The market is currently dominated by geopolitical tensions in Iran and concerns about a potential recession driven by private credit issues. Simultaneously, the housing market faces significant affordability challenges primarily due to regulatory burdens on land development, despite efforts by builders like Meritage Homes to offer more accessible price points.
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Right now, the only thing the markets
care about is the war in Iran, and the
news on the war keeps moving at a fast
and furious pace. Hopes for a peaceful
resolution seem to be fading. Another
week, more bad news for private credit,
and this process can lead to a
recession. We are now going to show an
interview I did with the CEO of a home
builder, Meritage Homes. What are the
major costs that prevent homebuilders
from delivering, you think, homes at a
lower price? The reason affordability is
so problematic in our country is because
local regulatory bodies have no
incentive or motivation to help us to
bring land to the market in an
affordable way. It's been happening for
decades, but it's gotten worse and worse
and worse, and there's been no solution
Hi, this is Steve Eisman and this is
another edition of the weekly rap. This
is for the week ending March 27 but
recorded Thursday night, March 26. In
this week's rap, we will discuss one,
the latest on the war in Iran. Two, more
news on private credit. And three, we
will then cut to an interview with the
CEO of Meritage Homes, symbol MTH, a
stock I recommended earlier this year.
Right now, the only thing the markets
care about is the war in Iran. And the
news on the war keeps moving at a fast
and furious pace. Monday morning,
futures were down 100 basis points. But
then President Trump announced that he
was postponing the bombing of Iranian
energy infrastructure for 5 days because
the US and Iran are talking. Futures
soared. At one point on Monday, the
market was up over 200 basis points.
However, the Iranians denied that there
were any talks at all and the market
sold off some. It still closed up 1.15%
but well off its highs. Tuesday after
the close, President Trump announced
that the US and Iran are negotiating and
that the US had submitted a 15point plan
to end the war. Wednesday morning, Iran
rejected this ceasefire proposal and
called US talks quote illogical unquote
and demanded control over the Straits of
Hormuz. By Thursday, hopes for a
peaceful resolution seemed to be fading.
Now, it's possible that President Trump
has just been using delaying tactics to
set up a time for the US to take over
Car Island, which is the key to Iran's
economy. Until the war is over, the
markets will continue to trade
headlines. This coming Monday, we are
posting an amazing interview with Steven
Cook, who is a scholar and expert on the
M East at the Council on Foreign
Relations and has sources on the ground
providing him with unique insights. And
if you haven't seen my interview with
Hale Lima Croft, the head of commodity
strategy and M East research at Royal
Bank of Canada, I'd suggest you watch
that interview this weekend before
watching the Steven Cook interview on
Monday. Another week, more bad news for
private credit. On Monday, the news was
at Apollo. Its flagship $25 billion
private credit fund called Apollo Debt
Solutions received a quarterly
redemption notice of 11.2% but only the
5% cap was honored. That was Monday. On
Tuesday, Moody's downgraded the rating
of the $13 billion private credit fund
jointly run by Future Standard and KKR.
Moody's downgraded the fund to junk and
when the company reported fourth quarter
results a few months ago it showed that
non-accrral loans had climbed to 5 and a
half% one of the highest in the industry
that caught the attention of the ratings
agencies. Also on Tuesday there was bad
news from the Aries $10.7 billion
strategic credit fund. The fund received
redemption notices at 11.6% 6% of assets
but only honored redemptions at the 5%
cap. In related news on Wednesday,
Barkclays announced that it is scaling
back its assetbased lending to small
borrowers after facing losses from the
collapses of market financial solutions
andricolor holdings. Barkclays is
shifting its focus to loans and
securizations for large corporates and
has already pulled back on some deals
and increased pricing to reflect higher
risks. If you take one thing away from
this rap, focus on this. These patterns
signal the beginning of a credit cycle.
This is what it looks like. bad news
starts to mount and then lenders begin
to tighten underwriting standards and to
restrict credit to at first certain
borrowers and more borrowers over time
and this process can lead to a
recession. I am keeping this wrap short
because we are now going to show an
interview I did recently with the CEO of
a home builder Meritage Homes. This is a
stock I recommended in January. My
thesis was that Meritage is a well-run
midsize homebuilder that was then
trading at tangible book value. The
range of valuation for a Meritage is 50%
of tangible to one and a half times.
Thus far, my recommendation has not
played out. Why? The one thing you can't
get away from with respect to
homebuilders is interest rates. When I
recommended Meritage in January, the
10-year was a little above 4% and it
looked like it was going lower. However,
because of the war, the 10-year has
climbed to as high as 4.4%.
And Meritage is now at 80% of tangible
book value. I still like the stock
because this is a profitable company, so
tangible book value should continue to
grow. But I will admit that right now
fundamentals are being hurt by higher
interest rates. That could of course
change very quickly.
I really have always liked examining
home builders. I find them fascinating
companies. It's an industry that has
changed dramatically over the years.
This is one of the better midcap
companies. Most people haven't really
heard about it because most people just
focus on LAR, PY, DHI, NVR, and Toll and
forget the rest. But I think there's
real opportunity here which is one of
the reasons why I recommended it about a
month and a half ago and I full
disclosure I own this stock and um I
think we're going to have a very
interesting conversation with the CEO.
Before we begin a technical
announcement, Philipe had some
difficulty joining the video and so as a
result he had to join on his phone. The
video quality for this interview is not
up to our usual standard. The interview
itself, however, I think is a very good
interview, very informative, and we
decided to forge ahead. I think you're
going to learn a lot, and I'll be back
afterwards with some conclusions.
Today, we have as a guest the CEO of a
company that I actually recommended as
an investment about a month and a half
ago, Meritage Homes, which is a home
builder. And today, as our guest, we
have the CEO, Phipe Lord. So, Phipe,
welcome to the Real Eman. Thank you very
much. Very happy to be here. Looking
forward to the conversation.
>> Great. So, you're a five billion market
cap company. Before we get into the
specifics of your company in particular,
why don't you just give our viewers an
overview of the state of the housing
market in the United States right now
from your perspective?
>> So, we're coming off about 5 years of
pretty unprecedented demand. You know,
we came out of COVID and everyone
understands that there was some uh a big
surge in demand coming out of COVID.
Rates went down substantially. It freed
up a lot of affordability. A lot of
people bought homes during that period
of time. A couple years later, um
interest rates went up. It really locked
in the existing home market. So, new
home demand continued to be very strong.
And that's really lasted the last, you
know, pretty much through, I would say,
the middle of last year.
>> So, new home demand was strong, but
existing home sales was was not good.
Was it was kind of a dichotomy.
>> Yes, sir. We had a captive audience. I
think everyone that bought um since
2016, bought on a very at a very low
rate. So, they were kind of locked into
their homes. Uh they couldn't really
make the math work. As rates started to
rise, it didn't make a lot of sense. So,
people stayed in their homes for longer.
and the new home public builders and
private builders really had a captive
audience for those folks who were out
shopping during that time. I would say
that that was generally true uh all the
way till the middle of last year. And I
think the other thing I would share is
just overall the country is
pretty underbuilt uh since the great
recession. Home builders backed off and
a lot of people didn't bring lots to the
market and didn't bring a lot of supply
to market. So the demand there was a
little a lot of pent-up demand coming
out of the great recession and we really
underbuilt in this country. So you
couple that with what happened over the
last 5 years and you had some really
strong strong numbers coming out of
>> for new home for new homes.
>> For new homes. Yeah. And I mean I mean I
think during the early part of those
five years it was strong for existing
homes too. The existing home market got
eaten up. It wasn't really till rates um
started getting elevated in the middle
of 23 and in 2024 that the existing home
market started to um shrink, if you
will, and the new home market really
continued to go forward as a as kind of
a captive audience.
>> What you're saying is the cap the
existing home market deteriorated as
rates went up. You as a new home builder
and and your peers had sort of a captive
market because there was no place else
to go. And you said that lasted to
basically the middle of last year. Why
why did it then fade?
>> Yeah, I think it's a a confluence of
three things. And really, you know, the
housing market, there's three legs to
the housing market stool. There's job
growth in the economy. If people are if
there's jobs being created and people's
income levels are going up, you know,
people tend to be buying homes. And then
there's affordability.
uh when rates are low or prices are low,
more people can buy homes than if rates
are high or prices are high. And then
finally, there's consumer confidence.
And really, consumer confidence is just
how optimistic these folks are on sort
of what their future prospects look
like. Affordability has been an issue
since the middle of 2023, but new home
builders have really been solving that
by buying down mortgages for our
customers. So, let me let me let me
explain that to the viewers. I don't
think everybody understands that. So,
just all all the viewers know companies
like Meritage have their own mortgage
company. And so, if you go buy a home
from Meritage or LAR, um you get a
mortgage from them. And if you went
outside, let's say to Wells Fargo, you
might get a loan at 6 12%, but the
homebuilders will subsidize through
their captive mortgage insurance
companies. So instead of saying paying
six and a half percent I'm just making
up number they buy you down and as part
it's basically as part of the price of
the house but the but the mortgage rate
is 5 and a half%. And so you get a much
better rate from the captive mortgage
mortgage company and that's one of the
reasons why the the homebuilders did so
well for so long.
>> Yeah, that's exactly right. You I
couldn't have described it any better.
Uh through our JVS or our wholly owned
mortgage subsidiaries were able to
access the capital markets and buy
people's rates down with points. It's
expensive, but we can unlock
affordability for people. And as rates
rose, we use that lever to really
continue selling homes um up until the
middle of next last year.
>> Okay. So, going to the middle of next
year, what what happened? What was the
pain point?
>> That was where consumers started feeling
much less confident. Um it was a
combination of I think the job market
going a little bit sideways. Even though
the data suggests that things are still
very strong, I think they're very strong
in certain sectors, but they're not that
strong in other sectors. We're we're uh
focused on affordability. So, those
folks I felt the job market uh was
shrinking. Um I believe that you had the
government shutdown that happened in the
middle kind of the middle of the back
half of last year that really impact
impacted people's confidence and then
just the overall uncertainty out there
around the economy and some other things
has really uh impacted the consumer
psychology and this is common knowledge
you know the the indicators out there
that track consumer competence it's at
an all-time low um since we've been
measuring it and I think that all really
changed in the back half of the year.
And so now we're dealing with still have
the affordability issue. The job market
seems to be weakening a little bit uh
for some people and now the and now the
consumer is not feeling very confident
about things. And so the back half of
the year was not a good year for a lot
of public home builders. Our numbers
were down. Sales, revenue, margins were
getting compressed from incentives and
rate buys, which we just discussed. and
overall demand had just really really
softened. As we roll into this year,
that's still the environment. Although
it's the it's the spring and most of
home buying activity happens in the
first half of the year. People tend to
just go out and buy homes during the
spring. They get their bonuses. They're
feeling better about things. They're
looking to move and whatnot. We still
feel like the backdrop is low consumer
confidence. the backdrop is still high
rates even though they've come down um
from like the sevens into the sixes. And
I think the bigger concern right now is
just there's some negative news coming
out of the job market. You saw the job
report today.
>> Yeah. Just everybody know because this
is being recorded the day is talking
about is Friday, March 6, and the J the
job numbers were actually negative for
the first time in a very long time.
>> Yeah. And frankly, our consumer base was
kind of telling us that in the fourth
quarter um when we were surveying the
people that were coming into our
communities or onto our website or
whatever, what they were telling us as
that they weren't feeling great about,
you know, things. And when we asked them
what we can do to convince them to buy a
home today and make that decision, there
was kind of a a lack of urgency and sort
of a wait and see.
>> So, let's that that's a nice lead in.
Let's talk about let's turn to your
company. You focus on entry level. I'd
like you to define that. Tell us what
regions you're in. Um tell us how you
focus on the entry level market. What is
that price point? Give us a general
overview of of of the company and and
and and the strategy.
>> So, we're the fifth largest home builder
in the United States. We did
approximately 15,000 units uh in 2025.
uh which makes us the fifth largest
builder by units, not by revenue, but by
units. Um we build essentially all
across the southern hemisphere of the
United States from California into
Arizona, Utah, and Colorado. Then
throughout all the four major markets in
Texas, we build in the coastal areas of
Alabama, Mississippi, and Florida. um
all four major markets in Florida, uh
Atlanta, Georgia, uh the Carolas, South
and North, and then up into uh
Tennessee. So, we're a southern
hemisphere builder. We focus on markets
that have lots of job growth. Um
hopefully, uh are progrowth from a land
perspective. Um preferably low
regulation with the exception of some of
the West Coast markets
>> by California. Yeah. And where
affordability has really uh driven a lot
of the demographics uh which which was
the case all those markets um we believe
were affordable uh as it relates to some
of the inner migration patterns in the
United States. We're uh we're focused on
affordability. That's the name of the
game. Everything we do operationally is
focused on trying to deliver affordable
product. We typically like to operate
below FHA. Wh what what does that mean?
You like to operate below FHA. What does
that mean?
>> So FHA is the Fanny uh price level for a
market. If you price your homes below
that FHA limit um which is usually based
on local incomes, that's how they
usually set it. And then the the medium
home price in the market, you have
access to Fanny and Freddy financing.
>> So you're building homes that could be
financed through Fanny May and Freddy
Mack. You're not doing you're not you're
not building homes like Toll Brothers
that are jumbo that someone would have
take out jumbo loan or pay cash etc.
You're so what what's your price point?
Tell us tell us about what your price
point is.
>> So our ASP last year for the entire
company was right under 400,000
>> and that must that must differ by region.
region.
>> Exactly. I mean the west coast is higher.
higher.
>> How much? Right.
>> How much? I'm very curious how much higher
higher
>> it's closer to mid5s.
>> Okay. We still focus on affordability in
Arizona, in Colorado, in Utah, and in
California, but those prices are just higher.
higher.
>> And Alabama, what's the price there?
>> Could be. I think our ASP in Alabama,
Mississippi, and kind of the coastal
panhandle of Florida is closer to 300.
>> Wow. Okay. That's a big disparity.
>> Big disparity.
>> So, let's explore that for a second. Why
Why is there such an enormous disparity?
you're built I mean I would imagine and
correct me if I'm wrong you're building
basically the same home in California as
you as you are in Alabama and I would
would imagine and again I'm not sure how
much the cost differs but why is the pro
why is let's let's imagine it's 550
versus 350 that's a that's that's an
enormous percentage different for
essentially the same home why is that
>> yeah I I would definitely take
California out of the conversation
The statement that we're building the
same home across the rest of the markets
is probably true. We traditionally build
a single family detached home which is a
30 wide house or a 40 wide house or a 50
wide house which is the width of the
home and it's a single family detached
home. So it doesn't share walls. It's
not a condo. It's not a town home.
>> And how many how many bedrooms is it? Usually
Usually
>> somewhere around three to four bedrooms
and two to three bathrooms is kind of
the sweet spot.
>> Okay. For us, that's really again
focusing on affordability. But your
question about why we can deliver
product at these different ASPs from
region to region all comes down to the
land, the cost of the land.
>> I see.
>> Right. The cost of the land in
California is meaningfully higher than
the cost of the land in Alabama. Uh
meaning higher than the cost of land in
San Antonio, Texas. We can put a
traditional uh lot on the ground in most
of our markets for a price that allows
us to deliver in an ASP of somewhere
between 300 three and $400,000
which we believe is the sweet spot in
the market. We believe that's the most
under served portion of the market. The
strongest demographics that are coming
through the system are looking for that
type of home. the millennials, Gen Z,
the folks behind them, even affordable
people that are moving out of other
parts of the country are looking for
something more affordable. And that's
that's where the demand is. And frankly,
that's also where the underbuilding
occurred. Uh most of the building that
happens in our country is over half a
million dollars. It's not under a half a
million dollars. So at Marriage, we're
focused on delivering product below half
a million dollars across the country.
Again, we think that that's the sweet
spot. That's where people are
struggling. Those are the folks that are
struggling uh to attain home home
ownership. And so our mission is to
really try to figure out how to deliver
that deliver that to them.
>> Let's talk let's dig a little bit down
more down into affordability. You know,
there's a lot of articles written about
affordability and housing over the last
several years. Um why do you think I
mean you're the builder so you must know
what are the major causes? I mean, why
can't we build your home
for less in the United States? I mean,
350 400,000 is not bad, but if if it
could be built for if it could be built
and sold for less, obviously you could
sell more homes. What What are the major
costs that prevent the home builders
from delivering you think homes at a
lower price?
>> Yeah. And I think the way I would answer
that question, Steve, is that why could
we do it 20 years ago and why can't we
do it now? Uh because 20, right? Because
20 years ago, we could deliver these
houses for less and now we can't and
what what are the main drivers behind
that? And it's just it's three things.
It's it's land cost, it's vertical cost,
and it's labor. And so all three of
those have been pressured in the last 20
years for different reasons. I'll work
backwards. Um, labor is obviously
constricted by immigration right now.
Uh, not a lot of people who uh are
graduating from college want to get into
home building. So, we don't have enough
plumbers in the world. We don't have
enough electricians in the world. We
don't have enough framers, foundation
people. And so, that that talent pool is
very very constricted. And so, labor
costs have been elevated for some time.
That's the smallest component of the
three though. The next one would be
vertical costs. And whether it's lumber
or wiring or plumbing fixtures or
cabinets, flooring, you know, you name
it. All those costs have gone up
substantially due to uh supply chain
issues and um pro product constraints,
tariffs, yada yada yada. And then just
the fact that the way we're required to
build build a home as a new home builder
is so much more is such is is to such a
higher standard than what existing home
stock is built to. Whether it's code or
the windows we put into the house or how
we frame a house. The regulatory bodies,
the powers that be have required new
home builders to continue to increase
the cost of their homes to build our
homes to a much higher standard.
>> And why what why explain the reg explain
that like why have the regulators done
this to make to make it what's the
impetus for this?
>> I think that they believe they're being
good stewards of the environment. I
think they're being good stewards of
consumer preferences. I think that they
believe that um the homes that were
built in the past uh are less insurable
than the homes we build today. Whether
it's energy efficiency or making sure
that you build houses that are
floodproofed. Uh just all those things.
They think they're being good stewards,
which I which I by the way agree with,
but they tend to go too far. They tend
to require us to put more stuff in the
homes than the consumer values and
frankly is good stewardship. All it's
really doing is driving up the cost of
home ownership. Um so that would be the
second piece. But the third piece is the
most important piece which is the land.
And the reason affordability is so
problematic in our country is because
local regulatory bodies
uh have no incentive or motivation to
help us to bring land to the market in
an affordable way. Um they require us to
develop our projects and title our
projects in a way that doesn't allow us
to support affordable housing.
>> God, we need some examples, please.
>> Yeah, I'm going to give you really
examples. So, and I'm going to go to
ground zero cuz it's the best way to
kind of describe it. California. >> Yes.
>> Yes.
>> When we build a house in California,
literally the cost of bringing the lot
to the market, not including the land,
the dirt, and then the infrastructure
that we bring to the community,
utilities, sewer, and all the things you
need to build housing. Take all that out
of it. We're paying regulatory bodies
close to a hundred to $150,000
per lot just to build in their
community. Okay, this comes in the form
of building permit fees, impact fees,
school fees, traffic fees, you name it.
>> Let's just I want my viewers to really
understand. Let's say there's a big plot
of land that could be subdivided up into
50 lots. It's completely naked. It's
just land and you want and you want to
build on it. The cost of each of those
lots just for getting approvals for you
to buy it is $150,000 from the reg from
the the regular the local regulatory
buyers. You haven't even put a pipe in yet.
yet.
>> We haven't done anything. We haven't
even we haven't even leveled the
building that's sitting on this piece of
land that's vacant and dilapitated. Right.
Right.
>> We haven't done anything just literally
for the right to put a shovel in the
ground and start doing the work which is
now going to increase the value of the
property and provide housing in a very
underserved part of the country. As you
know, we're in the deal for 150 grand,
which means our consumers in the deal
for 150 grand.
>> Of course,
>> when a when a consumer comes into our
community and we tell them, hey, this
house is 700,000 instead of 500,000. And
the reason why is because we had to pay
150 grand uh for traffic and currency
and u building permit fees. They don't
value that, right? They value how many
bedrooms, how many bathrooms, the
backyard, you know, how how well is the
house built. So throughout the country,
those costs, those regulatory costs of
bringing lots to the market are the
highest they've ever been and they
continue to go higher and higher and
higher. And the cities, which are
elected officials who control this
process, they have no motivation to do
it differently. They believe that their
constituents want them to do this. They
believe that their constituents want
them to keep prices elevated because if
they keep prices elevated, then the
equity in their homes is elevated. And
so at at a local level, the cost of
bringing land to the market has gotten
worse and worse and worse. And there's
one other piece to this that's really
important that people I think need to
understand about housing because that's
usually something people understand.
Here's the part that people don't
understand. Not only does it cost us 150
grand to bring the to have the right to
go bring the project to the market, but
they also restrict what we can build,
right? Um, they'll tell us that they
want us to build bigger lots and bigger
homes, not smaller lots and smaller
homes, which is what people need. The
people that are priced out of, they'll
force us to build big homes on big lots,
which only does the same thing. the it
increase the cost of the land per lot
because you paid X for the land. You're
going to pay X to bring the
infrastructure in and you have to divide
that across 30 lots instead of 60 lots
which now forces the price of the home
to be even higher. And that's just
happening everywhere which is really
impacting the affordability in this
country. It's been happening for decades
but it's gotten worse and worse and
worse and there's been no sort of
solution to it. So what's happening? You
know, for a while there we were,
President Trump was talking about he's
busy now,
but he was talking a lot about
affordability, a lot about housing
affordability. There were some plans
floated. I'm sure you're in in the weeds
here. What what could you share with us
what this administration is attempting
to do to make housing more affordable in
the United States? Yeah. So, I'm a gl
I'm a glass half full kind of guy and so
I'm encouraged uh by the fact that it's
a conversation and it seems to be a loud
conversation. It's out there. It's
visible. Um the administration has
clearly understood that this housing
affordabilility is a real issue. Listen,
I got a 14-year-old daughter and a
16-year-old son. Um but people that are
coming out of college right now, they
feel like they missed the boat. uh with
where house prices are and where
interest rates are. They don't feel like
they can get into housing until they're
30 or 35 or 40 years old. That's
literally their view. So, the fact that
the administration
wants to tackle this issue uh to me is
is a real positive. I think the issue is
is they're looking for something that
the federal government can influence at
a national level to um change uh the
outcomes. And unfortunately, this isn't
something that can be changed by some
sort of federal government initiative.
You have to figure out a way to
incentivize through the steric through
the carrot and stick to influence the
behavior at the local level. And there
are ways to do that, but there's not a
silver bullet and there's not a stroke
of the pen, right? You really have to
it's a longer tail type of thing and
program that you have to put put
together. Texas is the best at this, by
the way. And I'll give you a really good
example. In Texas, they have programs
where you can access mu cheap municipal financing
financing
um to subsidize the cost of the land if
the land is being designed and developed
in a way to bring affordable housing to
the market. So, if we go into a market
like Houston and we buy a big track of
land where we're going to have to pull a
bunch of infrastructure to that
community, the city will allow us to
float cheap bonds to fund that
infrastructure in support of us bringing
affordable housing to their community.
>> So, you would pay a much lower rate than
you otherwise would because you're
piggybacking on their credit rating basically.
basically.
>> Yeah. And low and lower than our own
internal cost of capital as well.
>> Ah, interesting. Okay. So it's very
cheap. We can offset lots of costs. We
can bring the land cost down on a perl
lot basis and then we can deliver more
affordable housing to the market. So
there are there are local uh local
regulatory bodies out there who have
figured this out and I believe that if
the administration was focused on some
of those mechanisms and tried to
influence the util the utilization of
those mechanisms more so as long as it
was tied to affordable housing I think
you would see a lot of a lot a lot of progress.
progress.
>> Let's turn to your a little bit dig down
a little bit more into some of the
numbers of your company. So,
traditionally, homebuilders
at the worst of it will trade at book
value, tangible book value or lower, and
at the best of it will trade maybe at
something like two times tangible book
value. Right now, your stock is slightly
below tangible book value, which is one
of the reasons why I've recommended it
on my podcast other than I think you run
a very good company. But talk about why
um you know there there's Lenard, DHI,
PY home, the big three and then there's
everybody else who's kind of a lot
smaller and the big guys tend to have
higher ROIs and therefore higher price
to book valuations and than the
companies such as yourself. So you're
you're in good company with all the guys
who are roughly at your market cap which
is around 5 billion or lower
and then LAR at 20 billion up to 45
billion for DHI.
You know they they're at well they're
over one and a half times book value and
higher. So just talk about
one of the things I was curious about
which I'd like you to elaborate on is
your your EBIT margins are actually
quite good but your ROE is 10% or below
which is below what the what the big
guys are. So just talk about the
disparity in returns and valuation
between the big guys and companies such
as yourself and what what you're trying
to do about it.
>> Absolutely. I think the first thing I
would say is um
we agree with you that now is a good
time to buy Meridan stock. I don't think
you're going to get it any cheaper.
>> And full disclosure to my viewers, I not
not only did I recommend it, I bought
it. So I I own your stock
>> and we're putting our money where our
mouth is. By the way, uh if you listen
to our last earnings call, we held the
graph to the street that we were going
to do a significant share repurchase uh
initiative throughout 2026.
um essentially potentially taking out
almost 10% of our common shares over
that period of time because from my
perspective I can literally buy my
company right now at a discount to
tangible book versus going and
reinvesting the shareholders capital
into a somewhat challenging housing
environment for the future. And I don't
think there's a better deal for me to
make for my shareholders than to buy my
existing enterprise at such a meaningful
discount when we continue to grow book
value and we continue to project
profitability. Uh even in these even in
this environment, the large cap
builders, you name them, LAR, Horton,
PY, you might throw NVR and Toll
Brothers in there, but they're a little bit
bit
>> they're a little they're a little funkier.
funkier.
>> They're a little different. MVR buys a
lot of shares back and toll is a 2MU
million-doll ASP. But those other three,
the reason they trade at such a larger
multiple than say the midcap builders,
which I would say we are one of is
because of their scale and their ability
to serve all masters. So what do I mean
by that? They have bulletproof balance
sheets. They have very very very
efficient operating models. They
leverage their fixed overhead and their
SGNA. They maintain pretty strong EBID
margins in good times and bad times and
they continue to gain gain market share.
They pay a dividend. They buy shares
back to help with the ROE and then they
have great returns and good times and
bad times. So, they just check all the
boxes and they have for some time. We're
right there. Um, you know, when I talk
to my board, what I tell my board is we
just have to show the street that we can
do what we've been doing in good times
and bad times. Now, up until uh
recently, we were driving our ROE, which
is one of the best ROEs uh in the
industry until last year through growing
the R. We saw a great opportunity for us
to grow our
>> prior to last year. What was your return
on tangible equity? Because right now
it's sub 10%.
>> Yeah, it was uh it reached as high as I
think 17%. And it operated it operated
between uh 12 and 17% all the way from
2000 to 2004. 2005 or 25 sorry is the
first time it dropped below 10%. A lot
of that was because we invested in
growth. We wanted to get to this fifth
largest home builder. As our ASP was
coming down, we knew we had to grow
market share so we could get our revenue
uh to continue to grow. And we were
driving great operating returns um some
of the best in the industry. And so we
were reinvesting in that um that core
operating return of our business. And we
were a little bit of an outlier over the
last 12 months where we didn't buy as
many shares as other people were. other
people were using their free cash flow
to buy more shares back than we were as
we were investing our business. We're
getting sort of on step with that now
given given kind of how we we we look at
the tea leads. Um which should help our
ROE as well. Um but that is really the
goal. Our goal, the reason we wanted to
get to the fifth largest home builder is
our goal is to get somewhere closer to
that 17-2
multiple that those big guys get when
things are good.
>> 17 to two times multiple of tangible
book value. And you're right. And just
so the viewers know, right now you're at
like a 95% of tangible book value.
>> Yeah. I mean, super cheap for a company
that's been growing book value and a
company that um uh is is is you know,
profitable and still delivering a pretty
good pretty good. So, the ROE is the big
the big opportunity. Got to get more
efficient with our land book from here.
As we grow our businesses, we need to
grow uh in a balanced way. Uh again, try
to get more efficient with land and kind
of fuel the growth but in a more
efficient manner. continue to return
shareholder capital through our dividend
and uh our share repurchases and I think
there's a path um to double digit roe as
the market starts to recover.
>> So let me press you one thing on the way
you manage your business which is now
now somewhat different from the large
guys. So this let me give people a
little history lesson. So prior to the
great financial crisis,
all the home builders with the exception
of NVR
literally would would buy the land that
they would eventually build on and that
land would sit on the balance sheet and
it would generally be the biggest part
of the balance sheet. And post great
financial crisis the at least the large
home builders have migrated more towards
the MVR model where instead of buying
land they option more of the land and
that has proven to help their roses
because therefore they are tying up less
capital in land they only tie up the
capital as it comes closer to entitled
land. So, you know, a company like uh PY
or DHI used to have 100% of its
inventory in purchased land, now most of
the inventory is in options land. But I
was looking at at you, you're still over 70%
70%
actually buying the land. Are you
thinking about changing that? And and
and why have you kept call that the
oldfashioned way? And why have you stuck
to that old quote unquote and I'm not
being porative that was the way it was
done forever, but that was that has
changed. Wh why why have you stuck to
that and and and are you thinking about
changing it?
>> Yeah. And it's a very good question and
a very fair question. When you look at
the sector other than two other
builders, public builders, we're the
lowest as it relates to the percent of
land that we keep off balance sheet in
some form of an auction structure. So
you you buy you're you're like 75% you
buy the land.
>> Buy the land, self-develop the land.
Correct. Right.
>> And we're around 30%.
And most of the sector is closer to 50%.
With some builders like NBR, LAR now
with Milrose and a few others getting
north of that 70% range and they're
going to a very landlike model.
>> Right. The reason we um didn't go as
fast as the rest of them did in that
direction was really two reasons. The
first reason is we were kicking off so
much cash through our growth that we had
over a billion dollars of cash for four
years running. And we just believed that
the best use of our capital was to
deploy it back into our business versus
pay some land banker a substantial lift
to option the land back to us. It's not
cheap. Taking land off balance sheet is
not cheap.
>> Explain the mechanics and why is that
not cheap.
>> Yeah. So the way those capital partners
uh operate, you know, Meredith goes out
and finds a piece of land, identifies a
police piece of land that they want to
operate on, figures out what it's going
to take it's going to cost to bring it
to the market. We then bring it over to
a capital partner. They look at the
land. They essentially will step in, buy
the land on our behalf, improve the land
on our behalf, and then roll the roll
the lots back to us over some agreed
schedule. They usually charge somewhere
between 12 and 14%.
>> 12 and 14% of what?
>> Of the land.
>> Okay. So, so they're basically marking
it beyond the purchase price, they're
marking it up 12 to 14%. Back to you.
>> Yes. So, you're talking about depending
on the length of the deal, the cost of
the deal, anywhere from 250 to 400 bips
of gross margin, incremental gross
margin cost. that will go to a a lot
option capital partner. Okay, so very
very very expensive. So
>> it does bring your R down and one of the
reasons we didn't do it is because we
had all this cash sitting on our books
and it was very expensive and also
during the last 5 years land was taking
forever to bring to the market.
Schedules were expanded because of
COVID. the costs were elevated because
of COVID and because of the supply chain
and so whenever those schedules are
extended and the cost extended that
burden just gets bigger and bigger and
bigger. So for us with all this cash
sitting on our books we just didn't
think it was the right decision at the
time. That being said eventually you get
to a point like the other companies did
and now we are where your b your balance
sheet can no longer support the growth
you want to achieve on its own. And
frankly, uh, if you're trying to improve
your efficiency of your land book, you
have to start taking some stuff off
balance sheet. So on Ernie's call, we
telegraph to the street that we're
sitting at 30 and our goal is to get
somewhere between 40 and 50. I kind of
like the window we're in right now
because land prices are starting to like
get soft because the market's gotten
soft and development costs and schedules
are starting to tighten up and it makes
it a lot less expensive to introduce a
capital partner into our future ramp
book today than it did three four years
ago. So, I'm hoping our t our timing is
right. But listen, you look at some of
these builders that have taken a lot of
land off their books and you uh listen
to their calls and they share with what
that's costing them. Take a company like
LAR who is now almost 100% off balance
sheet through their REIT mechanism
called Miltrose. Their margins are
really not great. They don't love their
margins and a lot of that is that
incremental burden they're taking uh
they're paying to take that land off.
>> So there's no free lunch here is
basically what you're saying.
>> Yeah. Yeah. And it's all math, right?
It's it's looking at the impact to the R
and then looking at the opportunity to,
you know, uh, financially kind of look
at your E differently. But, but more
importantly, it's just about capital
efficiency. If you can get it right and
you're bringing land on book when you're
ready to build homes, it makes you so
much more efficient with your working
capital, which can drive a lot of other
benefits to your P&L.
>> Well, let's finish up. I'm going to give
you the last word. If we if we're here 5
years from now,
what's your hope for where Meritage is
going to be in terms of profitability, geography,
geography,
expansion, etc. What what what are your
goals here over the next three to five years?
years?
>> I think number one, we want to be a
company that produces some of the
strongest returns in the company or in
the industry. I think we want our gross
margins, we our long-term gross margin
uh hurdles are 22 and a half. We're
currently closer to 19 19 and a half.
there's a 300 or so bit spread there
because of incentives and the things we
all the things we've talked about. So,
we want to get our long-term core
operating margins back to that 22 and a
half. We want to have a 15% ROE
um year-over-year. We want a bulletproof
balance sheet. We are one of the few
builders out there that's investment
grade. Um we want to make remaining
investment grade which means that we
have to keep our net debt to cap below
at or or below 20%. I think we can do
that and we want to be one of the top
gross growth uh builders out there which
means we have to grow our revenue around
10% year-over-year. Um I think if we do
all that really really well um I think
the numbers are going to look great. I
think we're going to gain market share.
We're going to be in position uh to
compete with some of the big guys. And
you know, hopefully we can get a
multiple north of 1.5. You can do the
math on that. If we're trading at 0.95
right now and we can get to a 15, uh
we're going to have a lot of happy
shareholders. We're going to have a
happy board. We're going to have happy
investors. Everyone's going to be happy.
>> And on that happy note, Phipe, thank you
very much for your time and uh best of
luck on your goals.
>> Thank you so much for having me. I
really appreciate it.
>> So, that was a very interesting
interview. Couple of takeaways and some
investment conclusions. First of all,
this is actually a very well-run
company. It focuses on the entry-level
home, which is really where Americans
really need the most help. It's one of
the more efficient homebuilders. It's
profitable. It grows book value. What I
thought was very interesting about the
interview was and the question that I
asked him as to why are homes in America
so much less affordable than they once
were? And he basically focused on three
things as labor costs which have gone
up. That's the least important. Then
there are supply chain issues which have
impacted the cost of putting in cabinets
and kitchens etc. But the biggest
biggest biggest cost is local
regulations and how much they have
increased the cost of land. One thing
that he said which which I didn't know
which was shocking was that in some
regions like in California just to buy a
parcel of land per lot the regulatory
fees are so high that before you do
anything it cost you $150,000
per lot in fees to the local regulators
just to get started which is one of the
reasons why housing is so unaffordable
in the United States. That's a very
difficult problem to solve. Trump
administration is trying to deal with
it, but as of now they don't have any
solutions, but they seem to be trying to
work on something. What I took away from
the interview was that Philippe Lord
runs a very good company. It has very
good margins. It's profitable in good
times and bad, but it has an
exceptionally low valuation. And
historically, if you can buy a home
builder below tangible book value, if
you are patient, you will make money.
And the tangible book value of Meritage
right now is around $74 to $75 per
share. And as of today, March 6th, on
the day of the interview, the stock's 68
and change. So if you buy the stock,
you're buying the stock at a slight
discount to tangible book value, which I
think long-term is a good investment.
What's going to drive this stock higher
is I near-term I think are if interest
rates come down which would give a real
boost to the spring selling season that
would certainly help but what I think
longer term is going to help is that
some of the large home builders have
moved away from buying land to optioning
them and that has really helped their roserage
roserage
however stuck to being an old-fashioned
company where it bought the land and
they buy 70% of their lots
as opposed to a LANR which options over
90% of their lots and he basically
Philippe basically said that they're
going to move more towards a 50/50 model
and right now their returns are subpar
10% or lower they have had higher
returns but I think as they move more
towards an optioning model the returns
of this company are going to increase
and in terms of valuation you could get
at least one and a half times tangible
book value which would be 50% upside
side. If we get some good times, you
could get even more. So, I actually
think this is a pretty good investment.
Like I said at the beginning, and I'm
going to say it again, I own it. I think
if you're patient, you'll make money.
Before we end, I want to remind our
viewers that on Monday, March 16th, we
posted an interview with Mark Cuban.
Mark runs a private company called Cost
Plus that delivers pharmaceuticals in
the US at a price of wholesale plus a
15% markup. Mark is trying to reform our
pharma system with transparency and
lower prices. And our discussion focused
on our broken farmer pricing system as
well as issues in the overall health
care system. I learned a lot during the
interview and I think you will too. So
check it out. And this last Monday,
March 23rd, we posted an interview with
Michael Ha, the managed care analyst at
Baird. Michael is a recurring guest. We
discussed many of the issues Mark Cuban
brought up with respect to the pricing
of pharmaceuticals, but we also
discussed why the entire managed care
industry is doing so poorly in literally
every one of its businesses. So check it
out. And this coming Monday, as I said
before, we are posting an interview with
Steven Cook of the Council of Foreign
Relations, who is a M East expert with
deep context in the region. We discuss
the war and how it will potentially
change the region. and we also discussed
what his contacts are telling him about
what is really going on. Hope you tune
in. Be sure to check out our website realismanplaybook.com.
realismanplaybook.com.
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This podcast is forformational purposes
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positions and stocks discussed. Opinions
expressed are their own and not
recommendations. Please do your own due
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