What changed in this filing

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Item 1. Business

2021-02-12 compared with 2020-02-18 · 143 added, 106 removed, 241 unchanged (51% of the section changed)

Meritage Homes is a leading designer and builder of single-family homes.

We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed with a focus on first-time and first move-up buyers.

Meritage Homes Corporation ("Meritage Homes") is a leading designer and builder of single-family homes.

We primarily build in historically high-growth regions of the United States and offer a variety of homes that are designed for the first-time and first move-up buyers.

We have homebuilding operations in three regions:

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These three regions are our principal homebuilding reporting segments.

We also operate a wholly-owned title company, Carefree Title Agency, Inc.

("Carefree Title").

Carefree Title's core business includes title insurance and closing/settlement services we offer to our homebuyers.

We also operate a financial services reporting segment.

In this segment, we offer title and escrow, mortgage, and insurance services.

Carefree Title Agency, Inc.

("Carefree Title"), our wholly-owned title company, provides title insurance and closing/settlement services to our homebuyers.

Managing our own title operations allows us greater control over the entire escrow and closing cycles in addition to generating additional revenue.

Beginning in the fourth quarter of 2019, we commenced operations of a wholly-owned insurance broker, Meritage Homes Insurance Agency (“Meritage Insurance”).

Meritage Insurance works in collaboration with insurance companies nationwide to offer homeowners insurance and other various insurance products to our homebuyers in the markets where we build homes.

Our financial services operations also provide mortgage loans to our homebuyers indirectly through an unconsolidated joint venture ("MTH Mortgage").

Revenue and expense from Carefree Title and Meritage Insurance and the net profit from MTH Mortgage are included in our Financial Services segment in the accompanying consolidated financial statements.

Meritage Insurance works in collaboration with insurance companies nationwide to offer homeowners' insurance and other various insurance products to our homebuyers.

Our financial services operations also provide mortgage loans to our homebuyers indirectly through an unconsolidated joint venture.

Our homebuilding activities are conducted under the name of Meritage Homes in each of our homebuilding markets.

In limited cases, we also offer luxury homes under the name of Monterey Homes that are currently in close-out stages.

At December 31, 2020, we were actively selling homes in 195 communities, with base prices ranging from approximately $191,000 to $921,000.

Our average sales price on closings and orders were approximately $389,000 and $383,100, respectively, for the year ended December 31, 2019.

Our average sales price on both home closings and orders was approximately $377,000 for the year ended December 31, 2020.

Available Information;

Corporate Governance

Meritage Homes Corporation was incorporated in 1988 as a real estate investment trust in the State of Maryland.

On December 31, 1996, through a merger, we acquired the homebuilding operations of our predecessor company.

We commenced our homebuilding operations in 1985 through our predecessor company known as Monterey Homes.

Meritage Homes Corporation was incorporated in the state of Maryland in 1988 under the name of Homeplex Mortgage Investments Corporation and merged with Monterey Homes in 1996, at which time our name was changed to Monterey Homes Corporation and later ultimately to Meritage Homes Corporation.

Since that time, we have engaged in homebuilding and related activities and ceased to operate as a real estate investment trust.

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Meritage operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities and setting high standards for ethical conduct.

Our Board of Directors has established an audit committee, executive compensation committee, nominating/governance committee and land committee.

Our Board of Directors has established an audit committee, executive compensation committee, nominating/governance committee, environmental, social, and sustainability committee and land committee.

The charters for each of these committees are available on our website, along with our Code of Ethics, Corporate Governance Principles and Practices, Conflict of Interest Policy and Securities Trading Policy.

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These values combine our entrepreneurial spirit, cutting-edge innovation and organizational agility to strive for industry-leading results in all of our functional areas, including:

management, land acquisition and development, finance, marketing, sales, purchasing, construction and customer care.

land acquisition and development, finance, marketing, sales, purchasing, construction, customer care and information technology.

The main tenets of these core values are:

• Value, recognize and appreciate our employees, our trade partners and our customers;

• Value, recognize and appreciate our employees, trade partners and customers;

• Provide the highest level of customer service by bringing passion and care to every customer interaction and make a difference by giving back to the communities we serve;

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• Lead with action, be relentless in our pursuit of excellence and never settle;

• Foster an environment of positive energy and alignment by collaborating and leveraging each other's strengths in order to win as a team and celebrate and reward success.

• Commitment to drive diversity, equity, and inclusion throughout our organization and industry by partnering with organizations that support and promote diversity and by providing an inclusive environment by applying such standards in our everyday hiring, promotion and operational activities;

• Create an inclusive and positive culture focused on cultivating an environment where every team member can be highly engaged in embracing opportunities to develop and grow in their careers.

These core values are evident in the operational decisions we make in each of our divisions and communities, all of which contribute to the successes we have achieved with our customers, within the marketplace and within the homebuilding industry.

Over the last several years we made a strategic shift in our business, focusing on the growing demand for entry-level and first move-up homes.

Our LiVE.NOW ® communities are targeted to the first-time buyer combining nicely appointed entry-level homes with a simplified and streamlined construction and sales processes aimed to create a stress-free buying experience for our customers while allowing our trade partners and suppliers to work more efficiently and cost effectively, which allows us to pass resulting savings on to our customers.

Our strategy shift also encompassed a simplification of the home buying process for move-up buyers, a demographic we have historically had a significant presence in.

Over the last 18 months we introduced a re-imagined design center experience that simplifies the sale and design center processes in our move-up communities called "Studio M".

Studio M provides an efficient and less stressful process for homebuyers to personalize their new homes through a design center packages versus the traditional a-la-carte design center process.

We believe these strategic changes address the need for well-appointed yet lower-priced homes, given rising home prices in today's environment, allowing us to simplify and maximize our business.

Our LiVE.NOW ® communities are targeted to the entry-level price point combining nicely appointed affordable homes with a simplified and streamlined construction and sales processes aimed to create a stress-free buying experience for our customers while also allowing our trade partners and suppliers to work more efficiently and cost effectively, which allows us to pass resulting savings on to our customers.

Our strategy shift also encompassed a simplification of the home buying process for the first-time move-up segment, a demographic we have historically had a significant presence in.

For our first-time move-up product, our design center called "Studio M" provides an experience that simplifies the sale and design center processes and provides an efficient and less stressful way for homebuyers to personalize their new homes through design center collections versus the traditional a-la-carte design center offerings.

We believe our strategy addresses the need for well-appointed yet lower-priced homes, while allowing us to simplify and maximize the profitability of our business.

We continue to focus on innovation in every new home we build, employing industry-leading building techniques and technologies aimed at setting the standard for energy-efficient homebuilding.

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home of the same size.

Our commitment to incorporate these energy standards into all of our homes has resulted in our achievement of design, purchasing and production efficiencies that have allowed us to offer these as standard features to our home buyers for nominal additional cost while providing significant additional value to our customers.

In 2020, we introduced MERV-13 air filters in our homes, one of the most advanced air filtration systems offered today for residential construction, which controls and improves air exchange within the home.

As a result of our commitment to interior air quality with these new filters, we now carry the Environmental Protection Agency’s Indoor airPLUS certification.

Our commitment to incorporate

these energy and healthy living standards into all of our homes has resulted in our achievement of design, purchasing and production efficiencies that have allowed us to offer these as standard features to our home buyers for nominal additional cost while providing significant additional value to our customers.

In addition, all homes we build include home automation features through our M.Connected Home Automation Suite ® .

This technology includes features that allow homeowners to monitor and control key components of their homes, such as Wi-Fi enabled lighting, video doorbells and smart door locks.

This technology includes features that allow homeowners to monitor and control key components of their homes, such as Wi-Fi enabled thermostats, garage doors and smart door locks.

Year after year, the homes we design and build help deliver energy savings to our homeowners.

As a result, for the seventh consecutive year, we have earned the EPA's highest ENERGY STAR award, "Partner of the Year - Sustained Excellence".

Because of our recognized industry leadership, utility companies and the US Department of Energy periodically partner with us to demonstrate scale advanced building technologies in the homes we build that further differentiate our product in the marketplace when compared against both new and resale homes.

As a result, we have earned various national and regional awards, including:

• 2013 - 2020 ENERGY STAR ® Leadership in Housing;

• 2013 - 2019 ENERGY STAR ® Partner of the Year for Sustained Excellence, awarded by the U.S.

Environmental Protection Agency;

• 2020 Builder of the Year for Green Home Builder;

• Various AVID Diamond, Gold and Benchmark awards across multiple categories and divisions.

We believe responsible corporate governance and social responsibility is important for the long-term sustainability of the business.

We are committed to sustainability through the homes we build, the communities in which we live and work, and the ways we conduct ourselves every day.

We provide information regarding these topics on our website and within publicly filed reports, including our Corporate Sustainability Report which can be located within the Investor Relations area of our website.

We provide information regarding these topics on our website and within publicly filed reports, including our Corporate Sustainability Report which is located within the Investor Relations area of our website.

We currently build and sell homes in the following markets:

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Recent Industry and Company Developments

The housing market got off to a sluggish start in 2019 after a notable slow-down in the latter part of 2018, however, demand picked up quickly and was strong through the end of the year, aided by increased consumer confidence, lower interest rates and more affordable product offerings.

We believe the strengthening demand experienced throughout the year reflects the sustained positive macroeconomic factors in the economy with wage growth and low unemployment levels, allowing more people to own their own homes.

With millennials entering the home buying market in a meaningful way and the desire to downsize in the baby boomer generation, we believe demand for affordable new homes will continue to outpace demand for other product offerings at least for the short to mid-term.

Accordingly, homebuilders with attractive, lower price-point product in desirable locations should be poised to capture this demand for nicely appointed but affordable homes, as buyers in this environment are value-conscious and are primarily motivated by affordability.

Over the last couple of years we have executed a strategy to address the demand for more affordable homes by acquiring and developing communities and designing homes that can be delivered at a lower cost by simplifying our product and our construction processes, switching to an all spec home sales program for our entry-level communities, which allow buyers to move in quicker, and by enhancing and making the entire home buying experience easier for our customers.

We are confident in our strategy and continue to demonstrate our commitment to the first-time and first move-up buyer through our land acquisitions, roll out of our new Studio M streamlined option and upgrade offerings for our move-up product, and our focus on delivering affordable homes through simplification of the design, development and construction processes.

We also remain committed to our key strategic initiatives such as home closing gross margin improvement, controlling selling, general and

administrative costs and pursuing long-term community count growth, all of which should benefit from our strategic product switch and simplification initiatives.

We believe the successful execution of these initiatives will position us to continue to improve profitability as we fully realize the benefits of our transition.

We have made considerable progress as approximately 87% of our active communities are targeted to first-time and first move-up buyers and who collectively represented approximately 90% of our orders in 2019, contributing to a company-wide 18.9% increase in orders year over year.

Higher orders translated to higher closing volume providing another year of revenue growth in 2019, generating 3.7% higher home closing revenue for the year ended December 31, 2019 despite a decline in average sales prices compared to the prior year.

The housing market was exceptionally strong in 2020 despite a short pause in March and April due to COVID-19-related shutdowns.

Post COVID-19, demand was driven by favorable market factors including historically-low mortgage interest rates, a limited supply of existing homes and an increased demand for healthier, safer homes.

We believe the strengthening demand experienced throughout the year reflects the sustained positive macroeconomic factors in the economy allowing more people to own their own homes.

We believe demand for affordable new homes will at least keep pace with demand for other home offerings for the short to mid-term.

Accordingly, homebuilders with attractive, lower price-point product in desirable locations with inventory available for quick move-in should be poised to capture this demand for nicely appointed but affordable homes.

Over the last couple of years, we have executed a strategy to address the demand for more affordable homes by acquiring and developing communities and designing homes that can be delivered at a lower cost.

We are achieving our goal by simplifying our product and construction processes, switching to an all spec home sales program for our entry-level communities, which allow buyers to move in quicker, and by enhancing and making the entire home buying experience easier for our customers.

We are confident in our strategy and continue to demonstrate our commitment to first-time and first move-up buyers through our land acquisitions, our Studio M streamlined option and upgrade offerings for our move-up product, and our focus on delivering affordable homes through simplification of the design, development and construction processes.

We also remain committed to our key financial goals such as home closing gross margin improvement and controlling selling, and general and administrative costs, both of which are benefiting from our strategic product switch and simplification initiatives.

We are now fully operational with these strategies, which will enable us to continuously improve profitability and turn our focus to expanding our market share as we pursue long-term community count growth.

Approximately 94% of our active communities are targeted to first-time and first move-up buyers and who collectively represented approximately 95% of our orders in 2020.

We had a 42.7% increase in orders in 2020, translating to a 27.7% higher closing volume than in 2019 thanks in large part to our shortened construction and sale to close timeline for our entry-level and first move-up product.

Home closing revenues grew 23.9% for the year ended December 31, 2020 despite a decline in average sales prices compared to the prior year.

Home closing gross margin improved by 310 basis points to 22.0% in 2020 compared to 18.9% in 2019.

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We carefully manage our liquidity and balance sheet, particularly during times of limited economic visibility.

Our improved earnings are generating cash that is allowing us to reinvest in our business through strategic land acquisitions while also reducing our debt and repurchasing our common stock.

Throughout 2019, we repurchased approximately 309,000 shares of our common stock and we redeemed our outstanding $300.0 million of 2020 Notes in the fourth quarter of 2019.

We ended the year with cash and cash equivalents totaling $319.5 million as compared to $311.5 million at December 31, 2018.

Our debt-to-capital ratio was 34.0% and our net debt-to-capital ratio was 26.2% at December 31, 2019, compared to 43.2% and 36.7%, respectively, at December 31, 2018.

We grew our lot supply with 41,399 lots under control at December 31, 2019 versus 34,553 in 2018.

Our improved earnings are generating cash that is allowing us to reinvest in our business through acquiring and developing land while also repurchasing our common stock.

Throughout 2020, we repurchased 1,100,000 shares of our common stock and we ended the year with cash and cash equivalents totaling $745.6 million as compared to $319.5 million at December 31, 2019.

Our debt-to-capital ratio was 30.3% and our net debt-to-capital ratio was 10.5% at December 31, 2020, down from 34.0% and 26.2%, respectively, at December 31, 2019.

Land Acquisition and Development

Our current land pipeline goal is to maintain an approximate four-to-five year supply of lots, which we believe provides an appropriate planning horizon to address regulatory matters, perform land development and manage to our business plan for future closings.

To grow our business and to better leverage our existing overhead, we are currently focused on adding to our current lot positions and expanding our market share in our existing markets and their surrounding submarkets while also exploring opportunities outside of our existing markets, when available, with a target of 300 actively selling communities by the end of 2021.

We are aggressively securing new land positions to replace communities as they sell out and to expand our business and grow our footprint.

During the year ended December 31, 2020, we invested approximately $1.3 billion in land acquisition and development and secured more than 27,200 net new lots, a 60% increase as compared to approximately 17,000 new lots in 2019.

We grew our lot supply with 55,502 lots under control at December 31, 2020 versus 41,399 in 2019.

We are currently focused on adding to our current lot positions and expanding our market share in our existing markets and their surrounding submarkets while also exploring opportunities outside of our existing markets, when available, with a target of 300 actively selling communities by mid-2022.

As of December 31, 2020 we have a 4.7 year supply of lots, based on 2020 closings.

We continually evaluate our markets, monitoring and adjusting our lot supplies through lot and land acquisitions to ensure we have a sufficient pipeline that is in sync with local market dynamics as well as our goals for growth in those markets.

We continually evaluate our markets, monitoring and adjusting our lot supply through lot and land acquisitions to ensure we have a sufficient pipeline that is in sync with local market dynamics as well as our goals for growth in those markets.

Approximately 81% of the lots placed under control in 2020 are designated for entry-level communities.

We are currently purchasing primarily partially-developed or undeveloped lots as the opportunity to purchase substantially finished lots in desired locations is more limited.

We are currently purchasing primarily partially-developed or undeveloped lots as the opportunity to purchase substantially finished lots in desired locations is limited.

Finished lots are those on which the development has already been completed by a third party, and which are ready for immediate home construction.

Undeveloped land and partially developed lots require a longer lead time to allow for development activities before our new communities are able to open for sales.

Typically, undeveloped and partially developed lots are purchased at a lower cost than finished lots as we are responsible for improvements on the land, rather than paying a mark-up on improvements from a prior developer.

When evaluating any land acquisition, our selection is based upon a variety of factors, including:

Typically, undeveloped and partially developed lots will have a lower all-in cost than finished lots as we are responsible for improvements on the land, rather than paying a mark-up on improvements by a prior developer.

When evaluating any land acquisition opportunity, our selection is based upon a variety of factors, including:

• financial feasibility of the proposed project, including projected profit margins, return on capital invested, and the capital payback period;

• suitability of the land to achieve desired shift in product mix toward entry-level and first move-up product;

• suitability of the land for our product offering of entry-level and first move-up homes;

• management’s judgment as to the local real estate market and economic trends, and our experience in particular markets;

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• availability of seller-provided purchase options or agreements that allow us to defer lot purchases until needed for production.

When purchasing undeveloped or partially developed land, we strive to defer the closing for the land until after most necessary entitlements have been obtained to eliminate or minimize risk and so that development or construction may begin as market conditions dictate.

When purchasing undeveloped or partially developed land, we strive to defer the closing for the land until after entitlements have been obtained to eliminate or minimize risk and so that development or construction may begin as market conditions dictate.

The term “entitlements” refers to appropriate zoning, development agreements and preliminary or tentative maps or plats, depending on the jurisdiction within which the land is located.

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These activities may include site planning and engineering, as well as constructing road, sewer, water, utilities, drainage, landscaping improvements, recreation amenities and other improvements and refinements.

We may build homes in master-planned communities with home sites that are along or near major amenities, such as golf courses or recreation facilities.

We may build homes in master-planned communities with home sites that are adjacent to or near major amenities, such as golf courses or recreation facilities.

The factors used to evaluate finished lot purchases are similar to those for land we intend to develop ourselves, although the development risks associated with the undeveloped land—financial, entitlement, environmental, legal and governmental—have largely been borne by others.

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Acquiring our land through option contracts, when available, allows us to leverage our balance sheet by controlling the timing and volume of lot and land purchases from third parties.

These contracts provide us the right, but generally not the obligation, to buy lots and are usually structured to approximate our projected absorption rate at the time the contract is negotiated.

These contracts provide us the right, but generally not the obligation, to buy lots at predetermined future intervals and are usually structured to approximate our projected absorption rate at the time the contract is negotiated.

Lot option contracts are generally non-recourse and typically require the payment of non-refundable deposits of 5% to 20% of the total land purchase price.

The use of option contracts limits the market risks associated with land ownership by allowing us to re-negotiate option terms or terminate options in the event of market downturns.

The use of option contracts limits the market risks associated with land ownership by allowing us to re-negotiate option terms or terminate options in the event of market downturns but also include a fee to the counterparty.

In the event we elect to cancel an option contract, our losses are typically limited to the forfeiture of our option deposits and any associated capitalized pre-acquisition costs.

The cost of obtaining land through such option contracts is generally higher than if we were to purchase land in bulk, although the financial leverage benefits they can provide can outweigh the financing costs associated with them.

However, during a period of gross margin contraction, it is more difficult to achieve financial feasibility through option contracts and we will generally only contract for lots in this manner if we are still able to achieve desired margins.

During 2019 we were successful in securing approximately 3,000 lots through such options.

During periods of gross margin contraction, it is more difficult to achieve financial feasibility through option contracts and we will generally only contract for lots in this manner if we are still able to achieve desired margins.

Land purchases are generally financed through our working capital, including corporate borrowings.

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We may enter into joint ventures as a means of accessing larger parcels of land, expanding our market opportunities, managing our risk profile and leveraging our capital base.

While purchasing land through a joint venture can be beneficial, we currently do not view joint ventures as critical to the success of our homebuilding operations.

While purchasing land through a joint venture can be beneficial, we do not view joint ventures as critical to the success of our homebuilding operations.

We currently have only one such active venture that is only selling a limited portfolio of land to third parties.

In addition to land development joint ventures, we also participate in one mortgage business joint venture.

The mortgage joint venture is engaged in mortgage activities, primarily providing services to our customers.

In connection with our land development joint ventures, we may also provide certain types of guarantees to associated lenders and municipalities.

In addition to the land development joint venture, we also participate in one mortgage business joint venture.

The mortgage joint venture is engaged in mortgage activities and primarily provides services to our homebuyers.

In connection with our land development joint ventures, we may also provide certain types of limited guarantees to associated lenders and municipalities.

Construction Operations

We typically act as the general contractor for our projects and hire experienced subcontractors on a geographic basis to complete construction at fixed prices.

We usually enter into agreements with subcontractors and materials suppliers on an individual basis after receiving competitive bids.

We usually enter into agreements with subcontractors and materials suppliers after receiving competitive bids.

In certain markets at high risk for construction or development cost increases, we enter into fixed-fee bids when it makes economic sense to do so.

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However, because such materials are substantially comprised of natural resource commodities, their cost and availability is subject to national and worldwide price fluctuations and inflation, each of which could be impacted by legislation or regulation relating to energy, climate change and tariffs.

We typically do not enter into any derivative contracts to hedge against weather or materials fluctuations as we do not believe they are particularly advantageous to our operations, although we do lock in short and mid-term pricing with our vendors for certain key construction commodities.

We typically do not enter into any derivative contracts to hedge against weather or materials fluctuations as we do not believe they are particularly advantageous to our operations, although we do periodically lock in short and mid-term pricing with our vendors for certain key construction commodities.

We experienced building material cost pressures, particularly for lumber, and in some instances, limited production capacity issues with some of our main product suppliers, including supply chain constraints in 2020 largely associated with COVID-19 responses.

These upward cost trends may continue in 2021.

We generally build and sell homes in phases within our larger projects, which we believe creates efficiencies in land development, home construction operations and cash management.

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Part of these plans involve reaching new customers through a combination of advertising and other promotional activities targeting key consumer segments through online advertising, online listings, social media, email, articles and posts to drive consumers to our website at www.meritagehomes.com .

In addition, our local marketing efforts are focused to drive consumers to visit specific communities in the market via incremental online promotions, direct mail, grass roots marketing campaigns and events, and to a more limited extent magazine, newspaper or radio advertisements, as well as strategically placed signs in the vicinities near our communities.

During 2020, we accelerated various company-wide digital initiatives that were in progress to provide a contactless customer experience, including:

• Offering virtual tours in all of our communities to realtors, customers, and prospective buyers;

• Offering extensive online tools such as 3-D tours and dynamic floor plans to mimic the live experience of walking through a model home;

• Pre-qualifying buyers for mortgages through digital solutions on our website;

• Collecting earnest money payments remotely through third-party hosted money-transfer solutions;

• Offering drive-through and partial or fully virtual closings in states where such services are permitted.

In addition, our local marketing efforts are focused to drive consumers to visit specific communities in the market via incremental online promotions, direct mail, grass roots marketing campaigns and events, as well as strategically placed signs in the vicinities near our communities.

Our marketing strategy is aimed at differentiating Meritage from resale homes, as well as new homes offered by other homebuilders.

We solidify this differentiation across all of our marketing and sales efforts to explain how we have incorporated in every home industry leading energy-efficient features and benefits as part of a larger, integrated system that enables us to deliver on our LIFE.

We market this differentiation by highlighting our industry leading energy-efficient features and benefits as part of a larger, integrated system that enables us to deliver on our LIFE.

BETTER.® brand promise to our customers, which means having a home that is quieter, cleaner, healthier, smarter and safer.

We sell our homes using furnished model homes as a marketing tool to demonstrate to prospective homebuyers the advantages of the designs and features of our homes.

At December 31, 2019, we owned 325 completed model homes, 30

models under construction and leased back two model homes previously sold to buyers.

At December 31, 2020, we owned 251 completed model homes, had 31 models under construction and leased back 10 model homes previously sold to buyers.

We generally employ or contract with interior and landscape designers who enhance the appeal of our model homes, which highlight the features and options available for the homes within a project.

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We strive to implement marketing strategies that will educate our buyers on how our unique building techniques and the energy efficient and home automation features in our homes differentiate them from other homes.

In some of our communities, we have built "learning centers" and in-home displays in order to inform our buyers about our many energy-efficient and home automation features and help them understand how and to what extent a Meritage home can help them realize savings through reduced energy bills, and experience and enjoy better health, improved comfort and peace of mind.

In every community, we integrate interactive in-home displays in order to inform our buyers about our many energy-efficient and home automation features and help them understand how and to what extent a Meritage home can help them realize savings through reduced energy bills, and experience and enjoy better health, improved comfort and peace of mind.

For our move-up buyers, we offer home customization options through Studio M, a completely re-imagined design center experience.

Rather than the traditional a-la-carte design studio experience, Studio M offers option packages which we refer to as our "Design Collections" products.

Rather than the traditional à la carte design studio process, Studio M offers option packages which we refer to as our "Design Collections".

These collections offer a pre-selected combination of flooring, cabinetry, countertops, lighting and fixtures that are all professionally designed to work together to meet each buyer's preference.

Our homebuyers meet with our designers to follow a streamlined design process for personalizing their homes through a selection of these packages that are curated by interior design experts.

Our homebuyers meet with our designers to follow a streamlined process for personalizing their homes through a selection of these packages and enhancements, while benefiting from bulk-purchase savings that we attain from our national vendor relationships.

Our concept for Studio M is a direct result of feedback from our homebuyers and, based on our core values of innovating with the customer in mind, we took action to completely rethink how the home buying and design process should work to meet the needs of today’s buyer.

With the introduction of our new design center experience, we believe we will deliver this experience to our move-up buyers.

Our homes generally are sold by our commissioned sales associate employees who work from a sales office typically located in a converted garage of one of the model homes for each community.

We also employ a team of online sales associates who offer assistance to potential buyers viewing our communities and products online.

We also employ a team of online sales associates who offer assistance to potential buyers viewing our communities and products online through digital offerings such as virtual tours and 3-D tours and dynamic floor plans.

At December 31, 2020, we had approximately 466 full-time sales and marketing personnel.

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We differentiate ourselves from our competitors with our highly desirable and affordable community and plan offerings and our simplified home buying process to effectively meet the needs of today's homebuyers.

We also differentiate ourselves through the superior design and value of our communities and homes, our energy-efficiency features and other technologies, and other unique offerings and enhancements made as a result of ongoing surveying and product research efforts.

We believe our commitment to design and build energy-efficient homes is aligned with buyer sensitivities about how eco-friendly designs, features and materials help impact the environment and the livability of homes, as well as their pocketbooks.

We also differentiate ourselves through the superior design and value of our communities and homes and our energy-efficiency features and home automation packages.

as their pocketbooks.

As evidenced in our strategic shift to focus primarily on first-time and first move-up buyers through our LiVE.NOW ® and Design Collections offerings, we are committed to continually evaluating buyer preferences and making adjustments to the homes we offer and the targeted price points in accordance with buyer demand.

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Our sales contracts require cash deposits and may be subject to certain contingencies such as the buyer’s ability to qualify for financing.

Homes covered by such contingent sales contracts but which are not yet closed are considered “backlog” and are representative of potential future revenues.

Homes covered by sales contracts but which are not yet closed are considered “backlog” and are representative of potential future revenues.

Started homes are excluded from backlog until a sales contract is signed and are referred to as unsold speculative or “spec” inventory.

A contract contingent upon the sale of a customer’s existing home is not considered a sale and not included in backlog until the contingency is removed.

All of our entry-level homes are started as spec homes whereas a signed sales contract is generally required to release a lot to start construction of a move-up home, although on a regular basis we also start a certain number of move-up homes for speculative sales inventory.

A contract contingent upon the sale of a customer’s existing home or a mortgage pre-approval is not considered a sale and not included in backlog until the contingency is removed.

All of our entry-level homes are started as spec homes whereas a signed sales contract is generally required to release a specific lot to start construction of a move-up home, although on a regular basis we also start a certain number of move-up homes for speculative sales inventory.

We may also start construction on spec homes to accelerate or facilitate the close-out of a community.

As a result of our strategic shift to expand our entry-level home product offerings and increase the availability of quick move-in home opportunities, our spec inventory has increased to 12.4 specs per active community as of December 31, 2019 as compared to 9.2 in 2018.

Our spec inventory per active community is consistent with prior year, at 12.9 as of December 31, 2020 as compared to 12.4 as of December 31, 2019.

At December 31, 2020, 89.2% of our 4,672 homes in backlog were under construction.

We do not recognize any revenue from a home sale until a finished home is delivered to the homebuyer, payment is collected and other criteria for sale and profit recognition are met.

At December 31, 2019, of our total unsold homes in inventory excluding completed model homes, 40.6% were under construction without sales contracts and 15.9% were completed homes without sales contracts.

At December 31, 2020, of our total unsold homes in inventory, excluding completed model homes, 91.1% were under construction and 8.9% were completed.

A portion of the unsold homes resulted from homesites that began construction with valid sales contracts that were subsequently canceled.

We believe that during 2021 we will deliver to customers substantially all homes in backlog at December 31, 2020 under existing or, in the case of cancellations, replacement sales contracts.

The number of units in backlog increased 14.3% to 2,782 units at December 31, 2019 from 2,433 units at December 31, 2018 with an 8.1% increase in the value of backlog to $1.1 billion from $1.0 billion.

The number of units in backlog increased 67.9% to 4,672 units at December 31, 2020 from 2,782 units at December 31, 2019 with a 65.1% increase in the value of backlog to $1.8 billion from $1.1 billion.

Customer Financing

Most of our homebuyers require financing to purchase their home Accordingly, we refer them to mortgage lenders that offer a variety of financing options.

While our homebuyers may obtain financing from any mortgage provider of their choice, we have a joint venture arrangement with an established mortgage broker that acts as a preferred mortgage broker to our buyers to help facilitate the financing process as well as generate additional revenue for us through our interest in the joint venture (See Note 5 for additional information on joint venture financial results).

While our homebuyers may obtain financing from any mortgage provider of their choice, we have a joint venture arrangement with an established mortgage broker that acts as a preferred mortgage broker to our buyers to help facilitate the financing process as well as generate additional revenue for us through our interest in the joint venture (See Note 5 in the accompanying consolidated financial statements for additional information on joint venture financial results).

We also have referral relationships with unaffiliated preferred mortgage lenders.

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• conduct formal inspections as specific stages of construction are completed.

At the time a home is completed and delivered to a buyer, the customer relationship is transitioned to a customer relations employee who manages the warranty and customer care efforts.

At the time a home is completed and delivered to a buyer, the continuing relationship is transitioned to a customer relations employee who manages our warranty and customer care efforts.

We generally provide a complete workmanship and materials warranty for the first year after the close of the home, a major mechanical warranty for two years after the close of the home and a structural warranty that typically extends up to 10 years after the close of the home.

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In certain markets and for certain attached product, we offer an owner-controlled insurance program to our subcontractors which, if accepted, is the insurance for damage resulting from construction defects in lieu of some of the insurance we require from the subcontractor.

Although our subcontractors are generally required to repair and replace any product or labor defects (and for those operating in markets with our owner-controlled insurance program, pay a deductible as a condition to such coverage), we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs.

subcontractors are generally required to repair and replace any product or labor defects (and for those operating in markets with our owner-controlled insurance program, pay a deductible as a condition to such coverage), we are, during applicable warranty periods, ultimately responsible to the homeowner for making such repairs.

Accordingly, with the assistance of an actuary, we have estimated and established reserves for future structural warranty costs based on the number of home closings and historical data trends for warranty work within our communities.

Warranty reserves generally range between 0.1% to 0.6% of a home’s sale price.

Those projections are subject to variability due to uncertainties regarding structural warranty claims relating to the construction of our homes, the markets in which we build, claim settlement history, and insurance and legal interpretations, among other factors and we are, therefore, constantly monitoring such reserves.

Those projections are subject to variability due to uncertainties regarding structural warranty claims relating to the construction of our homes, the markets in which we build, claim settlement history, and insurance and legal interpretations and developments, among other factors and we are, therefore, constantly monitoring such reserves.

Historically, these reserves have been sufficient to cover net out-of-pocket warranty costs.

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Some of our competitors have significantly greater financial resources and may have lower costs than we do.

Competition among residential homebuilders of all sizes is based on a number of interrelated factors, including location, reputation, product

type, amenities, design, innovation, quality and price.

Competition among residential homebuilders of all sizes is based on a number of interrelated factors, including location, reputation, product type, amenities, design, innovation, quality and price.

We believe that we compare favorably to other homebuilders in the markets in which we operate due to our:

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• experience within our geographic markets which allows us to develop and offer products that provide superior design and quality in line with the needs and desires of the targeted demographic;

• ENERGY STAR ® standards in all of our communities and incremental energy-efficient features that create a variety of benefits to our customers and differentiate our product from competing new and existing home inventories;

• inclusion of home automation through our new M.Connected Home Automation Suite ® ;

• inclusion of home automation through our M.Connected Home Automation Suite ® ;

• ability to recognize and adapt to changing market conditions, from both a capital and human resource perspective;

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Governing agencies may also require concessions or may require the builder to construct certain improvements to public places such as parks and streets.

In addition, governing agencies may impose construction moratoriums.

Because most of our land is entitled, construction moratoriums typically would not affect us in the near term unless they arise from health, safety or welfare issues, such as insufficient water, electric or sewage facilities.

We could become subject to delays or may be precluded entirely from developing communities due to building moratoriums, “no growth” or “slow growth” initiatives or building permit allocation ordinances, which could be implemented in the future.

In addition, governing agencies may impose construction moratoriums and therefore we could become subject to delays or may be precluded entirely from developing communities due to building moratoriums, “no growth” or “slow

growth” initiatives or building permit allocation ordinances, which could be implemented in the future.

However, because most of our land is entitled, construction moratoriums typically would not affect us in the near term unless they arise from health, safety or welfare issues, such as insufficient water, electric or sewage facilities.

In addition, there is constantly a variety of new legislation being enacted, or considered for enactment at the federal, state and local levels relating to energy and climate change.

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We condition our obligation to acquire property on, among other things, an environmental review of the land.

To date, we have not incurred any material unanticipated liabilities relating to the removal or remediation of unknown toxic wastes or other environmental conditions.

To date, we have not incurred any material unanticipated liabilities relating to the removal or remediation of toxic wastes or other environmental conditions.

However, there is no assurance that we will not incur material liabilities in the future relating to toxic waste removal or other environmental conditions affecting land currently or previously owned.

In order for our homebuyers to finance their home purchases with Federal Housing Administration "(FHA") insured or Veterans Administration ("VA") -guaranteed or USDA-guaranteed mortgages, we are required to build such homes in accordance with the regulatory requirements of those agencies.

In order for our homebuyers to finance their home purchases with Federal Housing Administration ("FHA") insured or Veterans Administration ("VA")-guaranteed or United States Department of Agriculture ("USDA")-guaranteed mortgages, we are required to build such homes in accordance with the regulatory requirements of those agencies.

Some states have statutory disclosure requirements governing the marketing and sale of new homes.

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Some states require us to be registered as a licensed contractor, a licensed real estate broker and in some markets our sales agents are required to be registered as licensed real estate agents.

Employees, Subcontractors and Consultants

At December 31, 2019, we had approximately 1,510 full-time employees, including 300 in management and administration, 40 in our title and insurance companies, 490 in sales and marketing, and 680 in construction and warranty operations.

Human Capital

At December 31, 2020, we had 1,570 full-time employees, including 326 in management and administration, 47 in our title and insurance companies, 466 in sales and marketing, and 731 in construction and warranty operations.

We are committed to creating an inclusive and positive culture for our employees.

Our culture is guided by our core values where every employee is strongly encouraged to embrace opportunities to develop and grow their careers.

We have a robust talent recognition and succession planning model in place to help identify talent and provide a roadmap for promotion of identified individuals.

Of our entire employee population at December 31, 2020, 41% were female and 25% were minorities.

While we are proud of our current diversity, through a combination of targeted recruiting and talent development, we intend to expand the diversity of our employee base across the Company over the coming years.

In 2020, we implemented trainings to educate our employees on unconscious bias in the workplace and identified an internal resource to lead our diversity, equity and inclusion ("DE&I") efforts.

In addition, we donated $200,000 to established charitable organizations that support racial equity and inclusion initiatives.

These efforts are integrated in a broader DE&I focus for the organization that will extend into 2021 and beyond.

In response to the COVID-19 pandemic, we implemented a number of strategies, policies and procedures to allow our employees to work remotely, safely and effectively return to the office and address actual and suspected COVID-19 cases all in an effort to reduce the potential spread of COVID-19.

The safety of our employees, customers and trade partners guided the decisions we made along with adherence to CDC guidelines and practices.

We communicated early and often with our employees and provided several resources including a dedicated intranet site, webinars and trainings.

We also provided employees with personal protective equipment, cleaning supplies and increased flexibility to work remotely.

Our operations are carried out through both local and centralized management.

Local operations are made up of our division employees, led by management with significant homebuilding experience and who typically possess a depth of knowledge in their particular markets.

Our centralized management sets our strategy and leads decisions related to the Company's land acquisition, risk management, finance, cash management, capital allocation and information systems.

Our employees are not unionized, and we believe that we have good employee relationships.

We pay for a substantial portion of our employees’ insurance costs, with the balance contributed by the employees.

We also have a 401(k) savings plan, which is available to all employees who meet the plan’s participation requirements.

Local operations are made up of our division employees, led by management with significant homebuilding experience and who possess a depth of knowledge in their particular markets.

Our employees are not unionized, and we have a highly engaged workforce.

We act solely as a general contractor, and all construction operations are coordinated by our project managers and field superintendents who schedule and monitor third-party independent subcontractors.

We use independent consultants and contractors for architectural, engineering, advertising and some legal services, and we strive to maintain good relationships with our subcontractors and independent consultants and contractors.

We use independent consultants and contractors for certain architectural, engineering, advertising, technology and legal services, and we strive to maintain good relationships with our subcontractors and independent consultants and contractors.

We maintain open lines of communication to support and develop our employees.

We promote an open-door policy where individuals are encouraged to voice concerns which are promptly addressed.

We recognize and emphasize the importance of a balanced work-life and offer our employees competitive and comprehensive compensation and benefits packages.

We pay for a substantial portion of our employees’ insurance costs.

We also offer a 401(k) savings plan, which is available to all employees who meet the plan’s participation requirements, as well as various other employment-related benefits.

Historically, we have experienced seasonal variations in our quarterly operating results and capital requirements.

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We typically benefit from the cash generated from home closings more in the third and fourth quarters than in the first and second quarters.

We expect this seasonal pattern to continue over the long term, although it has been and may continue to be affected by volatility in the homebuilding industry.

In 2020, historical cycles were impacted by low interest rates and COVID-19.

However, we expect our historical seasonal pattern to continue over the long term although it may continue to be affected by volatility in the homebuilding industry and in the overall economy.

Information about our Executive Officers

The names, ages, positions and business experience of our executive officers are listed below (all ages are as of December 31, 2019)

The names, ages, positions and business experience of our executive officers as of the date of this report are listed below (all ages are as of December 31, 2020):

Name Age Position

Hilton 58 Chairman of the Board and Chief Executive Officer

Hilton 59 Executive Chairman

Phillippe Lord 47 Chief Executive Officer, Executive Vice President

Hilla Sferruzza 45 Chief Financial Officer, Executive Vice President

Timothy White 60 General Counsel, Executive Vice President and Secretary

Phillippe Lord 46 Chief Operating Officer, Executive Vice President

Clinton Szubinski 44 Chief Operating Officer, Executive Vice President

Javier Feliciano 47 Chief People Officer, Executive Vice President

Hilton co-founded Monterey Homes in 1985, which merged with our predecessor in December 1996.

Hilton served as Co-Chairman and Co-Chief Executive Officer from July 1997 to May 2006 and has been the Chairman and Chief Executive Officer since May 2006.

Hilton co-founded Monterey Homes in 1985, which merged with Homeplex in December 1996 and later became known as Meritage Homes.

Hilton served as Co-Chairman and Co-Chief Executive Officer from July 1997 to May 2006, served as Chief Executive Officer from May 2006 to December 2020, has been the Chairman since May 2006, and became the Executive Chairman effective January 1, 2021.

Phillippe Lord was appointed Chief Executive Officer on January 1, 2021.

Prior to his appointment as Chief Executive Officer, Mr.

Lord was Chief Operating Officer, Executive Vice President from April 2015 to December 2020, Western Region President from 2012 through March 2015 and Vice President of Strategic Operations from 2008 through 2012.

Hilla Sferruzza was appointed Chief Financial Officer and Executive Vice President in April 2016.

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Timothy White has been General Counsel, Executive Vice President and Secretary since October 2005 and served on our Board of Directors from December 1996 until October 2005.

Phillippe Lord has been Chief Operating Officer, Executive Vice President since April 2015.

Clinton Szubinski was appointed Chief Operating Officer, Executive Vice President on January 1, 2021.

Prior to his appointment as Chief Operating Officer, Mr.

Lord was Vice President of Strategic Operations from 2008 through 2012 and served as our Western Region President from 2012 through March 2015.

Javier Feliciano joined Meritage in November 2015 as Chief Human Resources Officer, Executive Vice President.

Szubinski served as South Region President of Meritage Homes from 2018 to December 2020.

Previously, Mr.

Szubinski served in senior management roles at K.

Hovnanian and CalAtlantic from 2014 to 2018 and from 2011-2014, was the Florida Region President at Meritage Homes.

Javier Feliciano joined Meritage in November 2015 as Chief Human Resources Officer (now "Chief People Officer"), Executive Vice President.

From January 2013 through November 2015, Mr.

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What changed 10-K

Item 1. Business