MHO - NYSE

Good afternoon. Thank you for attending today's M/I Homes First Quarter Earnings Conference Call. [Operator Instructions] I would now like to pass the conference over to Phil Creek with M/I Homes. Thank you. You may proceed.

Thank you. Appreciate you joining us today. On the call from Columbus, Ohio is Bob Schottenstein, our CEO and President; Derek Klutch, Head of our Mortgage Operations. First to address Regulation Fair Disclosure. We encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn it over to Bob.

Thanks, Phil. Good afternoon and thank you for joining us today. We had very strong first quarter results, highlighted by record revenue, record income and a 10% increase in homes closed. We were particularly pleased to deliver these strong results against and always changing macroeconomic landscape marked with uncertainty. As everyone knows housing conditions today are materially different than a year ago. The best example being that today's homebuyer is facing significantly higher interest rates than they were a year ago. Despite these changes in housing conditions, it is clear that there remains a strong consistent desire for homeownership. Since January 1, demand for new homes has been considerably stronger than I suspect most anyone anticipated underscoring the strength and resilience of the consumer. We feel very good about our business and believe the homebuilding industry will continue to benefit from strong fundamentals, including increased household formations and other favorable demographic trends as well as an under-supply of housing and low inventory levels. In terms of our results, our pretax income for the quarter increased 11% to a first quarter record of $136 million. Net income increased 12% to a first quarter record of $103 million. Revenue driven by the previously mentioned 10% increase in closings, along with a 6% increase in average sale price increased 16% to a first quarter record of $1 billion. Though our gross margins declined by 130 basis points to 23.5%, they frankly held up better than we had expected going into this year. The decline was primarily due to mortgage rate incentives selectively employed by us to help drive sales and closings during the first quarter. Offsetting the decline in our gross margins, our SG&A expense ratio improved by 50 basis points to 10% and that is a first quarter record. Our pretax income margin declined by 60 basis points year-over-year to 13.6%, still a very solid bottom line return considering the housing conditions. And we were proud to achieve a strong 26% return on equity during the quarter. From a sales standpoint, during our last earnings call, we shared that January of this year was our best sales month since April of 2022. I am pleased to report that February was even better than January and we were further encouraged by the continued sales improvement in demand that we saw in March. Thus far, I'm pleased to report that April is in line with March. With that said, we sold 2,171 homes during the quarter, a decline of 14% from last year. As mentioned in my opening comments, despite the current interest rate environment, we are seeing strength in buyer demand and traffic and that traffic is very solid and high quality, both in our communities and online. During the quarter, we were operating on average in 13% more communities than a year ago. We are on track to open a number of new communities this year and expect to increase our community count for the year by 15% over 2022. Now, I'll provide some additional comments on our markets. Our division income contributions in the first quarter were led by very strong performance in Dallas, Columbus, Tampa, Charlotte, Orlando and Sarasota. Sales for the first quarter in the Northern region decreased by 30% while sales in the Southern region increased by 1%. To provide a bit more color on our sales, we have seen good consistent demand in all of our Florida markets, as well as in Charlotte and Raleigh. Texas has also been very steady with the exception of Austin, which was red hot a year ago and has been a bit choppy thus far in 2023. The Midwest is a bit of a mixed bag. For example, Columbus and Chicago have seen good quality consistent demand and good sales performance while Indianapolis and Minneapolis have been slightly more challenging. Our deliveries in the Southern region increased 14% from a year ago and our deliveries in the Northern region increased by 5% from last year. A 60% of deliveries came out of the South, 40% out of the North. Our owned and controlled lot position in the Southern Region decreased by 15% compared to a year ago and decreased by 2% from last year in the Northern region. A 37% of our owned and controlled lots are in the North, the other 63% in the South. That said, I want to emphasize that we have a very strong land position, in terms of both the quantity of land and the quality of that land. Company-wide, we own approximately 24,000 lots, which is roughly a three-year supply. Of that total, 32% of the owned lots are in the North, 68% in the South. On top of the owned lots, we control pursuant to option contracts, an additional 17,000 lots. In total therefore, our owned and controlled lots increased 11% year-over-year to approximately 41,000 lots, roughly a five-year supply. Significantly, almost half of the lots that we own and control, roughly 42% are controlled under option contracts, which gives us that important flexibility to react to changes in demand or changes in individual market conditions. In regards to our balance sheet, let me just simply say, it has never been stronger. We ended the first quarter of 2023 with an all-time record $2.2 billion of equity, which equates to a book value per share of $79. We also ended the quarter with a cash balance of $543 million and zero borrowings under our $650 million unsecured revolving credit facility, thus giving us very significant liquidity. All of this resulted in a debt-to-capital ratio of 24% down from 29% a year ago and a net debt-to-capital ratio of 6%. As I conclude, let me just state that we are in the best financial condition in our 47-year history and despite the uncertainty surrounding the general economy, M/I Homes is very well positioned to have another year of strong results in 2023. With that, I'll turn the call over to Phil.

Thanks, Bob. Our new contracts were down 18% in January, down 18% in February and down 6% in March. And our cancellation rate for the first quarter was 13%. A 54% of our first quarter sales were to first-time buyers and 58% were inventory homes. Our community count was 200 at the end of the first quarter compared to 176 a year ago. The breakdown by region is 104 in the North and 96 in the Southern region. During the quarter, we opened 19 new communities and closed 15. We currently estimate ending 2023 with about 225 communities. We delivered 2007 homes in the first quarter, delivering 64% of our backlog and at March 31, we had 4100 homes in the field, versus 5700 homes in the field a year ago. Revenue increased 16% in the first quarter, reaching a first quarter record of $1 billion. Our average closing price for the first quarter was a first quarter record of 486,000, a 6% increase when compared to last year's first quarter average closing price of 457,000. And backlog average sale price is $522,000 which is also a first quarter record, up from $505,000 a year ago. Our first quarter gross margins were 23.5%, down 130 basis points year-over-year. Our construction cost were flat in the first quarter compared to last year's fourth quarter and we are starting to get improvement in our building cycle time. Our first quarter SG&A expenses were 10% of revenue, a first quarter record, improving 50 basis points compared to 10.5% a year ago. Interest income for the quarter was $1.3 million and our interest incurred was $7 million. Our pretax income was 14% and our return on equity was 26%. We're pleased with our returns. And during the quarter, we generated $147 million of EBITDA compared to $135 million in last year's first quarter. Our effective tax rate was 24% in the first quarter compared to 25% in last year's first quarter. And our earnings per diluted share for the quarter increased to $3.64 per share from $3.16 per share last year, up 15%. And our book value per share is now $79, a $19 per share increase from a year ago. We did not buy any stock back during the first quarter. Since 2021's third quarter, we have repurchased 2 million shares, spending $107 million and we bought back about 7% of the outstanding shares. Now, Derek Klutch will address our Mortgage Company results.

Thanks, Phil. Our mortgage and title operations achieved pretax income of $12.6 million compared with $13.1 million in 2022's first quarter. Revenue increased 5% from last year to $25.3 million due to slightly higher margins on loans sold and an increase in the average loan amount compared to the prior year. The average loan to value on our first mortgages for the first quarter was 83%, which was slightly lower than last year. The 81% of the loans closed in the quarter were conventional and 19% FHA or VA compared to 77% and 23% respectively for 2022's first quarter. Our average mortgage amount increased to $393,000 in 2023's first quarter compared to $377,000 last year. Loans originated decreased to 1258, which was down 1% from last year, while the volume of loans sold decreased by 7%. Our borrower profile remains solid with an average down payment of over 17% and an average credit score on mortgages originated by M/I Financial of 746 compared to 747 in 2022's first quarter. Our mortgage operation captured 78% of our business in the first quarter compared to 82% last year and we maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors. At March 31, we had a total of $224 million outstanding under these facilities, which expire in May and October this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now, I will turn the call back over to Phil.

Thanks, Derek. For the balance sheet, we ended the first quarter with a cash balance of $543 million and no borrowings under our unsecured revolving credit facility. We have one of the lowest debt levels of the public homebuilders and are positioned well with our maturities. Our bank line matures in late 2026 and our public debt maturities are in 2028 and 2030 with interest rates below 5%. Our unsold land investment at the end of the quarter was $1.3 billion compared to $1.1 billion a year ago. We had $650 million of raw land and land under development and $600 million of finished unsold lots. During the first quarter, we spent $46 million on land purchases and $92 million on land development for a total of $138 million. And at the end of the quarter, we owned 24,000 lots and controlled 41,000 lots. Also at the end of the quarter, we had 432 completed inventory homes and 1,551 total inventory homes. And of the total inventory, 730 were in the Northern region and 821 were in the Southern region. A year ago, we had 75 completed inventory homes and 1,224 total inventory homes. This completes our presentation, we will now open the call for any questions or comments.

[Operator Instructions] The first question is from the line of Jesse Lederman with

Hi there, thanks for taking my questions and congrats on the strong quarter.

Thanks, Jesse.

So last quarter, you noted you were limiting sales in a small number of communities. So my first question is kind of twofold, one is how is pricing power today across your footprint? And are you able to maybe quantify the share of communities in which you're increasing prices or even pulling back on incentives? And the second part of that question is now limiting sales perhaps suggest you're worried about land availability and lot availability going forward, but your land acquisition and lot acquisition spending declined again during the quarter as you just mentioned. So, what will it take for you to return to the land market with little more vigor?

Well, I don't know if this is the order in which you asked it, but I'll take some of that I can't quantify, maybe Phil can or others listening in can. I can't quantify the number of communities where we think we have pricing power, but there are some where we're starting to get it. I think the markets are settling a bit, settling into -- buyers getting used to these interest rates in the upper-5s to mid-6s. We're really pleased with the level of demand in traffic that we've seen essentially since the very end of December of last year and it's continued as I mentioned thus far in April. Little bit of choppiness in a few markets. As far as limiting sales go, it's a handful of communities. We've got over 200 communities, it's in less than 10%, but in those communities, we could have sold more and the reason we haven't is not because of land and lot availability, it's strictly because of delivery and supply chain and being able to protect our costs. And even though I think that that problem has peaked and it's gotten considerably better, there still are inflationary pressures that come out of nowhere. Numbers have been a bit of a roller coaster. It's good now but it could just as quickly turn back up and there are some indications that it might be. So, we don't want to get too far out ahead of ourselves. We're very pleased with our margins for the first quarter. We did have to discount a little to get some people across the closing line with financing and so forth, and I mentioned that in my comments. The majority of our markets buy a lot, we're in 17 markets. We're not quite officially open yet for sale in Nashville and we've just sold less than four or five in Fort Myers, Naples, so we are actually open there, but it's an immaterial amount. The other 15 markets, 10, 11, 12 of them are performing at very high levels for us. Dallas is very strong. Demand in Houston has been very good. Orlando, Tampa, Sarasota, Raleigh, Charlotte, Columbus, Chicago, Indianapolis, and Minneapolis, we're a little up and down. I think they're heading back towards to where they should be. We're very, very pleased with where things are. We did not think we would be able to say all the good things we said three months ago, but we know we've got good communities. We knew they would hold up well whether the market was thick, thin or really thin. And right now, I would say, demand is about anywhere from a B-minus in some markets to a B-plus and others and it's very manageable and enhanced, I think we were able to post some pretty strong numbers in the bottom line.

That's really helpful. Thank you. Just one quick follow-up on that before my second question. Are you actually raising prices in any of your markets given the stronger-than-expected demand that you're seeing?

It's a subdivision business. And I suspect there is a few communities where we're raising prices. I don't think it's a significant percentage. My guess is, it's -- I'm guessing a little bit because I don't know the exact number, but I'm guessing it somewhere between 5% and 10%. And we have new community openings, so those communities, it's important to know we don't have to worry about the backlog and we're able to open up it and plan for targeted margins in which they were underwritten. And our new communities, we're very pleased with how they're performing. I think housing in general is under-appreciated by the market and hopefully, you and your cohorts can convince the market that this is a pretty damn good industry and it should be for the next most of the years during the next 10, I'd bet on housing.

Got it and thanks for that. My last question is just in terms of, as you mentioned your closings increased by a pretty healthy percentage in the first quarter, which was very impressive and we assume a lot of that was driven by specs that you kind of had built up late last year and throughout the first quarter. I think I missed some of your numbers related to homes in the field and whatnot. But I think it would be helpful just to understand the kind of run rate on deliveries from the rest of the year that's pretty dependent on how many specs you've got built up and your ability to continue ramping those up to the extent you did for your first quarter deliveries. Can you kind of talk about the cadence and maybe your spec supply and how you see that kind of playing out through the rest of the year?

Yes, this is Phillip, basically happened was that with sales being weak in the second half of last year, we significantly slowed down starts. We also ended up with a low higher level of finished specs. And one of the reasons our first quarter was stronger than we thought was with our sales picking up the first quarter, we talked about 58% of our first quarter sales being specs and a number of those specs, we not only got sold, we got closed. We are increasing starts more now, but we did in the quarter as I said in my remarks, with 4100 houses in the field versus 5700 a year ago. So first quarter closings again were stronger than we thought. We're doing all we can to close as many houses as we can obviously in the second quarter, third quarter, et cetera, but it will be a little bit of an unusual year in that normally closings kind of tend to increase as you go through the year. The second and third quarter will be a little bit choppier for us because we have 1600 less houses in the field. But again with the demand we're seeing that Bob talked about and store count increasing on average about 15% in most of our divisions, if we get houses in the field in May and June, we can still get them closed this year. So, we're still excited about where we are and still thinking we're going to have a strong closing and income year but the closing cadence will be a little bit different with the second and third quarter being a little bit lower than it has in the past.

Thanks so much Phil and Bob. I appreciate the color.

Thanks.

Thank you. The next question is from the line of Jay McCanless with Wedbush Securities. You may proceed.

Hi. Thanks for taking my questions. Phil, actually, you didn't realize it but you actually answered my first question I was going to ask you if we should expect a little dip in closing sequentially. It sounds like that's how it's lining up?

Yes. I mean if you look at it, Jay, again would have been 1600 houses less in the field at 3/31 versus a year ago. Now, we do have 400 or so finished specs and we're doing all we can to get those sold and closed, but we will be a little challenged in the second and third quarter when you compare that level of closings, what we did in the first quarter, but again with the demand way it is and some improvement in the cycle time, which we're starting to see, we're still expecting to have decent closings, don't give me wrong, with the second and third closings, but we're hoping the fourth quarter will go back up.

Got it. So where are you? I mean it sounds like you're down and maybe six, seven months based on what Bob said about if you get a house in the field by May or June, you can still close it this year.

It depends.

I actually didn't say that.

I did. I did. It depends on the...

And I agree with it.

It depends when you look at Houston and San Antonio with primarily Smart Series type houses. You can see some housing start even in June and July and get closed. Some of our larger houses, et cetera, they may need to be in the field in April or May. So it depends a little bit. But again, we're still expecting to have a strong year.

That's great. And then on Smart Series and I apologize if I missed it, did you all give the percentages this quarter of what percentage for Smart Series sales?

I didn't, but I'm happy to do it right now. It continues to go up. A year ago, it was in the low to mid-40s and today it's in the low to mid-50s. I think it's like 53%, 54%. I've got it here somewhere. And last year at this time, I think it was around 43%, 44%. It continues to be a very important part of our business. But by the way, I mean, the other way to think about it is, half of our business is not. So that's also important. And we love the diversity of our product offering and we think it's a strength and we'll continue to push it as hard as we can push it.

And if you look at the average sale price of the Smart Series, Jay, these days it is little over 400,000 and it continues to be above company average in GP and also in pace, so that's a good thing.

Absolutely. And then going back to, I think, the comments where you said that the gross margin in 1Q came in better than what you were expecting. What were you guys expecting for the quarter?

Well, look the same thing everyone else was expecting. We weren't really sure. The last three months of 2022, demand was significantly more challenging than it turned out to be beginning in January. And sticker shock from rate increases was in full bloom and we weren't sure what we'd have to do to hold the backlog together. And we didn't know if they would drop 200 basis points, perhaps as much as three in certain markets and as it turned out, I'd like to think it's due to several factors. Quality buyers, creditworthy buyers, good execution on our part and also demand improved. And the improvement in general of macro demand has been huge for the industry and us. If you too said to me back in the fourth quarter you think your margins will be approaching 24% in Q1, knowing what I knew now then I would have said no shot. And I think by the way, we did get that question asked during our last call, maybe the one before and we talked about things trending down closer to 21%, 22%. So, we were wrong. I'm glad we were wrong in this way because it helps generate a lot more income and I think that's where the EPS so-called surprise came from and also the additional closings.

Yes. If you look at it, Jay, if you look at the fourth quarter of last year, excluding the $20 million of impairments we took in the fourth quarter of last year, the GP was 24.1, we were 23.5 the first quarter. So, we were only down 60 basis points. I mean like Bob said, we thought that might be 150 to 200 basis points. We just weren't sure. We are selling and closing more spec homes than we have in the past and that's kind of hard to estimate. As far as the ASP on closings was 4.92% in the fourth quarter of last year, 4.86% the first quarter, down 1%, we thought that might be down a little bit more so that benefited us. When you look from a sales standpoint, the first quarter sales, the ASP was 480. So, it seems like things have stabilized a little bit, a little more than we thought, a big thing to us as those 19 stores we opened are doing even a little better than we thought and we obviously have plans to increase the number of stores this year new because we're going to increase stores by 15% on average. So, we'd like to be closing more houses in the second and third quarter, but we still should have good solid quarters and still thinking we're going to have a really good year.

Great. And then I guess, when you're talking about...

I think there was - I'm not sure. Hey Jay, I'm just sorry to interrupt you, but it just occurred to me that one of the questions that might have been asked by

Got it, And then. No worries. So, I guess where is the differential now on spec gross margin versus to be built?

The last couple of quarters in general, this has been about 200 basis points as far as specs being lower than to be built. But again, that moves around some, but that's kind of what it's been recently.

And then last question from me, I guess if you look at what's in backlog right now, is it still that same 58% that you did in terms of spec for the first quarter or is that a lower number? And do you think carrying the same type of gross margin sequentially is that possible achievable, et cetera?

It's hard, I mean obviously what's in backlog or sold houses. As far as specs, we feel good about our spec levels. As I've said before, we have whatever over 400 finished specs. We are trying to move those finished specs to the system sooner because we have 1600 less houses in the field. So, it's always hard to predict what margins and what ASP are going to be on the specs. Our hair is not on fire, it's not like we have to do anything, but would discontinue making the best decisions that we need to, to get through that spec inventory.

Okay, great. Thanks for taking my questions.

Thanks, Jay.

Thank you. There are no further questions in queue. [Operator Instructions] There are no further questions in queue. I'd like to turn the call back over to Phil Creek for concluding remarks.

Thank you very much for joining us. Look forward to talking to you next quarter.