset write-offs in the prior year.

  • Other income for the first nine months of the year increased by $4.0 million in 2018 primarily due to a $4.8 million favorable legal settlement in the first quarter of 2018 related to a previous joint venture in Nevada.

  • The effective tax rate for the first nine months of 2018 was 21%, compared to 34% for the first nine months of 2017, due to the lower statutory corporate tax rate in 2018, as well as $6.3 million of energy tax credits recorded in the first quarter of 2018 for homes closed in 2017 that qualified for the credits. These energy tax credits were extended only for 2017 and are expected to reduce the full year 2018 effective tax rate by at least 200 basis points.

BALANCE SHEET

  • Cash and cash equivalents at September 30, 2018, totaled $205.8 million, compared to $170.7 million at December 31, 2017. Real estate assets increased to $2.89 billion at September 30, 2018, compared to $2.73 billion at December 31, 2017. Homes under construction or completed increased by $224.6 million, reflecting a higher level of spec inventory for entry-level communities, while finished home sites and land under development decreased by $63.0 million.

  • The Company repurchased and retired approximately $29.4 million of its outstanding stock during the third quarter of 2018 under the Company's authorized $100 million share repurchase program.

  • Meritage ended the third quarter of 2018 with approximately 34,400 total lots owned or under control, compared to approximately 33,300 total lots at September 30, 2017. Approximately 80% of the lots added during the third quarter were in communities planned for entry-level product.

  • Debt-to-capital ratio was reduced to 43.4% at September 30, 2018 from 44.9% at December 31, 2017, with net debt-to-capital ratio reduced further to 39.2% and 41.4%, respectively.

CONFERENCE CALL

Management will host a conference call to discuss the results at 8:00 a.m. Arizona Time (11:00 a.m. Eastern Time) on Thursday, October 25.

The call will be webcast with an accompanying slideshow available on the "Investor Relations" page of the Company's web site at http://investors.meritagehomes.com. Telephone participants may avoid any delays by pre-registering for the call using the following link to receive a special dial-in number and PIN.

Conference Call registration link: http://dpregister.com/10124467.

Telephone participants who are unable to pre-register may dial in to 866-226-4948 on the day of the call. International dial-in number is 1-412-902-4125 or 1-855-669-9657 for Canada.

A replay of the call will be available beginning at approximately 1:00 p.m. ET on October 26 and extending through November 9, 2018, on the website noted above or by dialing 877-344-7529, 1-412-317-0088 for international or 1-855-669-9658 for Canada, and referencing conference number 10124467. 

       
Meritage Homes Corporation and Subsidiaries
Consolidated Income Statements
(In thousands, except per share data)
(Unaudited)
       
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2018   2017   2018   2017
Homebuilding:              
Home closing revenue $ 877,734     $ 805,008     $ 2,478,649     $ 2,263,405  
Land closing revenue 6,847     589     25,991     16,942  
Total closing revenue 884,581     805,597     2,504,640     2,280,347  
Cost of home closings (719,142 )   (659,350 )   (2,036,212 )   (1,869,569 )
Cost of land closings (6,922 )   (1,646 )   (27,963 )   (15,504 )
Total cost of closings (726,064 )   (660,996 )   (2,064,175 )   (1,885,073 )
Home closing gross profit 158,592     145,658     442,437     393,836  
Land closing gross (loss)/profit (75 )   (1,057 )   (1,972 )   1,438  
Total closing gross profit 158,517     144,601     440,465     395,274  
Financial Services:              
Revenue 3,832     3,549     10,750     10,142  
Expense (1,659 )   (1,524 )   (4,836 )   (4,454 )
Earnings from financial services unconsolidated entities and other, net 4,148     3,489     10,278     9,673  
Financial services profit 6,321     5,514     16,192     15,361  
Commissions and other sales costs (60,282 )   (55,845 )   (173,857 )   (158,866 )
General and administrative expenses (35,906 )   (31,636 )   (101,004 )   (90,849 )
Earnings/(loss) from other unconsolidated entities, net 894     (91 )   692     852  
Interest expense (53 )   (1,116 )   (233 )   (3,561 )
Other income, net 1,918     2,028     9,223     5,218  
Earnings before income taxes 71,409     63,455     191,478     163,429  
Provision for income taxes (17,274 )   (20,905 )   (39,631 )   (55,727 )
Net earnings $ 54,135     $ 42,550     $ 151,847     $ 107,702  
               
Earnings per share:              
Basic              
Earnings per share $ 1.34     $ 1.06     $ 3.75     $ 2.67  
Weighted average shares outstanding 40,283     40,323     40,472     40,273  
Diluted              
Earnings per share $ 1.33     $ 1.02     $ 3.69     $ 2.55  
Weighted average shares outstanding 40,855     42,011     41,100     42,585  
                       

 

         
Meritage Homes Corporation and Subsidiaries
 Consolidated Balance Sheets
(In thousands)
(Unaudited)
         
    September 30, 2018   December 31, 2017
Assets:        
Cash and cash equivalents   $ 205,762     $ 170,746  
Other receivables   79,573     79,317  
Real estate (1)   2,887,293     2,731,380  
Real estate not owned   36,562     38,864  
Deposits on real estate under option or contract   49,893     59,945  
Investments in unconsolidated entities   16,294     17,068  
Property and equipment, net   53,371     33,631  
Deferred tax asset   36,674     35,162  
Prepaids, other assets and goodwill   82,837     85,145  
Total assets   $ 3,448,259     $ 3,251,258  
Liabilities:        
Accounts payable   $ 156,772     $ 140,516  
Accrued liabilities   200,445     181,076  
Home sale deposits   34,159     34,059  
Liabilities related to real estate not owned   32,676     34,978  
Loans payable and other borrowings   16,669     17,354  
Senior notes, net   1,295,054     1,266,450  
Total liabilities   1,735,775     1,674,433  
Stockholders' Equity:        
Preferred stock        
Common stock   400     403  
Additional paid-in capital   568,976     584,578  
Retained earnings   1,143,108     991,844  
Total stockholders' equity   1,712,484     1,576,825  
Total liabilities and stockholders' equity   $ 3,448,259     $ 3,251,258  


(1) Real estate – Allocated costs:
       
Homes under contract under construction   $ 660,944     $ 566,474  
Unsold homes, completed and under construction   646,709     516,577  
Model homes   136,291     142,026  
Finished home sites and home sites under development   1,443,349     1,506,303  
Total real estate   $ 2,887,293     $ 2,731,380  
                 


       
Supplemental Information and Non-GAAP Financial Disclosures (Dollars in thousands – unaudited):
       
  Three Months Ended September 30,   Nine Months Ended September 30,
  2018   2017   2018   2017
Depreciation and amortization $ 6,850     $ 4,199     $ 19,458     $ 12,071  
               
Summary of Capitalized Interest:              
Capitalized interest, beginning of period $ 84,443     $ 72,327     $ 78,564     $ 68,196  
Interest incurred 21,545     21,024     63,788     58,199  
Interest expensed (53 )   (1,116 )   (233 )   (3,561 )
Interest amortized to cost of home and land closings (17,871 )   (15,462 )   (54,055 )   (46,061 )
Capitalized interest, end of period $ 88,064     $ 76,773     $ 88,064     $ 76,773  
               
  September 30,
2018
  December 31,
2017
       
Notes payable and other borrowings $ 1,311,723     $ 1,283,804          
Stockholders' equity 1,712,484     1,576,825          
Total capital 3,024,207     2,860,629          
Debt-to-capital 43.4 %   44.9 %        
Notes payable and other borrowings $ 1,311,723     $ 1,283,804          
Less: cash and cash equivalents $ (205,762 )   $ (170,746 )        
Net debt 1,105,961     1,113,058          
Stockholders' equity 1,712,484     1,576,825          
Total net capital $ 2,818,445     $ 2,689,883          
Net debt-to-capital 39.2 %   41.4 %        
                   


     
Meritage Homes Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
     
    Nine Months Ended September 30,
    2018   2017
Cash flows from operating activities:        
Net earnings   $ 151,847     $ 107,702  
Adjustments to reconcile net earnings to net cash provided by/(used in) operating activities:        
Depreciation and amortization   19,458     12,071  
Stock-based compensation   13,737     9,898  
Equity in earnings from unconsolidated entities   (11,160 )   (10,525 )
Distribution of earnings from unconsolidated entities   11,898     10,410  
Other   2,197     1,265  
Changes in assets and liabilities:        
Increase in real estate   (161,816 )   (336,069 )
Decrease in deposits on real estate under option or contract   10,080     13,633  
Decrease/(increase) in other receivables, prepaids and other assets   1,686     (15,207 )
Increase in accounts payable and accrued liabilities   35,625     21,298  
Increase in home sale deposits   100     11,098  
Net cash provided by/(used in) operating activities   73,652     (174,426 )
Cash flows from investing activities:        
Investments in unconsolidated entities   (551 )   (404 )
Distributions of capital from unconsolidated entities   597     1,250  
Purchases of property and equipment   (23,754 )   (12,038 )
Proceeds from sales of property and equipment   107     251  
Maturities/sales of investments and securities   1,065     1,297  
Payments to purchase investments and securities   (1,065 )   (1,297 )
Net cash used in investing activities   (23,601 )   (10,941 )
Cash flows from financing activities:        
Proceeds from Credit Facility, net       10,000  
Repayment of loans payable and other borrowings   (13,484 )   (10,491 )
Repayment of senior notes and senior convertible notes   (175,000 )   (126,691 )
Proceeds from issuance of senior notes   206,000     300,000  
Payment of debt issuance costs   (3,198 )   (3,986 )
Repurchase of shares   (29,353 )    
Net cash (used in)/provided by financing activities   (15,035 )   168,832  
Net increase/(decrease)in cash and cash equivalents   35,016     (16,535 )
Beginning cash and cash equivalents   170,746     131,702  
Ending cash and cash equivalents   $ 205,762     $ 115,167  
                 

 

                 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Dollars in thousands)
(Unaudited)
                 
    Three Months Ended September 30,
    2018   2017
    Homes   Value   Homes   Value
Homes Closed:                
Arizona   411     $ 134,977     424     $ 141,249  
California   206     143,386     261     154,731  
Colorado   160     87,716     135     77,728  
West Region   777     366,079     820     373,708  
Texas   721     256,308     647     236,759  
Central Region   721     256,308     647     236,759  
Florida   249     105,902     185     77,652  
Georgia   139     47,429     95     29,019  
North Carolina   165     63,381     107     48,129  
South Carolina   69     23,605     74     25,164  
Tennessee   42     15,030     41     14,577  
East Region   664     255,347     502     194,541  
Total   2,162     $ 877,734     1,969     $ 805,008  
Homes Ordered:                
Arizona   347     $ 112,185     348     $ 116,757  
California   104     67,810     200     124,339  
Colorado   157     84,078     92     55,459  
West Region   608     264,073     640     296,555  
Texas   635     228,627     593     213,241  
Central Region   635     228,627     593     213,241  
Florida   231     94,089     269     120,243  
Georgia   89     32,459     102     33,039  
North Carolina   139     52,434     147     59,976  
South Carolina   65     21,448     86     28,449  
Tennessee   61     21,959     37     13,524  
East Region   585     222,389     641     255,231  
Total   1,828     $ 715,089     1,874     $ 765,027  
                             

 

                 
    Nine Months Ended September 30,
    2018   2017
    Homes   Value   Homes   Value
Homes Closed:                
Arizona   1,052     $ 344,245     1,139     $ 382,814  
California   643     444,796     702     427,095  
Colorado   416     231,523     417     233,377  
West Region   2,111     1,020,564     2,258     1,043,286  
Texas   2,004     707,397     1,752     637,147  
Central Region   2,004     707,397     1,752     637,147  
Florida   761     329,156     518     225,674  
Georgia   316     107,237     223     74,860  
North Carolina   488     191,129     370     164,596  
South Carolina   211     72,611     217     75,085  
Tennessee   135     50,555     118     42,757  
East Region   1,911     750,688     1,446     582,972  
Total   6,026     $ 2,478,649     5,456     $ 2,263,405  
Homes Ordered:                
Arizona   1,222     $ 401,063     1,148     $ 380,459  
California   513     359,907     802     480,694  
Colorado   498     270,991     368     214,532  
West Region   2,233     1,031,961     2,318     1,075,685  
Texas   2,210     785,686     2,000     719,656  
Central Region   2,210     785,686     2,000     719,656  
Florida   814     343,293     791     342,754  
Georgia   346     125,293     270     88,306  
North Carolina   439     168,623     440     187,683  
South Carolina   233     80,774     224     76,827  
Tennessee   161     60,251     119     45,537  
East Region   1,993     778,234     1,844     741,107  
Total   6,436     $ 2,595,881     6,162     $ 2,536,448  
                 
Order Backlog:                
Arizona   496     $ 176,843     453     $ 158,988  
California   188     138,274     331     207,237  
Colorado   281     154,451     224     135,239  
West Region   965     469,568     1,008     501,464  
Texas   1,226     461,628     1,179     437,243  
Central Region   1,226     461,628     1,179     437,243  
Florida   499     211,063     526     233,534  
Georgia   181     68,605     138     46,809  
North Carolina   194     74,405     263     110,339  
South Carolina   121     43,678     123     42,378  
Tennessee   99     38,059     96     37,034  
East Region   1,094     435,810     1,146     470,094  
Total   3,285     $ 1,367,006     3,333     $ 1,408,801  
                             


                 
Meritage Homes Corporation and Subsidiaries
Operating Data
(Unaudited)
                 
    Three Months Ended September 30,
    2018   2017
    Ending   Average   Ending   Average
Active Communities:                
Arizona   44     42.0     40     39.5  
California   14     14.5     24     25.0  
Colorado   20     19.5     9     9.5  
West Region   78     76.0     73     74.0  
Texas   92     91.0     93     92.5  
Central Region   92     91.0     93     92.5  
Florida   30     30.0     29     29.5  
Georgia   22     21.0     17     18.0  
North Carolina   20     20.0     18     19.0  
South Carolina   12     11.5     14     14.0  
Tennessee   10     9.0     6     6.5  
East Region   94     91.5     84     87.0  
Total   264     258.5     250     253.5  
                         


                 
    Nine Months Ended September 30,
    2018   2017
    Ending   Average   Ending   Average
Active Communities:                
Arizona   44     41.0     40     41.0  
California   14     17.0     24     26.0  
Colorado   20     15.5     9     9.5  
West Region   78     73.5     73     76.5  
Texas   92     92.0     93     86.5  
Central Region   92     92.0     93     86.5  
Florida   30     29.0     29     28.0  
Georgia   22     20.5     17     17.0  
North Carolina   20     18.5     18     17.5  
South Carolina   12     12.5     14     14.5  
Tennessee   10     8.0     6     6.5  
East Region   94     88.5     84     83.5  
Total   264     254.0     250     246.5  
                         

About Meritage Homes Corporation
Meritage Homes is the seventh-largest public homebuilder in the United States, based on homes closed in 2017. Meritage builds and sells single-family homes for entry-level, move-up, and active adult buyers in markets including California, Texas, Arizona, Colorado, Florida, North Carolina, South Carolina, Tennessee and Georgia.

The Company has designed and built over 110,000 homes in its 32-year history, and has a reputation for its distinctive style, quality construction, and positive customer experience. Meritage is the industry leader in energy-efficient homebuilding and has received the U.S. Environmental Protection Agency's ENERGY STAR Partner of the Year for Sustained Excellence Award every year since 2013 for innovation and industry leadership in energy efficient homebuilding.

For more information, visit www.meritagehomes.com.

The information included in this press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include management's projected home closings, home closing revenue, home closing gross margin and pre-tax earnings for the full year 2018, as well as management's expectation for entry-level demand and its intention to repurchase additional shares.

Such statements are based on the current beliefs and expectations of Company management, and current market conditions, which are subject to significant uncertainties and fluctuations. Actual results may differ from those set forth in the forward-looking statements. The Company makes no commitment, and disclaims any duty, to update or revise any forward-looking statements to reflect future events or changes in these expectations, except as required by law. Meritage's business is subject to a number of risks and uncertainties. As a result of those risks and uncertainties, the Company's stock and note prices may fluctuate dramatically. These risks and uncertainties include, but are not limited to, the following: the availability and cost of finished lots and undeveloped land; shortages in the availability and cost of labor; changes in interest rates and the availability and pricing of residential mortgages; changes in tax laws that adversely impact us or our homebuyers; inflation in the cost of materials used to develop communities and construct homes; the success of strategic initiatives; the ability of our potential buyers to sell their existing homes; cancellation rates; the adverse effect of slow absorption rates; slowing in the growth of entry-level home buyers; competition; impairments of our real estate inventory; a change to the feasibility of projects under option or contract that could result in the write-down or write-off of earnest or option deposits; our potential exposure to and impacts from natural disasters or severe weather conditions; home warranty and construction defect claims; failures in health and safety performance; our success in prevailing on contested tax positions; our ability to obtain performance and surety bonds in connection with our development work; the loss of key personnel; failure to comply with laws and regulations; our limited geographic diversification; fluctuations in quarterly operating results; our level of indebtedness; our ability to obtain financing if our credit ratings are downgraded; our ability to successfully integrate acquired companies and achieve anticipated benefits from these acquisitions; our compliance with government regulations, the effect of legislative and other governmental actions, orders, policies or initiatives that impact housing, labor availability, construction, mortgage availability, our access to capital, the cost of capital or the economy in general, or other initiatives that seek to restrain growth of new housing construction or similar measures; legislation relating to energy and climate change; the replication of our energy-efficient technologies by our competitors; our exposure to information technology failures and security breaches; negative publicity that affects our reputation; legislation related to tariffs and other factors identified in documents filed by the Company with the Securities and Exchange Commission, including those set forth in our Form 10-K for the year ended December 31, 2017 and Form 10-Q for the second quarter ended June 30, 2018 under the caption "Risk Factors," which can be found on our website at www.investors.meritagehomes.com.

   
Contacts: Brent Anderson, VP Investor Relations
  (972) 580-6360 (office)
  investors@meritagehomes.com

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