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Meritage Homes (MTH -0.97%)
Q1 2024 Earnings Call
Apr 25, 2024, 11:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and welcome to the Meritage Homes first quarter 2024 analyst call. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Emily Tadano, vice president, investor relations and ESG. Please go ahead, Emily.
Emily Tadano -- Vice President, Investor Relations
Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2024 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page.
Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2023 annual report on Form 10-K.
We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, executive chairman; Phillippe Lord, CEO; and Hilla Sferruzza, executive vice president and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today.
I'll now turn it over to Mr. Hilton. Steve?
Steve Hilton -- Executive Chairman
Thank you, Emily, and welcome to everyone listening in on our call. I will briefly discuss current market trends and our recent accomplishments. Phillippe will cover highlights of our operational performance and how our strategy is driving our success. Hilla will provide a financial overview of the first quarter and our forward-looking guidance for Q2 and full year 2024.
Meritage had a remarkable start to the year. We achieved an average absorption pace of 4.9 sales per month in the first quarter of 2024, which resulted in our highest quarterly sales orders totaling 3,991 homes. During the spring selling season with a healthy supply of move-in ready inventory, we were able to capitalize on strong market conditions generated by the increasing need for housing for millennials and Gen Zs as well as the move-down Baby Boomers who continue to find our limited inventory, limited availability of resale housing supply. In the first quarter of this year, our record backlog conversion of 138% drove 3,507 home deliveries, which led to home closing revenue of $1.5 billion.
Home closing gross margin for the quarter was 25.8%, which combined with SG&A of 10.4%, resulting in diluted EPS of $5.06. As of March 31, 2024, we increased our book value per share 17% year over year to $129.98 and generated a return on equity of 18%. Although visibility into what interest rate mortgage rates will do for the remainder of the year remains unclear, we believe that by satisfying homebuyers desire to have quick closing time lines, our available inventory should position us to continue increasing our market share. Now, on to Slide 4 for our recent milestones.
It's very timely that during the month that we celebrate Earth Day, we can announce Meritage's 11th Award as the EPA's ENERGY STAR Partner of the Year for sustained excellence for continued industry leadership in the production of energy-efficient homes. Additionally, Meritage was also named in Newsweek's 2024 America's Greenest Companies list as our commitment to sustainability is recognized even outside of our sector. Also, I take pride in sharing that at the end of the first quarter of this year, Meritage received the President's Volunteer Service Award, a civil award bestowed by the U.S. President and the highest honor available for volunteerism that refers to our partnership with No Child Hungry and the 1,100-plus hours our team members volunteer to package nearly 260,000 meals over the past two years to fight childhood hunger.Lastly, this quarter, we were recognized as one of Forbes' 2024, most successful mid-cap companies based on sales and earnings growth, return on equity, and total stock return for the last five years.
At Meritage, we believe that financial achievements must be maintained while maintaining a focus on responsible corporate citizens and we are honored that these accolades continue to illustrate the breadth and depth of our commitment. With that, I'll now turn it over to Phillippe.
Phillippe Lord -- Chief Executive Officer
Thank you, Steve. This quarter, we are excited to share our financial results, but I wanted to provide a bit more context behind the numbers. Nearly 50% of our quarterly deliveries were sold and closed intra-quarter, a trend that has been increasing for the last three to four quarters, resulting in a record backlog conversion of 138%. This conversion rate is materially north of our previous long-term target of 80% plus and notably higher than even our fourth quarter 2023 backlog conversion of 110%, helping drive improved ROE over the last several quarters.
This success was the intentional result of migrating to a move-in ready strategy across both our entry-level and first-mover products, allowing us to enter the year with a sufficient supply of homes available for quick close, particularly in advance of the spring selling season. We were able to both increase prices and offer less financing incentives than we anticipated on those quick move-in closings, meaningfully improving our first quarter 2024 gross margin. With our intra-quarter sales activity representing half of the quarter's closing volume, our gross margin reflects more current market conditions in real time, and our outperformance validates that our move-in-ready strategy is the right one for Meritage and for our customers. Now, turning to Slide 5.
Demand remained solid this quarter. Our sales orders of 3,991 homes were up 14% year over year. The nationwide sales event conducted in late January and into February was highly successful. We sold our highest quarterly sales order volume, which benefited from an 8% cancellation rate, significantly below our historical average in the mid-teens.
Entry-level homes comprise more than 90% of the total order volume. ASP on orders this quarter of $409,000 was down 5% from prior year, but fairly aligned sequentially from the fourth quarter of 2023. The ASP decrease from 2023 was due to both the larger mix of our closings coming from our Eastern markets and product mix shift, even as we increased pricing in about half of our communities and use fewer rate locks this quarter. The first quarter 2024 average absorption pace of 4.9 per month improved from 4.2 in the prior year and was well above four net sales per month due to strength of spring demand.
The first quarter 2024 ending community count of 275 was up 2% sequentially from the fourth quarter of 2023 and down 1% compared to prior year. Thirty-four new communities came online this quarter. We are still on target for more material community growth later in the year, ending 2024 mid to high-single digits higher than where we started with even greater projected growth in 2025. We only control all the lots we need for planned key openings in 2024 as well as most of our 2025 communities.
We are now focused on opportunities for quick openings in 2025 as well as longer-term growth into 2026 and beyond. Moving to the regional level trends on Slide 6. All of our regions generated a sales pace well above 4.0 net sales per month during the first quarter of 2024. Although we do expect Q1 to be one of our strongest absorption quarter as the overlap of the spring selling season.
The central region combined for Texas market had both the highest regional average absorption pace of 5.2 sales per month and a backlog conversion rate of over 150%. The economic growth in Texas fuels the positive momentum in the housing market and with over 90% of this region's average community being entry level, a steady supply of affordable and move-in ready inventory has been in high demand. The West region had an average absorption pace of 4.8 net sales per month compared to 4.5 last year. Our previously challenged markets in this region regained sales momentum this quarter, primarily in Arizona and Colorado, some of the toughest markets last year.
Colorado's first quarter 2024 sales order volume increased double digits on a year-over-year basis on a reduced community count. The East region experienced the largest year-over-year growth at an average absorption pace of 4.7 net sales per month, up from 3.8 from last year. As we have been focused on rebalancing our land portfolio over the last couple of years, our effort in East regions are now visible with a 10% year-over-year growth in average communities and double the prior year spec inventory, which positions us well to continue to take market share in the high-growth market parts of this country. Now, turning to Slide 7.
Our quarterly starts were approximately 4,000 homes in the first quarter of 2024. We were up from about 2,500 in the prior year and are consistent with our quarterly cadence for the last few quarters. In order to ensure we have sufficient loans available for quick move-in, we align our start pace with our expected future sales pace. Further, as we grow community count in the later half of this year, we will start more homes to meet our targeted per-community move-in ready supply across our growing footprint.
We had approximately 6,000 spec homes in inventory as of March 31, 2024, up 54% from about 3,900 specs as of March 31, 2023, but only about 100 homes greater than where we started this quarter. This represents 22 specs per community this quarter, which equates to 4.5 months supply specs on the ground, well within our target level of four to six months of supply. At our home closings this quarter, 93% came from previously started inventory, up from 87% in the prior year. Twenty-two percent of the total specs were completed as of March 31, 2024, as we continue to make progress to our target run rate of carrying one-third move-in ready homes.
Our ending backlog as of March 31, 2024, totaled approximately 3,000 homes, down from about 3,900 homes in the prior year as our intra-quarter sales to closing percentage increased. With our focus on carrying more move-in ready inventory, we would expect our backlog will continue to represent less than one quarter sales as our backlog converged rates start to consistently perform above 100%, improving our returns. With our backlog and specs on the ground totaling over 9,000 homes, we believe we have the optimal level of home supply to deliver on our full-year results.I will now turn it over to Hilla to walk you through our financial results. Hilla?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Thank you, Phillippe. Before I cover our financial highlights, I wanted to first address the momentum we've gained with our land goals as this has been a key pillar in our growth plan. Our land teams have been successful at sourcing deals despite the competitive land market. And through their efforts, we put nearly 6,300 net new lots under control this quarter.
This led to the growth in our total lot count by nearly 10% year over year and up sequentially by 3% to approximately 56,400 lots. With these new deals, we are starting to increase our use of off-balance sheet financing, growing our outlook percentage to 31% this quarter from 25% in the first quarter of 2023 and 28% from Q4 of last year. We continue to be focused on accelerating our land acquisitions and looking for off-book opportunities while maintaining a healthy balance sheet. Now, let's turn to Slide 8 and cover our Q1 financial results in more detail.
First quarter 2024 home closing revenue was $1.5 billion, reflecting 21% higher home closing volume year over year, that was partially offset by 4% lower ASP due to a shift in product mix. On a sequential basis, ASP closings increased in the first quarter of 2024 with reduced utilization of rate locks and targeted price increases reflected in our intra-quarter sales and closings as the market improved over the last 90 days. Assuming interest rates hold steady or improve, ASP for the rest of the year is expected to be fairly consistent with some reductions from geographic mix and new entry-level communities opening with lower prices will be balanced by reduced financing incentive costs and price increases where the markets can absorb them. While the utilization of rate locks have slowed from 2022 and 2023, our all-in discounts are still running at an elevated level, and we expect to continue to utilize rate locks and buy-downs to negate concerns around rate volatility.
Home closing gross margin increased 340 bps to 25.8% in the first quarter of 2024 compared to 22.4% in the prior year. This improvement was a combination of several factors. First, the reduced utilization of rate lock financing incentives that we've discussed. Next, the greater leverage of fixed costs on higher revenue.
And finally, improvements in our direct cost as last year's first quarter marked the highest per square footage direct for us since the start of COVID. These savings were partially offset by higher lot costs. We want to take a minute and cover the trends we're seeing in our direct costs. Our team has been leveraging our spec strategy and increasing volume, allowing us to deepen our relationships with our vendors.
We are proud of the reductions we achieved to date, and we expect that we will be able to hold the line to keep cost steady and find offsets to the recent lumber increases. On the labor front, capacity has held fairly steady perhaps as multifamily construction has pulled back a bit, creating a stable environment for residential construction at the moment. Our cycle times have settled in at around 140 calendar days over the last three quarters. We remain disciplined in our start cadence and are only selling homes later in the construction process to have the necessary inventory for quick move-in closings.
Our goal is to turn our assets three times a year to get their additional capacity will likely be needed for both trade labor and local government staffing for permitting and inspections. When we review the composition of our gross margin, the only known variable is lot cost since the land acquisition and development dollars have already been spent. Elevated land development costs, the impact of the entire industry over the past three years are now fully flowing through our financials as almost all of our land is now for post-COVID acquisitions. Our current guidance reflects the elevated lot cost, and we do not expect any additional pullback on margins beyond 2024 as go-forward lot costs have a similar land development composition component.
Over the past four to six quarters, our long-term gross margin target has been at least 22%. Structurally, we believe our target has changed as we continue to dial in our relationships with national vendors and further streamline our operations. The goal of these efforts is to improve cycle times and reduce costs. We've been operating under extreme environments for the past several years, highly favorable and then very challenging.
As the markets are stabilizing, we are gaining a clear understanding of our capabilities in a normalized environment and expect to share our higher internal targets with you over the next several quarters. Turning to SG&A. SG&A was 10.4% of home closing revenue in the first quarter of 2024, which was fairly in line with 10.2% for the first quarter of 2023. Higher commissions this quarter offset the incremental leverage achieved on higher home closing revenue.
We are still comfortable with our full-year SG&A goal of 10% or under and expect quarterly SG&A to improve throughout the year. Given our anticipated volume growth over the next few years, our longer-term SG&A target is 9.5%.In the first quarter of 2024, the financial services loss of approximately $700,000 included $5.8 million in write-offs related to rate lock unwind costs. This compares to financial services profit of $2.9 million in the first quarter of 2023 that had $1.9 million in similar write-offs. We anticipate potentially incurring another $7 million of rate lock underlying costs in the second quarter, which is included in our guidance.
Excluding these charges, the profitability of our financial services is held in line with our historical averages. The first quarter's effective income tax rate was 20.5% this year, essentially flat to prior year, with both periods benefiting from energy tax credits on qualifying homes under the Inflation Reduction Act. Overall, higher home closing revenue and gross profit with flat SG&A leverage and tax rate led to a 43% year-over-year increase in first quarter 2024 diluted EPS to $5.06 from $3.54 in 2023. Before we move to the balance sheet, I wanted to cover our Q1 2024 customers' credit metrics.
As expected, our buyer profile remained relatively consistent with our historical averages, with FICO scores near 740 and DTIs around 41 or 42. LTVs were still in the mid-80s and about 80% of our buyers in Q1 received some sort of financing incentives consistent with our mortgage company capture rate. Now, turning to Slide 9. Our balance sheet, returns, and liquidity management are a core focus for us.
We have nothing drawn under our credit facility, cash of $905 million, and net debt to cap of 2% at March 31, 2024. Our net debt-to-cap ceiling target is in the mid-20s, leveraging our improving backlog conversion. We also generated $82 million in operating cash flow for the first quarter of 2024. Our overarching capital spend philosophy looks to generate long-term shareholder value expansion through both growth in the business and returning capital to shareholders.
Since early 2023, we have been accelerating our investment in organic growth. This quarter, we spent $430 million on land acquisition and development, which was up 39% from prior year. We expect our go-forward trend for full year 2024 and beyond to total $2 billion to $2.5 billion of land spend. Given confidence in our business model and our ability to deliver strong and stable financial performance during the first quarter of 2024, we meaningfully enhanced our shareholder returns directive as well.
In February, we instituted a formal programmatic share repurchase plan with a minimum buyback commitment of $15 million in each quarter to provide consistency and predictability to our share repurchase activity. During the first quarter of 2024, we went beyond the systematic $15 million commitment and opportunistically bought back an additional $41 million. We repurchased over 360,000 shares or 1% of common stock outstanding at December 31, 2023, for $56 million this quarter. $129 million remain available under our authorization program.
One year after initiating our dividend policy, we nearly tripled our quarterly cash dividend to $0.75 per share this quarter or $0.27 per share, providing another avenue for us to improve our ROE. This resulted in total spend of about $27 million in dividends in the first quarter this year. And rounding out our capital plan for the year, we are also evaluating near-term opportunities to address the senior debt that's coming due in early 2025. On to Slide 10.
In the first quarter of 2024, we were able to find and secure land deals that meet our underwriting standards in the majority of our markets meaningfully putting more lots under control than home starts. The nearly 6,300 net new lots under control this quarter represent an estimated 43 future communities. We put about 200 net new lots under control in the first quarter of 2023 as we were only starting to ramp up from the pullback in late 2022 that quarter. As of March 31, 2024, we owned or controlled a total of about 56,400 lots, equating to 4.6 years supply of lots in line with our target of four to five-year supply.
Our land financing strategy focuses on managing our capital while being mindful of balance sheet metrics and margin goals. We've been able to utilize our healthy balance sheet to replenish our land portfolio while minimizing the gross margin impact from option land yields for the past several years. As we mentioned earlier, we have recently been utilizing more option financing for our land purchases. About 69% of total lot inventory at March 31, 2024, was owned and 31% optioned compared to prior year, where we had a 75% owned inventory and a 25% option lot position.
We believe that off-balance sheet financing will allow us to control more land and increase our year supply of lots beyond what we like our balance sheet to absorb. Our intent is to accelerate our growth into 2025 and onward, and we are currently working on some land financing opportunities that we hope to be able to share with you in the next several quarters. Finally, I'll direct you to Slide 11 for our guidance. Given the robust market conditions and our supply of move-in ready homes, we revised our projections upward for full year 2024 to the following.
Total closings between 14,500 and 15,000 units, home closing revenue of $6 billion to $6.2 billion, home closing gross margin of around 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $19.20 to $20.70. As for Q2 2024, we are projecting total closings between 3,600 and 3,800 units, home closing revenue of $1.5 billion to $1.6 billion, home closing gross margin of 24.5% to 25%, an effective tax rate of about 22.5%, and diluted EPS in the range of $4.70 to $5.30. Both Q2 and full-year guidance assume current market conditions and interest rates. We will continue to refine our guidance as additional clarity around interest rates becomes available later in the year.
With that, I'll turn it back over to Phillippe.
Phillippe Lord -- Chief Executive Officer
Thank you, Hilla. To summarize on Slide 12. Our first quarter 2024 results demonstrate that our ample spec home supply for quick closings and our focus on pace over price allowed us to plus up and exceed not only our volume targets but also our gross margin guidance. As we increase our community count in the second half of this year, we believe we are positioned to continue growing our market share.
Further, our acceleration on both land spend as well as share repurchases and dividends demonstrates our confidence in our business model. We are committed to balancing growth in the business and returning cash to shareholders in order to continue creating long-term value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator?
Questions & Answers:
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question is coming from Stephen Kim from Evercore ISI. Your line is now live.
Stephen Kim -- Evercore ISI -- Analyst
Thanks very much, guys. Really impressive results. Thanks for all the guidance and color. Question for you regarding the backlog turnover ratio.
This is something that we've chatted a lot about over the last year. It sounds like you're clearly now saying that you've arrived at a level at a point now with your business model where you feel comfortable guiding to a turnover ratio at triple digits. I was curious as to whether you think that when -- what you see this year in terms of how you're planning to operate, whether this is a level of backlog turnover ratio that you also think can continue sort of as you progress toward whatever your long-term normalized level is? Is this the new normal? Or do you see 2024 as maybe being a little higher than normal?
Steve Hilton -- Executive Chairman
I would say that it's pretty much going to be the new normal. As we think about the rest of this year, we're modeling a similar backlog conversion for the remaining quarters. Some of it is just predicated on cycle time stability, which currently we have. The production capacity is really, really good.
So, as long as that remains in the same state, this is going to be the new normal for us.
Stephen Kim -- Evercore ISI -- Analyst
Yeah. That's really great. And I assume the same thing could probably be said for absorption rates perhaps per community, but maybe you can update us on that. I know historically, I think you've talked about three to four.
And then as a follow-on to that, you talked about your gross margin now pretty much for this year, incorporating a fully adjusted land cost. You don't have that pre-pandemic unusual land effect. So, that would seem to suggest that your gross margins have potentially some upside from here. I know you're going to give us more on that later.
But you had talked in the past about how a higher level of volume translates very directly for you into a higher level of profitability, not just on the SG&A but the gross margin. So, I was wondering if you could remind me again about the sensitivity of higher volume to your gross margin as well as updating us on your absorption rate longer term.
Phillippe Lord -- Chief Executive Officer
Yeah. I'll take the absorption question, and then I'll hand it over to Hilla on the margin guidance. We obviously believe we're going to sell more houses in the front half of the year than the back half of the year just due to seasonal trends. But we are reevaluating our overall absorption targets specifically for our entry-level business.
We've often said that our target is around four to five for entry level and somewhere between three and four for one MU. And the affordable part of the market is extremely strong. We're finding really strong land positions out there to support that affordable price point, and we are evaluating whether we can do better than that 4% to 5%. But stay tuned on that.
And I'll let Hilla talk about the margin guide.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Sure. So, historically, when we have longer cycle times and lower closing, sales at closing time, they could be up to 100 bps pickup in the fixed component of gross margin between Q1 and Q4 due to the incremental volume. Now, that's a little bit different these days because we're selling the spring selling homes and closing some of the spring season homes in the same quarter, but increased volume for us, even 400, 500 incremental units in a quarter can have up to 100 bps improvement in our gross margin, not just SG&A leverage.
Stephen Kim -- Evercore ISI -- Analyst
Great. That's really helpful. Thanks, Hilla. Thanks, Phillippe.
Appreciate it.
Phillippe Lord -- Chief Executive Officer
Thank you.
Operator
Thank you. Next question today is coming from Alan Ratner from Zelman and Associates. Your line is now live.
Alan Ratner -- Zelman and Associates -- Analyst
Hey, guys, good morning. Congrats on the great quarter. First question, gross margin. So, if I look at your full-year guide, I think the biggest adjustment was to the margin range.
And if I think back to three months ago when you gave that, I believe, if I'm remembering correctly, obviously, higher land costs flowing through was kind of the main headwind as far as your expectation for some pressure through the year. But I think you probably also had some assumption on incentives embedded within that as well. And clearly, the first quarter came in better than, I guess, you guys were expecting. But when you think about the macro environment today versus back then, rates are higher and continuing to move higher.
So, what is actually embedded in that guide for the remainder of the year as far as incentives? Do you expect to kind of continue the improvement you've seen in the first quarter? Or are you baking in any potential for having to increase incentives as you get to the back half, softer seasonal time of the year?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
We're still in elevated level of incentives compared to where we were pre-2022. So, we're maintaining that level. There was a decent amount, even with the pullback in improved market conditions in Q1, there was still a decent amount of incentives that are being used. But something that's really important to consider when you're selling and closing intra-quarter, even though you're offering an incentive, you can offer it much less expensively if you're offering a 45-day interest rate lock, it's much cheaper than trying to buy a forward commitment.
So, we're still planning on using the tools that we have in our toolkit to rate lock buydowns and rate locks just in general, but the cost to those is going to be less expensive because of our ability to sell and close so quickly. So, we're modeling current market conditions, including what we're seeing in April, which includes the uptick in the guidance that we provided to you.
Phillippe Lord -- Chief Executive Officer
Yeah. I'll just -- I'll give you an extra question here because people are going to ask you about April. We're not needing to go out and increase our rate lock costs to acquire the customers for April. That's included in our guidance.
Even in these elevated rate environments, we're able to move people into our move-in ready inventory at about similar costs than we were in Q1. So, it's all baked into our guidance.
Alan Ratner -- Zelman and Associates -- Analyst
Got it. That's really helpful. Thank you for that added color. Second question, I guess, just pointing to your Slide 10, where you show the lot acquisition activity, which is very helpful to see.
So, I know this is not a smooth number by any means, but first quarter looks like it was down a little bit from the last couple of quarters in terms of dollars spent on both development and acquisition. It looks like the community, I guess, acquisition was relatively steady, but you're tracking, I guess, below the $2 billion to $2.5 billion target for land spend year to date. So, is that just a timing function? Or is there -- is it getting harder to find deals to pencil? How should we think about that? Because I know, obviously, your 25 community count growth is somewhat dependent on hitting that target.
Phillippe Lord -- Chief Executive Officer
Yeah. Everything is going as planned. It's really just a timing thing. I think you'll see that timing reverse out here in Q2 and Q3.
But none of it indicates anything around our ability to go acquire the lots we need for 2026 and beyond. And we're also finding deals for 2025. So, it's really all just timing.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
I'll add one more point, Alan. This is a disclosure that comes out in the 10-Q. So, you'll see but I will just give you guys a sneak peak. You guys know that we have about -- at the end of last year, we had about 28,000 lots that some level of due diligence was still ongoing but were not counted in our actual lot totals because we hadn't committed.
That number has actually increased from 28,000 to 34,000 just in the quarter while we grew our community comp. So, the ability to find land to pencil is definitely not the issue. It's just timing of when deals were closing.
Alan Ratner -- Zelman and Associates -- Analyst
Great. That's really helpful. Thanks a lot, guys. Good luck.
Phillippe Lord -- Chief Executive Officer
Thank you.
Operator
Thank you. Next question is coming from Michael Rehaut from JPMorgan. Your line is now live.
Mike Rehaut -- JPMorgan Chase and Company -- Analyst
Great. Thanks very much. Congrats on the results. So, first question, just around gross margins.
I would love to just get a sense, and I apologize if I kind of missed some of this earlier in the call. But just what drove the actual upside in the first quarter versus prior guidance? I think part of the review that was earlier was more just focused on year over year, but was more interested in kind of zeroing in the upside in the first-quarter results versus your guidance and how that also flows through to the higher guidance for the full year. And then also on the gross margins. I believe I heard correctly that you expect 2025 gross margins to, at minimum, be similar to 2024.
And I just wanted to make sure that I heard that correctly as well.
Phillippe Lord -- Chief Executive Officer
Yes. I'll let Hilla take the second part. So, as we came into Q1 and guided to our Q1. We didn't have real visibility into the strength of spring selling season.
So, it was early into January. And obviously, the spring selling season has been very, very strong. So, as you can see from our backlog conversion rate, we were able to convert a lot more move-in ready inventory than we had initially assumed. And the demand for that move-in ready inventory was really strong.
So, we were able to take pricing. And we didn't need to use as much of the rate lock dollars we had in our assumptions to get people into those mortgages and those homes. We obviously had assumed that rate locks are still going to be heavily utilized coming into the year, and they were much less utilized. So, between backlog conversion and more leverage, ASP improvement, and then less incentive utilization, obviously, we had a beat on our margin guide.
And then I'll let Hilla talk about the guidance for 2025.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah. So, we're not providing guidance yet for 2025. We just wanted to clarify. We heard that there was maybe some confusion about the composition of our lot cost that's flowing through the financials in 2024.
If it was going to be a little bit of the noise from the higher land development cost in 2024 and some also coming in 2025. And we just wanted to clarify that pretty much everything that's running through our financials these days is fully baked in at the higher land development spend. We don't have any more pre-COVID land. So, for us, the level of lot cost as a percentage of revenue that you're seeing in our numbers in 2024, that's the new run rate until land development costs come down.
So, there's not another shoe to drop with another reduction to gross margin from land. We've not given guidance on any other component of gross margin to 2025 just quite yet.
Mike Rehaut -- JPMorgan Chase and Company -- Analyst
OK. No, I appreciate that. And I guess maybe just also looking forward, you kind of talked consistently about an accelerated rate of growth in 2025 and beyond. You're obviously looking for mid to high single digits this year.
Without getting into too many details, I mean, my impression of higher growth would be something more in the low double-digit range at minimum. And I'm just curious if that's the right way to think about that. Or could it even be something in the teens? I'm just trying to get a degree of magnitude when you talk about accelerated growth.
Phillippe Lord -- Chief Executive Officer
Are you talking about for 2025?
Mike Rehaut -- JPMorgan Chase and Company -- Analyst
Correct. Yes.
Phillippe Lord -- Chief Executive Officer
Yeah. I mean, we're obviously not prepared to give any guidance on 2025, but we're buying a lot of land. And anything less than 10% isn't really what we're targeting either, but we're just not prepared to guide to that at this point.
Mike Rehaut -- JPMorgan Chase and Company -- Analyst
OK. Fair enough. Appreciate it. Thank you.
Operator
Your next question is coming from John Lovallo from UBS. Your line is now live.
John Lovallo -- UBS -- Analyst
Hey, guys, thank you for taking my questions. The first one is not to get nitpicky, but if we look at the midpoint of the 2024 delivery outlook, it's 14,750 homes. And if we back out the first-quarter deliveries of 3,507 and then the second-quarter midpoint, sorry, of 3,700, it would imply sort of average deliveries in the third quarter and the fourth quarter of around 3,771. So, I guess is the lack of sequential step-up in delivery more a function of the business becoming a bit more even flow from a production standpoint? Is it sort of a lack of available homes in the pipeline? Or is there something else that may be kind of leveling that growth off?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah. So, that's a great point. I'm glad that you made it. Thanks, John.
So, I think we alluded to it a little bit, but maybe we'll just put a fine point on it. I'll start and Phillippe can take us from there. When you're selling and closing homes in the same period, the spring selling season results get pulled up. So, before Q4 was kind of our huge quarter where what we were selling through May got delivered 2.5 quarters later because we're now buying.
But because now we're selling and closing intra-quarter, you're seeing that same fantastic value just come up earlier into the year. It's still going to be a good Q4, but it's not really reflecting the spring selling season homes anymore. I'll let Phillippe take that as well.
Phillippe Lord -- Chief Executive Officer
Yeah, that's right. I mean, we expect that we will now see Q2 and Q3 being our biggest volume quarters with Q4 being a little more modest and then Q1, just depending on the spring selling season. So, that's going to be kind of the new cadence of our business, unlike what it was before where, usually, Q3 and Q4 were our biggest quarters.
John Lovallo -- UBS -- Analyst
Yeah. That makes a lot of sense. OK. And then, you know, you guys returned $83 million back to shareholders in the first quarter, generated a similar level of cash from operations.
I mean, as we move forward here, can we sort of think of matching cash flow with repos and dividends over the next few quarters, particularly considering no real debt due until 2025?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah. I mean, that's exactly a function of cash. Like Phillippe mentioned earlier, the timing of land development acquisitions is kind of just based on when deals are closing. So, it's not necessarily a function of operating cash flow, but it is a function of prior year profitability.
So, if you look at it, we're on target to do like in the 20s of last year's net income and return to shareholders -- return of capital to shareholders. That's kind of more of our target rather than the timing of when a deal is closing on the land side.
John Lovallo -- UBS -- Analyst
Understood. Thanks very much, guys.
Phillippe Lord -- Chief Executive Officer
Thank you.
Operator
Thank you. Our next question is coming from Susan Maklari from Goldman Sachs. Your line is now live.
Susan Maklari -- Goldman Sachs -- Analyst
Thank you. Good afternoon, everyone. My first question is you've commented on the target of taking the ASP down over time. And the guide does imply that sequentially we will see a bit of a slowdown in there.
But I guess when you think about that relative to the pricing power and the level of demand that you talked to on the ground, how are you thinking about those two factors coming together? And any thoughts on how that ASP will come through over the longer term?
Phillippe Lord -- Chief Executive Officer
Yeah. The ASP, our forward-looking ASP guidance is predicated on the land we're buying. So, if we're buying less expensive lots that can allow us to produce our product in a more affordable part of the market long-term, which is what our core strategy is, that's driving the ASP decline. But that doesn't mean we're not taking pricing when the market is elastic in that affordable segment of the market, which it has been and was very strong in Q1.
So, there are two different concepts. One is the land we're buying, and the other is what the market allows us to do.
Susan Maklari -- Goldman Sachs -- Analyst
OK. All right. That makes sense. And then I guess, you know, can you just comment a bit on what you're seeing in terms of just overall cycle times and input costs in terms of some of the sticks and bricks and anything there as we think about the forward quarters?
Phillippe Lord -- Chief Executive Officer
Yeah. As Hilla said in her opening comments, cycle times are the best they've been in a long time. We're kind of where our target is. Production capacity is really stable.
We're hitting our timelines. I'm not sure how much more there is, but capacity is real strong. So, if there's more to take out of our cycle times, we will. And then direct costs are also really quite stable.
We have -- given the size of our business at this point, we have really strong relationships that are producing great cost structure for us. Lumber has ticked up a little bit, but we've been able to offset that in other areas and the categories of the business. So, as we look out into 2024, we're modeling stable cycle times and stable direct costs.
Susan Maklari -- Goldman Sachs -- Analyst
OK. All right. That's great color. Thank you.
Good luck with everything.
Phillippe Lord -- Chief Executive Officer
Thank you.
Operator
Next question today is coming from Alex Barron from Housing Research Center. Your line is now live.
Alex Barron -- Housing Research Center -- Analyst
Yes. Thank you. I was hoping you guys could elaborate a little bit on your average buyer. Well, first of all, what percentage of the buyers are actually first-time buyers? And what does that average buyer, entry-level buyer look like, right? What's their cycle, what's their down payment, what's their average income, that type of thing?
Phillippe Lord -- Chief Executive Officer
Hilla is pulling up some more details for you. So, just give us one second, but I'll kind of reiterate what Hilla said earlier. Our FICO scores, our DTIs, everything is pretty much the same as it was. It's been the same for a long time.
We're obviously targeting a more qualified entry-level buyer. But for the most part, these are their first homes. But they have really high income levels, and they're looking for as nice a home as they can buy in a certain price point. But hang on.
Hilla will tell you the exact metrics.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah. Our first-time buyer, they don't declare themselves the first-time buyer, you can only look at back data and back into whether they're a first-time buyer or not, but our first-time buyer is about two-thirds of our business right now.
Alex Barron -- Housing Research Center -- Analyst
OK. And I was kind of interested just to see what type of income level do these people have.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah. I don't know if we're sharing the income, but you can probably back into it because the DTIs are averaging 41, 42, and we're sharing that the LTV is in the mid-80s, so you kind of take our ASP back into what the loan amount is with an 85% LTV, you can probably back into their monthly -- their average monthly income.
Alex Barron -- Housing Research Center -- Analyst
Generally?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Yeah.
Alex Barron -- Housing Research Center -- Analyst
OK.
Phillippe Lord -- Chief Executive Officer
We're not seeing our particular consumer not be able to qualify and afford our home. We don't have to do rate buydowns and rate locks to qualify them. It's more of a psychological -- we want a lower rate on a 30-year mix. It's an incentive versus a qualification.
Alex Barron -- Housing Research Center -- Analyst
Got it. And then if you can elaborate on a comment you made about the cost of incentives being lower than the forward commitment if it was like a short close if you can elaborate on that because my thought was that the forward commitment was supposed to be the lower form?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
So, a forward commitment, there's a lot -- we don't need to get into all the dynamics of how a forward commitment works. We can talk about that offline. But there's a lot of benefits using a forward commitment. You can both buy and get some locked-in rate to give you an advantage that if rates are moving on you during that period of time, you have that amount locked in.
You're not trying to lock it in based on today's date. The way that we choose to do rate locks it also disregards your LLPA, the low-level price adjustment. So, it's agnostic to what your own creditworthiness is. However, if you're doing something spot rate for a short period of time, if you have good credit, that's going to be cheaper.
So, we have an opportunity because our sales-to-close cycle time is so short, we have an opportunity for certain customers to go out into the market if the rate is favorable that day and just buy a rate lock and/or buy down for them at that point of sale that could be cheaper than a forward commitment.
Alex Barron -- Housing Research Center -- Analyst
Got it. OK. Thanks a lot.
Phillippe Lord -- Chief Executive Officer
Thank you.
Operator
Thank you. Next question today is coming from Jay McCanless from Wedbush Securities. Your line is now live.
Jay McCanless -- Wedbush Securities -- Analyst
Thanks for taking the questions. Just to clarify what you're saying earlier, Phillippe, are you guys seeing kind of the slowdown in April foot traffic and demand that some of your competitors have talked about?
Phillippe Lord -- Chief Executive Officer
No.
Jay McCanless -- Wedbush Securities -- Analyst
OK. And then in terms of pricing power, where do you think you're getting better pricing power right now? Is it on the entry-level, first-mover? How has that been trending? And I guess also, how has that been trending thus far in April?
Phillippe Lord -- Chief Executive Officer
Now, Jay, we're mostly entry level at this point, although we're trying to source some more what we call one MU land, which we're having some success doing. So, primarily, we're entry level. So, obviously, the pricing power we experienced in Q1 was entry-level pricing power. I would say to give you some more information, it's more geographical and community by community.
Certain communities, certain markets are really strong and very -- there's a lot of pricing power. And then other markets that are more price-sensitive, we don't have as much.
Jay McCanless -- Wedbush Securities -- Analyst
And then just the last question I had. With the pretty large increase that the board put in with the dividend, maybe walk me through that from a capital allocation standpoint because that seems like a pretty big burden to put on the company, especially with a cyclical industry. So, maybe some of the thought process and why make such a big increase right now, especially with rates at this point, not having affected your business, but they might in the future.
Phillippe Lord -- Chief Executive Officer
So, we talked a lot about this through our organization as well as with our board and Steve here at German. But at the end of the day, we felt that there was a benefit to returning shareholder equity in two different ways, not just buying back shares where we have a limited float but also providing a dividend. We think the dividend signals to the Street that we have tremendous conviction in the cash flow of our business. Our operating model has dramatically changed from where it was seven years ago.
You can see our backlog conversion. We're generating a much stronger cash flow quarter to quarter. And so, we felt strongly that that was the signal we needed to send to the street that we believe our operating model, our business is less cyclical than it was before. There's been a lot of conversations about the industry being rerated because our balance sheets are stronger, but we think paying a dividend tells you exactly how strong our balance sheet is.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
I think it's important to note that the dollars, while it's a very impressive increase, we just reiterated our $2 billion to $2.5 billion annual land spend commitment. Our dividends are around $100 million a year. So, I think just to put everything in perspective, that's a pretty small portion and a pretty small commitment for us to be making of the entire capital outflow for the company.
Jay McCanless -- Wedbush Securities -- Analyst
OK. Great. Thanks for taking my questions.
Phillippe Lord -- Chief Executive Officer
Thanks, Jay. Appreciate it.
Operator
Thank you. Next question is coming from Ken Zener from Seaport Research Partners. Your line is now live.
Ken Zener -- Seaport Research Partners -- Analyst
Good morning, everybody.
Phillippe Lord -- Chief Executive Officer
Good morning.
Ken Zener -- Seaport Research Partners -- Analyst
I wonder if you could go into -- look, the beat was very good, both the units and the margins. I'm just trying to understand a little more specifically backlog, I assume converted at the margins you offered at the end of January. So, it's -- and there's a certain spread there. Could you kind of talk about that implied spread? I think I can do the math, half of your units were backlog, half more closings.
So, I'm trying to get initial spread.
Phillippe Lord -- Chief Executive Officer
Obviously, you know what we guided to and then what we delivered. So, if you came into the quarter with a backlog, that's generally what we guided to, but then we closed 148% of that backlog. So, we closed an extra 2,000 houses in the quarter than we were expecting. That's the spread.
Ken Zener -- Seaport Research Partners -- Analyst
So, it seems like was it the spread on the implied margins for the spec actually improved quite a bit first what you expected plus the units, correct?
Phillippe Lord -- Chief Executive Officer
Absolutely. As we came into January, our ability and the demand for move-in ready inventory that we were able to close intra-quarter was really strong, which allowed us to increase the pricing of that product as well as use less incentives on that product.
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
And the sheer fact that we closed many homes allowed us to leverage and gain incremental benefit in the margin. So, it's a combination of all of those coming together that drove margin.
Phillippe Lord -- Chief Executive Officer
So, when we guide, we're going to guide to what we know. But if there's a big intra-quarter movement like we saw in the spring selling season, it's either going to benefit us or maybe not.
Ken Zener -- Seaport Research Partners -- Analyst
Yeah. And the reason I ask is I think where you have -- I prefer looking at inventory, so your backlog plus your spec units, but the math, it seems like you're doing like 27% gross margin on your backlog units, and it implies roughly 300 bps lower on your spec. Is that something that you would be willing to comment on?
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
I think we're getting really granular. So, we're just going to pull back from there. I think that's kind of what we said a couple of times in the Q&A, I think we're really comfortable with what we guided. That was what we knew.
The incremental volume in the intra-quarter improvement is what you're seeing come through in our actuals.
Ken Zener -- Seaport Research Partners -- Analyst
Right. No, I think it's good. I'm just trying to --
Phillippe Lord -- Chief Executive Officer
We do, too. Did you have another question? Thank you. Operator, is that it?
Operator
Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Phillippe for any further or closing comments.
Phillippe Lord -- Chief Executive Officer
Thank you, operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of your day and a great weekend. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Emily Tadano -- Vice President, Investor Relations
Steve Hilton -- Executive Chairman
Phillippe Lord -- Chief Executive Officer
Hilla Sferruzza -- Executive Vice President, Chief Financial Officer
Stephen Kim -- Evercore ISI -- Analyst
Alan Ratner -- Zelman and Associates -- Analyst
Mike Rehaut -- JPMorgan Chase and Company -- Analyst
John Lovallo -- UBS -- Analyst
Susan Maklari -- Goldman Sachs -- Analyst
Alex Barron -- Housing Research Center -- Analyst
Jay McCanless -- Wedbush Securities -- Analyst
Ken Zener -- Seaport Research Partners -- Analyst
