Years from now, when Hilla Sferruzza recalls her initial actions to buffer the impact of COVID-19 on home builder Meritage Homes Corp. (NYSE: MTH) of Scottsdale, Arizona, she will likely not forget the seemingly endless calls that she placed to land sellers across the country.
“It’s not like I’m calling a manufacturer and telling them to bring less raw material to my factory. I’m calling land sellers in every one of our markets to start the renegotiation process,” says Sferruzza, who, as finance chief for the seventh-largest public home builder in the U.S., is no doubt accustomed to having her calls returned.
We recently asked Sferruzza to share some thoughts on Meritage’s response to COVID-19 and the likelihood of an economic recovery before 2021.
- Being designated an “essential service” in most markets has led Meritage to model using fewer extreme downside scenarios.
- Home building’s notoriously long cycle times make a 2020 recovery less likely.
- Land acquisition and development cycles are being lengthened as home buyers delay purchases and land sellers renegotiate.
CFOTL: You mentioned the summer earlier. I don’t think that you’re saying that then is when you expect to see a recovery occur, but as you do your modeling, what are the different scenarios being used with regard to when a recovery will be likely to occur?
Sferruzza: I think that you’re right. You interpreted my response correctly. I don’t think that anyone, myself included, is intimating that this will be a sharp V recovery or that it will occur by summertime or that it’s going to feel exactly like my initial budget that I submitted to the board in January. Right? I don’t think that this is going to be the case, although I will say that in comparison to the downside models that we were originally modeling back during the first half of March, we’ve seen the reality to be much more stable than what we saw. There was a downside scenario where we assumed that zero homes would be sold during the month of April, and maybe even May, because we didn’t know that we would be considered an essential service at that time. We didn’t know if we would even be able to sell and do any construction. But in the markets that we’re in—with a few limited exceptions in northern California—we were deemed an essential service. We have continued to operate in a modified model during the entire quarantine lockdown period through to today, so our results are improving.
The model is very dynamic. We’re constantly adjusting it based on what we’re seeing. For us, though, when we’re projecting for the full year 2020, we’re looking to not be recovered to the normalized pace that we would have expected. Then, into 2021, we’re really gauging that day by day, although the delays from our current land acquisition and development spend will surely play out later in our life cycle, right into 2021 and 2022. We just won’t have those communities open when we thought that we would. We’re not going to be able to sell and close homes from some of those communities that have a six- to eight-month delay until later in our projection. Even if the market comes back fully, just because we have such a long lead cycle time, it’ll take us longer to catch up.
“Even if the market comes back fully, just because we have such a long lead cycle time, it’ll take us longer to catch up.”