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Item 1. Business

2023-02-15 compared with 2022-02-16 · 146 added, 139 removed, 258 unchanged (52% of the section changed)

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

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

We primarily build in historically high-growth regions of the United States and offer a variety of entry-level and first move-up homes.

We have homebuilding operations in three regions:

West, Central and East, which are comprised of nine states:

Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina and Tennessee.

We have operations in three regions:

West, Central and East, which are comprised of ten states:

Arizona, California, Colorado, Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee and Utah.

These three regions are our principal homebuilding reporting segments.

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At December 31, 2022, we were actively selling homes in 271 communities, with base prices ranging from approximately $250,000 to $1,400,000.

Our average sales price on both home closings and orders was approximately $398,000 and $420,000, respectively, for the year ended December 31, 2021.

Our average sales price on home closings and orders was approximately $440,100 and $446,900, respectively, for the year ended December 31, 2022.

Available Information;

Corporate Governance

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

We commenced our homebuilding operations in 1985 through our predecessor company, 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.

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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, Securities Trading Policy and Human Rights Policy.

The charters for each of these committees are available on our website, along with our Lead Director Charter, Code of Ethics, Corporate Governance Principles and Practices, Conflict of Interest and Related Party Transaction Policy, Securities Trading Policy, Human Rights Policy, Vendor Code of Conduct, Environmental Responsibility Policy and Responsible Marketing Policy (collectively, the "charters and Published Policies").

All of our employees, officers and directors, are required to comply with our Code of Ethics and to immediately report through the appropriate channels, any known instances of non-compliance.

Our committee charters, Code of Ethics, Corporate Governance Principles and Practices, Conflict of Interest Policy, Securities Trading Policy and Human Rights Policy are also available in print, free of charge, to any stockholder who requests any of them by calling us or by writing to us at our principal executive offices at the following address:

Our charters and Published Policies are also available in print, free of charge, to any stockholder who requests any of them by calling us or by writing to us at our principal executive offices at the following address:

Meritage Homes Corporation, 8800 East Raintree Drive, Suite 300, Scottsdale, Arizona 85260, Attention:

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• 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;

• Always act with honesty, character and integrity by demonstrating openness and transparency with our internal and external 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;

• Strive to have the best team available through investing in our people and fostering an environment that embraces continual growth and learning;

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We champion a culture where team members are treated with respect, valued for their unique perspectives and experiences, and feel a sense of belonging.

These core values are evident in the operational decisions we make at our corporate offices and 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.

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

Our operational strategy focuses on building affordable, quick move-in homes that are designed to meet the growing demand for entry-level and first move-up homes.

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.

We strive to achieve a 100% speculative ("spec") home building strategy for our entry-level product by maintaining reduced SKU counts and plan libraries.

In the current market of rising interest rates, supply chain disruptions and labor shortages, this strategy also provides us a competitive advantage by allowing our customers to lock their mortgage rate and avoid rate lock expirations in addition to providing predictability of volume and timing for our trade partners.

Our strategy also encompasses 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, providing 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.

Our LiVE.NOW ® communities are targeted to the entry-level price point combining nicely appointed affordable homes with 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.

We strive to achieve a 100% speculative ("spec") home building strategy for our entry-level product by pre-starting all of our homes and preselecting plans and features from our reduced SKU counts and plan libraries when we start the home.

During 2022, supply chain disruptions and labor shortages coupled with high demand, particularly in the first half of the year, created a challenging environment to maintain strategic levels of spec inventory, although we still pre-started most of our homes.

More recently, as the supply chain has started to loosen, we have an opportunity to replenish our spec inventory levels, increasing the number of homes at or near move-in ready.

We believe this provides us a competitive advantage by allowing our customers to lock their mortgage rate and offer a quick delivery, as per the current desire in the marketplace.

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

For our first move-up product, our preselected option packages provide an experience that simplifies the sale and design processes, providing an efficient and less stressful way for homebuyers to personalize their new homes through preselected design collections versus the traditional a-la-carte design center offerings, although in 2022 most of these offerings were also pre-

started prior to sales order to expedite the building cycle time.

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.

In 2021, we introduced a multispeed heating, ventilation and air conditioning ("HVAC") system as a standard feature in newly-constructed homes.

The system is designed to operate more efficiently than traditional HVAC, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs.

Accordingly, at a minimum, every new home we construct meets or exceeds ENERGY STAR ® standards and comes standard with the MERV-13 air filter, one of the most advanced air filtration systems offered today for residential construction, and a multispeed heating, ventilation and air conditioning ("HVAC") system that is designed to operate more efficiently than traditional HVAC, allowing owners to better manage the comfort of their home while reducing their environmental impact and operating costs.

These standard offerings provide our customers with homes that utilize, on average, half of the energy of a typical U.S.

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As a result of our commitment to interior air quality, we carry the U.S.

Environmental Protection Agency’s ("EPA") Indoor airPLUS certification.

Environmental Protection Agency’s ("EPA") ENERGY STAR ® and Indoor airPLUS certifications.

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 which includes the Honeywell Home Pro Series Hub that allows users 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, we have earned various national and regional awards, including:

• 2021 ENERGY STAR ® Partner of the Year for Sustained Excellence for the eighth year awarded by the EPA;

• 2021 Indoor airPLUS Leader Award;

• 2013 - 2020 ENERGY STAR ® Leadership in Housing;

In addition, all homes we build include home automation features through our M.Connected Home™ Automation Suite which includes a central hub that allows users to monitor and control key components of their homes, such as Wi-Fi enabled thermostats, garage doors and smart door locks.

Year after year, we strive to improve the energy efficiency of our homes through better building processes and selection of construction materials and features inside the home.

These efforts reduce the energy consumption and greenhouse gas emissions of our homes, which creates energy savings and lower utility bills for our homeowners.

Our homes earn better Home Energy Rating System ("HERS") scores from the third-party energy rater, Residential Energy Services Network, as compared to their reference home.

We have also received various national and regional awards in recognition of our efforts, including:

• 2022 EPA's ENERGY STAR ® Partner of the Year for Sustained Excellence for the ninth year;

• 2021 - 2022 EPA's Indoor airPLUS Leader Award;

• 2013 - 2022 EPA's ENERGY STAR ® Residential New Construction Market Leader Award;

• 2022 EPA's Market Leader Award for Certified Homes;

• 2020 Builder of the Year for Green Home Builder;

• Various AVID Diamond, Gold and Benchmark customer service 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 take pride in being an organization driven by ethics and living by our core values and our promise to deliver a

Life.Built.Better.® We promote the long-term interests of stakeholders and customers and focus on the transparency and accountability of Meritage’s Board of Directors, executive management, our employees and trade partners.

We provide information regarding these topics on our website and within publicly filed reports, including our environmental, social, and governance (“ESG”) report which is located within the Investor Relations area of our website.

Environmental, Social and Governance

We believe responsible corporate governance and social responsibility is important for the long-term sustainability of the business and recognize the importance of environmental stewardship in our operations while serving our customers and growing our business.

In 2022, we adopted an Environmental Responsibility Policy, a Vendor Code of Conduct, and a Responsible Marketing Policy.

These policies are intended to define, promote and support continuous review and enhancements of sustainable practices throughout all phases of the homebuilding cycle, which we believe will help address climate change and biodiversity concerns.

Also during 2022, we issued our inaugural Task Force on Climate-Related Financial Disclosures ("TCFD") report and joined approximately 3,900 other institutions to become an official TCFD supporter.

We take pride in being an organization driven by ethics and living by our core values and our promise to deliver a Life.Built.Better.

® We promote the long-term interests of stakeholders and customers and focus on the transparency and accountability of Meritage’s Board of Directors, executive management, our employees and trade partners.

More information regarding these topics can be found on our website and within publicly filed reports, including our environmental, social, and governance (“ESG”) report which is located within the Investor Relations area of our website.

The ESG report and other information on our website is not incorporated by reference into this Annual Report on Form 10-K.

We currently build and sell homes in the following markets:

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Recent Industry and Company Developments

The housing market was exceptionally strong in 2021 as the high demand that we experienced in 2020 continued, driven by favorable market factors including low mortgage interest rates, record low supply of existing homes and persistent demand, particularly from the millennial and baby boomer generations who are experiencing increased levels of household savings alongside life events that align with home ownership.

We believe that the elevated demand created by these underlying economic and demographic factors will continue in the near to mid-term but will taper to a normalized pace over time.

We believe our strategy for providing affordable new homes in desirable locations with inventory available for quick move-in is well positioned to address these buyer concerns.

During 2021, supply chain constraints and labor shortages caused by COVID-19 and other economic-related disruptions impacted our production and the homebuilding industry as a whole.

Through long cultivated relationships with our national and local partners, we were able to navigate the limitations and expect to continue to utilize our spec-heavy, limited SKU operating model to manage the supply chain concerns that are expected to continue for at least the next several quarters.

During the second half of 2020 and throughout all of 2021, the homebuilding industry experienced unprecedented growth.

The expansion continued in the first quarter of 2022, but the market steadily weakened throughout the rest of 2022, as higher interest rates reduced the overall affordability of homes.

Affordability constraints combined with uncertainty regarding future interest rates, inflation, and deterioration in the general economy, created homebuyer hesitancy and led to significant cancellations and drove down net orders in the back half of the year.

Although these economic conditions are applying current downward pressure on the housing market, we believe favorable homebuyer demographics support long-term stable demand, although at a more normalized pace than what was experienced in the past two years.

We believe our all-spec strategy targeting affordable homes offers our customers readily available inventory which, combined with our financing and other incentives, still provides an attractive opportunity for homeownership.

Our full year financial results for 2022 were among the best in Company history, with record breaking home closing revenue of $6.2 billion, an expanded gross margin of 28.6% and greater leverage of overhead expenses, all of which resulted in a 34.5% increase in net earnings of $992.2 million.

However, supply chain constraints, labor shortages and other economic-related disruptions impacted our production and the homebuilding industry as a whole during 2022.

Through long cultivated relationships with our national and local partners, we were able to navigate the limitations and expect to continue to utilize our spec-focused, limited SKU operating model in 2023.

We have been successfully executing on our 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 first 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 higher home closing revenue, home closing gross margin improvement and sustainability, controlling selling, and general and administrative costs, and maintaining sufficient liquidity.

Our strategic product switch and simplification initiatives have enabled us to deliver on these goals and we believe will continue to provide improved profitability while also preserving liquidity.

Our current focus is on expanding our market share as we pursue long-term community count growth.

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 streamlined option packages and upgrade offerings for our first 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 higher home closing revenue, strong home closing gross margin, controlling selling, and general and administrative costs, and maintaining sufficient liquidity.

Our products and simplification strategy have enabled us to deliver on these goals and we believe will continue to provide improved profitability while also preserving liquidity.

Our near-term objectives in today's uncertain environment are expanding our market share and maintaining

Nearly our entire portfolio of active communities are targeted to first-time and first move-up buyers and who collectively represented approximately 99% of our orders and 98% of our closings in 2022.

We had an 11% increase in Average Sales Price ("ASP") on orders in 2021, translating to a 12% higher order value than in 2020 as we experienced pricing power due to the strong market demand with limited housing supply.

Home closing revenue grew 14% for the year ended December 31, 2021, the result of an 8% increase in home closing volume and a 6% increase in

ASP on closings.

Home closing revenue grew 21.8% for the year ended December 31, 2022, the result of a 10.2% increase in home closing volume and a 10.6% increase in Average Sales Price ("ASP") on closing providing $6.2 billion in home closing revenue.

We had a 6.5% increase in ASP on orders due entirely to pricing power resulting from strong demand with limited housing supply in the first half of the year.

Growing homebuyer concerns over affordability and general economic trends in second half of 2022 led to elevated cancellations and a 14.8% reduction in order volume, ending 2022 with a 9.3% decrease in home order value compared to 2021.

Home closing gross margin improved by 80 basis points to our highest full-year home closing margin in Company history of 28.6% in 2022, compared to 27.8% in 2021.

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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 acquiring and developing land, increasing the number of homes under construction as our community count grows and repurchasing our common stock.

Throughout 2021, we repurchased 639,346 shares of our common stock and we ended the year with cash and cash equivalents totaling $618.3 million as compared to $745.6 million at December 31, 2020, while growing our inventory 34% to $3.7 billion.

Throughout 2022, we repurchased 1,166,040 shares of our common stock for $109.3 million and we ended the year with cash and cash equivalents totaling $861.6 million as compared to $618.3 million at December 31, 2021, while growing our inventory 16.7% to $4.4 billion.

Our debt-to-capital ratio was 22.6% and our net debt-to-capital ratio was 6.8% at December 31, 2022, compared to 27.6% and 15.1%, respectively, at December 31, 2021.

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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.

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, 2021, we invested approximately $2.0 billion in land acquisition and development and secured nearly 34,000 net new lots, a 25% increase as compared to approximately 27,200 new lots in 2020.

We grew our lot supply with 75,049 lots under control at December 31, 2021 versus 55,502 in 2020.

As of December 31, 2021 we have a 5.9 year supply of lots, based on 2021 closings.

While this is above our goal to maintain four to five years supply, when based on forward projections of growth in closings our supply is closer to five years.

Approximately 90% of the lots placed under control in 2021 are designated for entry-level communities.

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.

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.

During 2021, we closed 12,801 homes, purchased approximately 30,200 lots for $1.1 billion, spent $865 million on land development, and started construction on 14,272 homes.

With the slowing market, we are limiting new land acquisitions to exceptional and unique opportunities or to develop our pipeline in newer markets, as we currently have enough land in our portfolio to meet our longer term community count goals.

During the year ended December 31, 2022, we invested approximately $1.5 billion in land acquisition and development and secured approximately 2,000 net new lots, down from 34,000 net new lots in 2021.

We ended the year with 63,182 lots under control at December 31, 2022 versus 75,049 in 2021.

As of December 31, 2022 we have a 4.5 year supply of lots, based on 2022 closings, in line with our goal to maintain four to five years supply.

In response to slowing demand, we evaluated our land positions during the year and terminated underperforming land deals totaling approximately 10,100 lots.

All of the lots placed under control in 2022 are designated for entry-level communities.

We are currently focused on growing our market share in our existing markets.

We continually evaluate our markets, monitoring and adjusting our lot supply through lot and land acquisitions or 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.

During 2022, we closed 14,106 homes, purchased approximately 12,600 lots for $457.0 million, spent $1.1 billion on land development, and started construction on 13,847 homes.

At December 31, 2022 and 2021, respectively, 73% and 65% of our controlled lots were owned.

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.

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

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

The entitlement and development of raw and 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 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.

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

• existing concentration of owned and contracted lots in surrounding markets, including nearby Meritage communities;

• timeline for development, generally within a three to five-year time period from the beginning of the development process to the delivery of the last home;

• surrounding demographics based on extensive marketing studies, including surveys of both new and resale homebuyers;

• the ability to secure governmental approvals and entitlements, if required;

• results of environmental and legal due diligence;

• proximity to schools and to local traffic and employment corridors and amenities;

• entitlement and development risks and timelines;

• availability and financial impact 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 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.

• environmental impact and sustainability considerations;

• existing concentration of lots owned and controlled by other builders and developers in surrounding markets, including nearby Meritage communities;

• development timeline, generally a three to five-year period from the purchase of the underlying property to the delivery of the last home;

• demographic data from the surrounding area based on extensive market studies, including surveys of both new and resale homebuyers;

• the ability to secure governmental approvals and entitlements, if required, and any associated risks;

• results of technical, environmental and legal due diligence;

• proximity to schools, local traffic and employment corridors, goods and services, and amenities;

• assessment of development risks, complexities and timelines;

• availability and financial impact of seller-provided purchase options or agreements that allow us to defer lot purchases until needed for production, if applicable.

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 significantly minimize risk and so that development or construction may begin as market conditions dictate.

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

Entitlements generally give the developer the right to obtain building permits upon compliance with conditions that are ordinarily within the developer’s control.

Even though entitlements are usually obtained before land is purchased, we are typically still required to secure a variety of other governmental approvals and permits prior to and during development, and the process of obtaining such approvals and permits can be lengthy.

Although entitlements are almost always obtained before land is purchased, we are typically still required to secure a variety of other governmental approvals and permits prior to and during development, and the process of obtaining such approvals and permits can be lengthy.

In unique circumstances, we may consider the purchase of unentitled land when we can do so in a manner consistent with our business strategy.

Currently, we are generally purchasing and developing parcels that provide us with communities that range on average from 100 to 200 lots.

We generally purchase and develop parcels that provide us with communities that range on average from 100 to 200 lots.

Once we secure undeveloped land, we generally supervise and control the development of the land through contractual agreements with subcontractors.

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We may also determine the overall community design for each project we develop including street and community layout, individual lot size and layout, and common areas and amenities to be included within the community.

The homes offered depend upon many factors, including the guidelines, if any, of the existing community, housing available in the area, the needs and desired housing product for a particular market, and our lot sizes, though we are increasingly able to use our standardized home design plans in most of our communities.

The homes offered depend upon many factors, including the guidelines, if any, of the existing community, housing available in the area, the needs and desired housing product for a particular market, and our lot sizes, though we almost exclusively use our standardized home design plans in our communities.

As a means of accessing parcels of land with minimal cash outlay, we may use rolling option contracts.

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 at predetermined future intervals 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 home sales 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 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.

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

At December 31, 2021, in addition to our 48,554 owned lots, we also had 26,495 lots under committed purchase or option contracts with a total purchase price of approximately $1.0 billion secured by $82.7 million in cash deposits.

At December 31, 2022, in addition to our 46,317 owned lots, we also had 16,865 lots under committed purchase or option contracts with a total purchase price of approximately $738.5 million secured by $67.0 million in cash deposits.

We purchase and develop land primarily to support our homebuilding operations, although we may sell land and lots to other developers and homebuilders from time to time where we have excess land positions or for other strategic reasons.

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All land and lot acquisitions are reviewed by our corporate land acquisition committee, which is comprised of certain members of our executive management team and key operational leaders.

All land acquisitions exceeding a specified dollar amount must also be approved by our Executive Chairman, with a secondary threshold requiring approval by our Board of Directors' Land Committee.

All land acquisitions exceeding a specified dollar

amount must also be approved by our Executive Chairman, with a secondary threshold requiring approval by our Board of Directors' Land Committee.

Investments in Unconsolidated Entities — Joint Ventures

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.

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.

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.

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We also enter into longer-term and national or regional contracts with subcontractors and suppliers, where possible, to obtain more favorable terms, minimize construction costs and to control product consistency and availability.

In addition to contractually requiring that our subcontractors comply with all laws and labor practices pertaining to their work, subcontractors must also adhere to our Code of Ethics, follow local building codes and permits, and meet performance, warranty and insurance requirements.

In addition to contractually requiring that our subcontractors comply with all laws and labor practices pertaining to their work, subcontractors must also adhere to our Code of Ethics, Vendor Code of Conduct, follow local building codes and permits, and meet performance, warranty and insurance requirements.

Our purchasing and construction managers coordinate and monitor the activities of subcontractors and suppliers, and monitor compliance with zoning, building and safety codes.

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Such materials have historically been available from multiple suppliers and therefore we do not believe there is a supplier risk concentration.

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.

However, because such materials are substantially comprised of natural resource commodities, their cost and availability are 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 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 production capacity issues with some of our main product suppliers, including supply chain constraints in 2021 largely associated with world-wide labor, material, and transportation shortages that were further exacerbated by the impact of COVID-19.

Although we have been working with our trade partners to minimize the impact of these obstacles in 2021 by leveraging the long-term relationships we have cultivated, we expect these trends to continue to pose challenges for the foreseeable future.

Beginning in 2021 and continuing throughout 2022, we experienced building material cost pressures and production capacity issues with some of our main product suppliers, including supply chain constraints largely associated with world-wide labor, material, and transportation shortages.

We continue to carefully navigate this constrained operating environment by expanding our trade base and strengthening critical relationships and expect that over time, with lower, normalized volume in the homebuilding market, costs will begin to decline and cycle times will shorten.

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.

We also believe it improves customer satisfaction by reducing the number of vacant lots and construction activity surrounding completed homes.

Our homes are typically completed within three to five months from the start of construction, although currently longer, depending upon the geographic location and the size and complexity of the home.

Our homes are typically completed within three to five months from the start of construction, depending upon the geographic location and the size and complexity of the home, although we are currently experiencing longer cycle times due to the supply chain constraints previously discussed.

Construction schedules may vary depending on the size of the home, availability of labor, materials and supplies, product type, location, municipal requirements and weather.

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Marketing and Sales

We believe that we have an established reputation for building attractive, high quality and efficient homes, which helps generate demand in our communities.

We believe that we have an established reputation for building attractive, high quality energy-efficient and affordable homes, which helps generate demand in our communities.

Our communication and marketing plans are tailored to target and reach our different customer segments.

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 .

During 2021, we continued to leverage and expand our digital offerings to provide a contactless customer experience, including:

• Launched online scheduling to allow customers to schedule in-person, self-guided model home tours after hours in select locations;

• 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;

• Launched our chat bot, Virtual Assistant Liaison ("VAL"), which provides customers and owners with around-the-clock information and support on our website;

We leverage a suite of digital offerings to provide our customers with a simple and streamlined experience, including:

• Online scheduling to allow customers to schedule in-person, self-guided model home tours after hours in select locations;

• Virtual tours in all of our communities for realtors, customers, and prospective buyers;

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

• Our chat bot, Virtual Assistant Liaison ("VAL"), provides customers and owners with around-the-clock information and support on our website;

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

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• Providing a warranty portal for our homeowners to submit and track warranty-related matters and a comprehensive online suite of financial services such as on-demand homeowners’ insurance quotes;

• Offering digital signing of sales contracts and drive-through and partial or fully virtual closings in states where such services are permitted.

In addition, our local marketing efforts are focused on opening new communities with strong interest lists and driving consumer traffic to communities through digital media campaigns, virtual events for both consumers and real estate agents, grass roots marketing, and strategically placed signs in the vicinities near our communities.

• Digital signing of sales contracts and drive-through and partial or fully virtual closings in states where such services are permitted.

Our marketing strategy is aimed at differentiating Meritage Homes by highlighting our simplification throughout the buying, building and closing processes, our transparency in setting clear expectations and by building a better home leveraging industry leading energy-efficient features, cutting edge design, upgrades and finishes.

All of this is part of our LIFE.

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

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

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.

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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.

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

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 process for personalizing their homes through a selection of these packages and enhancements, while benefiting from bulk-purchase savings that we pass through 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 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 healthier living, improved comfort and peace of mind.

For our first move-up buyers, we offer option packages which we refer to as our "Design Collections".

These Design Collections offer pre-selected combinations of flooring, cabinetry, countertops, lighting and fixtures that are all professionally designed to work together to meet each buyer's preference, and our homebuyers benefit from bulk-purchase savings that we pass through from our national vendor relationships.

Our concept for Design Collections 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.

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At December 31, 2022, we had approximately 475 full-time sales and marketing personnel.

Our goal is to ensure that our sales force has extensive knowledge of our homes, our energy efficient and innovative features, our sales strategies, mortgage options, and community dynamics, in order to fully execute our marketing message.

To achieve this goal, we train our sales associates and conduct regular meetings to update them on our product, communities, sales techniques, competition in the area, financing availability, construction schedules, marketing and advertising plans, available product lines, pricing, and options offered, as well as the numerous benefits and savings our energy efficient product provides.

Our goal is to ensure that our sales force has extensive knowledge of our homes and their energy efficient and innovative features, our sales strategies, mortgage options, and community dynamics, in order to fully execute our marketing message.

advertising plans, available product lines, pricing, and options offered, as well as the numerous benefits and savings our energy efficient product provides.

Our sales associates are licensed real estate agents where required by law.

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We have a robust loyalty program for these brokers and we aim to regularly educate them on the benefits of owning a Meritage home and our community offerings, which we believe help enhance the impact of our marketing message.

We may offer various sales incentives, including price concessions, assistance with closing costs, and landscaping or interior upgrades, to attract buyers.

We may offer various sales incentives, including mortgage-related incentives such as interest rate locks or buy-downs, price concessions, assistance with closing costs, and landscaping or interior upgrades, to attract buyers.

The use, type and amount of incentives depends largely on economic and local competitive market conditions.

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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 our first move-up homes can be started as a spec home or after a sales contract is signed.

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

Our spec inventory per active community is consistent with prior year, at 12.3 or 3,180 units as of December 31, 2021 as compared to 12.9 or 2,519 units as of December 31, 2020.

At December 31, 2021, 88% of our 5,679 homes in backlog were under construction.

We strive to achieve a 100% spec home building strategy for our entry-level product, whereas our first move-up homes may be started as a spec home or after a sales contract is signed.

In first move-up communities, we may also start construction on spec homes to accelerate or facilitate the close out of a community.

Our spec inventory per active community as of December 31, 2022 was 18.0 or 4,891 units as compared to 12.3 or 3,180 units as of December 31, 2021.

At December 31, 2022, approximately 90% of our 3,332 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, 2022, of our total unsold homes in inventory, excluding completed model homes, 85% were under construction and 15% were completed.

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

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

We believe that during 2023 we will deliver to customers substantially all homes in backlog at December 31, 2022 under existing contracts, or, in the case of cancellations, replacement sales contracts.

The number of units in backlog increased 22% to 5,679 units at December 31, 2021 from 4,672 units at December 31, 2020 with a 39% increase in the value of backlog to $2.5 billion from $1.8 billion.

The number of units in backlog decreased 41.3% to 3,332 units at December 31, 2022 from 5,679 units at December 31, 2021 with a 39.4% decrease in the value of backlog to $1.5 billion from $2.5 billion, largely due to an increased closing volume in the back half of 2022 coupled with a slower orders pace.

Customer Financing

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We also have referral relationships with unaffiliated preferred mortgage lenders.

We may pay a portion of the closing costs to assist homebuyers who obtain financing from our preferred lenders.

We may pay a portion of the closing costs or obtain interest rate locks or buy-downs to assist homebuyers who obtain financing from our preferred lenders.

Customer Relations, Quality Control and Warranty Programs

We believe that positive customer relations and an adherence to stringent quality control standards are fundamental to our continued success, and that our commitment to buyer satisfaction and quality control has significantly contributed to our reputation as a high-quality builder.

In accordance with our company-wide standards, one or more Meritage project manager or superintendent generally monitors compliance with quality control standards for each community through the building phase of our homes.

In accordance with our company-wide standards, one or more Meritage project managers or superintendents generally monitors compliance with quality control standards for each community throughout the building phase of our homes.

These employees perform the following tasks:

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Although our subcontractors are generally required to repair and replace any product or labor defects (and for those operating in markets with our Company-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.

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 0.5% 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 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.

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

Competition and Market Factors

The construction and sale of homes is a highly-competitive industry.

We compete for sales in each of our markets with national, regional and local developers and homebuilders, as well as existing resale homes, condominiums and rental housing.

We compete for sales in each of our markets with national, regional and local developers and homebuilders, as well as existing resale homes, condominiums, townhomes and rental housing.

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

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• streamlined construction processes that allow us to save on materials, labor and time and pass those savings to our customers in the form of lower prices while still offering a well-appointed home;

• simplified and less stressful home buying experience through LiVE.NOW ® and Studio M™;

• simplified and less stressful home buying experience through LiVE.NOW ® and Design Collections;

• 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 by providing cleaner, healthier and safer homes;

• ENERGY STAR ® standards in all of our communities and incremental energy-efficient features that create a variety of benefits to our customers which we believe differentiate our product from competing new and existing home inventories by providing cleaner, and healthier homes;

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

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Government Regulation and Environmental Matters

To the extent that we acquire undeveloped land, we prefer to close the acquisition of such land after all or most entitlements have been obtained.

To the extent that we acquire undeveloped land, we prefer to close the acquisition of such land after all governmental approvals and permits have been obtained.

Construction may begin almost immediately on such entitled land upon compliance with and receipt of specified permits, approvals and other conditions, which generally are within our control.

The time needed to obtain such approvals and permits affects the carrying costs of unimproved property acquired for development and construction.

The time needed

to obtain such approvals and permits affects the carrying costs of unimproved property acquired for development and construction.

The continued effectiveness of permits already granted is subject to factors such as changes in government policies, rules and regulations, and their interpretation and application.

Government approval processes occasionally cause timing delays but have not had a material adverse effect on our development activities, although there is no assurance that these and other restrictions will not adversely affect future operations as, among other things, sunset clauses may exist on some of our entitlements and they could lapse.

Government approval processes occasionally cause timing delays but have not had a material adverse effect on our operations, although there is no assurance that these and other restrictions will not adversely affect future operations as, among other things, sunset clauses may exist on some of our entitlements and they could lapse.

Local and state governments have broad discretion regarding the imposition of development fees for projects under their jurisdictions.

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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.

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 regulations being adopted and legislation being enacted, or considered for enactment, at the federal, state and local levels relating to energy and climate change.

Some of this legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards.

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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 toxic wastes or other environmental conditions.

To date, we have not incurred 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.

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Human Capital

Human capital is our greatest asset.

Developing our employees enhances each individual’s opportunity to progress their career at Meritage and enrich their work experience.

We work to retain talent by offering competitive and comprehensive compensation and benefits that include health insurance, 401(k) savings plan with a competitive company match, paid time off, paid parental benefits, employee discounts, tuition reimbursement, and a wellness program, among many others.

Human capital is one of our most critical assets.

At December 31, 2022, we had 1,921 full-time employees, including 384 in management and administration, 67 in our title and insurance companies, 475 in sales and marketing, and 995 in construction and warranty operations.

We are committed to creating an inclusive and positive culture for our employees in which everyone feels valued and invited to contribute.

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

We are committed to creating and cultivating a diverse team, fostering an inclusive culture and creating a workplace environment where our team members can reach their full potential in support of organizational goals.

We have a robust talent recognition and succession planning model designed to help identify and develop talent and provide a roadmap for promotion of identified employees.

Developing our employees enhances each individual’s opportunity to progress their career at Meritage and enrich their work experience.

Of our entire employee population at December 31, 2022, 40% were female and 26% 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 2021, we adopted a Human Rights Policy which applies to all employees and our Board of Directors, as well as contractors, subcontractors, vendors, suppliers and partners.

The Human Rights Policy defines our responsibilities to adhere to the Universal Declaration of Human Rights.

In addition, in 2021 we donated $300,000 to established charitable organizations that support racial equity and inclusion initiatives.

These efforts are integrated in a broader diversity, equity and inclusion (DE&I) focus for the organization that we will extend into 2022 and beyond.

We are proud of the diversity in our team and are committed to the ongoing and intentional work to achieve inclusive excellence, including the long-term goals of attracting diverse talent and forming strategic relationships.

The Company is dedicated to learning, improving its practices and challenging its leaders and employees to recognize and leverage our differences for the greater good of the team and the organization and we promote an open-door policy where individuals are encouraged to voice concerns which are promptly addressed.

In order to uphold our core values, we intend to continue to expand our commitment to diversity, equity & inclusion ("DE&I").

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

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

Our top priority from the very start of the COVID-19 pandemic has been the health, safety and well-being of our employees and their families, our trade partners and customers.

From the onset, we have consulted the evolving guidelines and practices from the Centers for Disease Control and Prevention to shape our decisions in our sales offices, on our job sites and at our corporate and division headquarters.

Our response to the COVID-19 pandemic continued throughout 2021, with policies and procedures that allowed our employees to work remotely where possible, and to safely and effectively return to the office at their discretion.

We addressed actual and suspected COVID-19 cases in an effort to reduce the potential spread of COVID-19.

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

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

We also provided a vaccination incentive and paid time off for employees to support COVID-19 vaccination efforts.

Our Vendor Code of Conduct applies to all contractors and subcontractors.

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.

In 2020 and 2021, historical cycles were impacted by COVID-19 and its impact on consumer behavior and supply chain, particularly as it relates to the homebuilding market, which resulted in prolonged construction timelines.

We saw a slight return of seasonality in the second half of 2021 and 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.

During 2020, historical cycles were impacted by COVID-19 and since then were further impacted by elevated demand and supply chain and labor constraints.

Historical seasonality returned in 2022 and we expect it to continue over the long term, although it may, from time to time, be affected by short-term volatility in the homebuilding industry and in the overall economy.

Information about our Executive Officers

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Clinton Szubinski 46 Chief Operating Officer, Executive Vice President

Malissia Clinton 54 General Counsel, Executive Vice President and Secretary

Javier Feliciano 49 Chief People Officer, Executive Vice President

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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.

Hovnanian and CalAtlantic, both public U.S.

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

Malissia Clinton joined Meritage on April 18, 2022 as General Counsel, Executive Vice President and Secretary.

Prior to joining Meritage, Ms.

Clinton was employed by The Aerospace Corporation from July 2009 through April 2022, where she served as Senior Vice President, General Counsel and Secretary.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business