Meritage Corporation (MTH)

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Meritage Homes Corporation (MTH)

Citi 2012 North American Credit Conference Call

November 14, 2012 10:05 am ET

Executives

Steven J. Hilton – Chairman and Chief Executive Officer

Presentation

Unidentified Analyst

Meritage and Citi were publishing research again. Meritage is one of the largest home builders in the U.S. They build mainly in Arizona, Texas, California, Nevada, Colorado, Florida, and North Carolina. In the last 12 months they have generated over $1 billion of revenue via closing the delivery of 3.9000 units. Steve Hilton is with us here today. The format of today’s presentation is going to be fireside chat. So I will start out with some questions, Steve will go into some discussion and I hope that is very interactive, so if there is questions from the audience we’ll go to the audience as well.

We will start out with some general discussions about the industry. One of the popular topics I think is better is, will there be M&A in the industry? What do you think will happen in terms of public-to-public M&A? What needs to happen, or think at point yet or do you think it is years away before we see publics merging with each other?

Steven J. Hilton

I think public to public M&A is a quite a years away, I mean that public CEOs, our founder still, those would have been around a long time like myself. I think really wouldn’t create a lot of shareholder value. In the early stages of this recovery over the next few years, so I just don't feel lot of M&A in general even amongst private builders in that robust, usually next couple of two years until we get later in to the cycle.

Unidentified Analyst

If you think these different tax assets that are in place right now are prevented as in terms of M&A as well, is than an obstacle?

Steven J. Hilton

I think that’s certainly is an obstacle, goodwill is also an obstacle, be it later in the cycle and values tend to come closer and on book value that I think potentially could happen with it, I just don’t see it happening in the short-term.

Unidentified Analyst

If new home sales were to, the pace of new home sales were slow over the next year or two, how would that impact your strategy?

Steven J. Hilton

I mean it’s so much way in the other direction I think new home sales are going to increase. We are still at historically low levels from around 3000 single family house and start to the $400,000 plus pace we are on right now. I mean peak of the market, we’re over a $1 million. So I think we have a long way to go. I think the key to mitigate any slowing is to not comprising your underwriting standards, and I think we are still even today with higher land prices buying land a lots that deliver high margins.

So when the market does, if the market does change correct then we can absorb some of the declining prices through our high profit margins so, but I don’t see the markets slowing anytime soon. I mean if anything that maybe the pace of the recovery could moderate a little bit but I still think we are going to see some positive year-over-year numbers for a while.

Unidentified Analyst

And you mentioned financing standards you think the current mortgage environment is such that it would support a 1 million starts or is it something we could change or is there any obstacles in the current mortgage environment holding back housing?

Steven J. Hilton

Certainly we could sell more homes if credit was a little loser I think as more clarity comes to the mortgage industry around QRM and mortgage putback rules, credit will loosen, I also believe that as we see improvement in the pricing model through the housing credit will also loose and prices will become less and less of an issue. And I think we will go to underwrite mortgages to higher sales volume. So more of an issue on the entry level business, it’s very small portion of our business, family of U.S. homebuilders, but in those entry level builders feel the entire credit more so than we do.

Unidentified Analyst

And for the line, can you explain QRM and various moving theses in terms of what the government is potentially going to do and wants to do and how that might impact the industry?

Steven J. Hilton

Well, I’m not an authority on QRM but from what I read is the government is going to designate, going to define what’s a qualified residential mortgage. And that will be based upon the buyer's down payment and the buyer's credit score. Some of our early discussions were, you need to have a 20% down payment to have a qualified residential mortgage. If the mortgage isn't – it’ll never be (inaudible). I think the down payment is going to be a lot less than that. If the mortgage isn’t qualified the bank will be required to have 5% holdback of that mortgage amount on their balance sheet for a specific period of time.

It could potentially be the life of the mortgage, it could be three years, five years and that is so that the underwriting or the issuing institution has some skin in the game on those mortgages. Obviously if the bank got to put out 5%, retain that, even after they sell the mortgage off to Fannie Mae or to somebody else, that’s going to require higher pricing and then higher credit standards. So we want qualified residential mortgages to be almost all mortgages.

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