Bob Schottenstein - Chief Executive Officer, President Phil Creek - Executive Vice President, Chief Financial Officer Tom Mason - Executive Vice President Derek Klutch - President of our Mortgage Company Ann Marie Hunker - Vice President, Corporate Controller Kevin Hake - Senior Vice President.

Alan Ratner - Zelman & Associates Jay McCanless - Wedbush.

Good afternoon and welcome to the M/I Homes, Third Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the conference over to Phil Creek. Please go ahead..

Thank you for joining us. On the call today is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Corporate Controller; and Kevin Hake, our Senior VP.

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 non-public 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.

Also during this call we disclose certain non-GAAP financial measures.

A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is also available on our website. With that, I’ll turn the call over to Bob..

Thank you Phil. Good afternoon and thank you all for joining us to review our third quarter results.

We reported another strong quarter, highlighted by record new contracts, record deliveries, record revenues, income growth and improved profitability and we achieved our strong performance notwithstanding the impact of hurricanes in our Florida and Huston markets.

Whilst hurricanes delayed approximately 20 third quarter deliveries, slowed down sales somewhat and caused nearly three quarters of $1 million in expenses. For the quarter new contracts increased 13% year-over-year to a record 1,225 homes. For the first nine months of this year, we have sold a record 4,079 homes, which is 9% better than last year.

Homes delivered during the quarter increased 9% to a record 1,256 homes. For the first nine months homes delivered increased 14% to 3,505 homes. Revenues for the third quarter increased 8% to a third quarter record of $476 million.

Homes and backlog at the end of the quarter increased by 7% to 2,378 homes with a backlog sales value of $912 million, which is 11% better than last year. Net income for the quarter increased 12% excluding the impact of some stucco related charges that were incurred last year during the third quarter of 2016.

Gross margins for the quarter came in at 21.4% consistent with this year’s second quarter, but 30 basis points higher than last year’s third quarter, and M/I Financial, our financial services business also had a very strong quarter with pre-tax income of $5.2 million and record quarter revenues.

Derek Klutch, the President of our Mortgage operation will discuss this in more detail momentarily. Our balance sheet, liquidity also remained very strong. We ended the quarter with a healthy home building debt to capital ratio of 47%.

Before I review our specific markets and regional performance, let me say that housing conditions remain favorable in most of our markets. We feel very good about our business and are pleased with our performance thus far in 2017.

Given the strength of our backlog and the quality of our operations, we are clearly optimistic about the balance of the year and believe that M/I Homes is well positioned for continued solid results. Now, with respect to our specific markets and our regions, beginning with the southern region.

This is comprised of our three Florida and four Texas markets. In this region we delivered 520 homes during the quarter, which represents a 27% increase over last year and 41% of total company volume. New contracts in the southern region increased 33% during the quarter.

While Texas and Florida sales and deliveries clearly improved year-over-year, as I mentioned earlier the impact of hurricanes in these markets delayed third quarter deliveries and also slightly impacted sales.

The dollar value of our sales backlog in the southern region at the end of the quarter was 22% higher than last year, and our controlled lot position in the southern region increased to 34% compared to a year ago.

We had 85 communities in the southern region at the end of the quarter, which is 15% more than last year, and as to our four Texas divisions, we had 55 communities at the end of the quarter versus 46 communities a year ago. We continue to make progress toward our goal of achieving better sale in our four Texas markets.

Sarasota is growing and making really good progress in its first full year of operation, and Orlando and Tampa continue to be amongst our best markets. In particular in Tampa we continue to be very pleased with the performance of our more affordable Smart Series community.

Next the Midwest region, which consists of Columbus, Cincinnati, Indianapolis, Chicago and Minneapolis. We delivered 461 homes in the third quarter, which is 4% more than the year ago and 37% of total company volume. New contracts in this region were up 13% for the quarter.

We are very pleased with the results in our new Minneapolis division where we saw sales increase significantly year over year. Our other Midwestern markets also continue to perform very well and like Tampa our new affordable Smart Series community in Columbus continues to have strong traffic and strong sales since opening earlier this year.

Our sales backlog in the Midwest was up 17% from the end of the third quarter in dollar value and our controlled lot position in the Midwest increased 4% compared to a year ago. We ended the quarter with 62 active communities in the Midwest, 3% higher than a year ago.

Raleigh and Charlotte have – moving to the Mid-Atlantic region I should say, Raleigh and Charlotte have been strong markets for us for the past several years and we continue to feel very good about both operations.

We have experienced a modest falloff in sales in both Charlotte and Raleigh this year and that’s a falloff continued into the third quarter. But I should note that the level of sales and overall market demand in each of these two North Carolina markets remains healthy.

We did sellout of a number of communities in North Carolina earlier this year and have less communities at the present time than we did a year ago. That has contributed also to the sales falloff. The DC market continues to be challenging.

We have reduced our investment level in Washington DC and we have also reduced the number of active communities that we have for sale in that market. Our absorption pace in DC actually improved in the third quarter compared to a year ago but still remains below targeted sales levels.

The net and net of all these factors in the Mid Atlantic region was that new contracts were down 25% for the quarter compared with last year and sales backlog as well was down, 20% compared with a year ago. Our average community count in this region is down approximately 18% from a year ago.

We delivered 275 homes in the Mid-Atlantic region during the third quarter, which was a 7% decrease from 2016 and this comprises 22% of total company volume. Our total control lots in the Mid-Atlantic region at the end of the quarter increased slightly, 2% compared to last year.

And with that I’ll turn it over to Phil for a more thorough review of our financial results. .

Thanks Bob. We continue to focus on increasing our profitability along with improving our returns. New contracts for the third quarter increased 13% to a record third quarter level of 1,225. Our traffic for the quarter was down 3% and our community count was up 3%. Our new contracts were up 18% in July up 5% in August and up 15% in September.

As to our [borrowers] profile, about 38% of our third quarter sales were the first time buyers compared to 35% in ’17 second quarter and 45% of third quarter sales were inventory homes, which is the same percentage as ’17 second quarter. Our active communities were 179 at the end of the third quarter.

To break it down by region its 62 in the Midwest, 85 in the south and 32 in the Mid-Atlantic. During the quarter we opened six new communities while closing 14.

We estimate that our average community count for the year should be up about 5% over 2016 levels and we delivered 1,256 homes in the third quarter, delivering 52% of our backlog compared to 50% a year ago. Revenue increased 8% in the third quarter, reaching a third quarter record of $476 million.

This increase was primarily the result of an increase in the number of homes delivered as well as record third quarter revenue from our financial services operation. Our average closing price for the third quarter was $366,000 compared to last year’s $365,000 and our backlog average sale price is $383,000 up 4% from a year ago.

Land gross profit was $365,000 in the third quarter compared to $1.1 million in last year’s third quarter. We sell land as part of our land management strategy and as we see profit opportunities. Our third quarter gross margin was 21.4%, up 30 basis points over ’16 third quarter excluding the impact of the last years stucco related charges.

We estimate that labor and material costs were up about 1% in the third quarter. Currently lumber and drywall cost pressures are increasing. Our third quarter SG&A expenses were 13.1% of revenue. This year was negatively impacted by the hurricanes and also by $1.3 million of increased land related expenses.

These were due primarily to an increase in abandoned projects, real-estate taxes and cost associated with the increase in our community count. Interest expense increased $1.1 million from the quarter compared to last year. An interest incurred for the quarter was $9.9 million compared to $7.9 million a year ago.

We have $18 million in capitalized interest on our balance sheet, about 1% of total assets and our affected tax rate was 36% in this year’s third quarter and we estimate our annual effective rate to be 35%. Our earnings per diluted share for the quarter was $0.64 per share.

Diluted earnings per share reflects a $2.3 million noncash equity charge, about $0.07 per share, related to the reduction of our preferred stock which was announced in September and completed in October. Now Derek Klutch will address our mortgage company results..

Thanks Phil. Our mortgage and title operations pre-tax income decreased slightly from $5.4 million in 2016’s third quarter to $5.2 million in the same period in 2017. While our third quarter results included increase in the number of loans originated and sold, this was offset by higher payroll and computer related expenses.

The loan to value of our first mortgages for the third quarter was 82% in 2017, down from 2016 third quarter of 83%. 76% of the loans closed were conventional and 24% were FHA or VA. This compares to 78% and 22% respectively for 2016 same period. Our average mortgage amount decreased to $292,000 in 2017’s third quarter compared to $295,000 in 2016.

Loans originated increased 6% from 848 to 902 and the volume of loans sold increased by 5%. This quarter, the average borrower credit score on mortgages originated by M/I Financial was 740, up slightly from 739 a quarter earlier. Our mortgage operations captured about 80% of our business in the third quarter, compared to 2016’s 85%.

At September 30 we had $63 million outstanding under the MIF warehouse agreements, which is a $125 million commitment and we have $28 million outstanding under a separate $35 million repo facility.

Those facilities are typical 364 day mortgage warehouse lines that we extend annually and we expect to extend the repo facility prior to its expiration date at the end of this month. Now I’ll turn the call back over to Phil. .

Thanks Derek. We continue to manage our balance sheet carefully focusing on investing in new communities, while also manage our capital structure.

Total home building inventory in 9/30/17 was $1.5 billion, an increase of $231 million above last year’s levels, increased primarily due to higher investment level in our backlog, higher community count and more finish lots. Our unsold land investment at 9/30/17 is $645 million, compared to $538 a year ago.

At September 30 we had $271 million of raw land and land under development and $374 million of finished unsold lots. We owned 4,664 unsold finish lots with an average of 80,000 per lot and this average lot cost is 21% of our 383,000 backlog average sale price. Our goal is to maintain about one year’s supply of our owned finished lots.

The market breakdown of our $645 million of unsold land is $229 million in the Midwest, $283 million in the south and $133 million in the Mid-Atlantic. Lots owned and controlled as of 9/30/17 totaled 26,863 lots, 43% of which were owned and 57% under contract.

We own 11,449 lots of which 40% are in the Midwest, 45% in the south and 15% in the Mid-Atlantic. A year ago we owned 10,127 lots and controlled an additional 13,092 lots for a total of 23,219 lots.

During this year’s third quarter we spent $65 million on land purchases, and $54 million on land development for a total of $119 million and about 30% of the purchase amount was raw land. Our estimate for 2017 land purchase and development spending is $525 million to $550 million, which includes the $387 million spent year-to-date.

At the end of the quarter we had 413 completed inventory homes, which is about two per community and 1,168 total inventory homes. And of the total inventory 369 are in the Midwest, 592 in the southern region and 207 in the Mid-Atlantic. At 9/30/16 we had 282 completed inventory homes and 973 total inventory homes.

We continue to focus on managing our leverage and liquidity and balancing this with our land position needs.

During the quarter we further strengthened our balance sheet by issuing $250 million of eight year senior notes, converted $58 million of convertible notes into equity, had announced the redemption of 50 million of preferred shares which was completed in October.

Our financial condition continues to be strong with $104 million of cash, no outstanding borrowings under our $475 million credit facility and shareholders’ equity of 723 million and a 47% home building debt to Cap rate. With that, that completes our presentation. We’ll now open the calls for any questions of comments. .

[Operator Instructions]. Your first question comes from Alan Ratner from Zelman & Associates..

Hey guys, good afternoon. A great quarter. Congratulations! Bob, my first question, you made a comment that your labor and material costs were only up 1% year-over-year which is pretty surprising. Other builders have talked about higher levels of inflation on the cost side.

So was curious if maybe you could expand on that a little bit, what you guys are doing to keep that cost pressure so low? And maybe just talk a little bit on the other side about your pricing power and how that compares to cost inflation? I assume you’re seeing an ability of push price a bit more than that 1%, so I’m curious what that means for the margin going forward? Thank you..

First, thank you for your comments about the quarter. Phil was the one that commented on the pricing increase and the pricing pressures and maybe I’ll let him begin answering that question and then if necessary I’ll add to it..

Yeah, Alan as far as the 1% number I gave you, it was actually the increase in just the third quarter. It was about 1,500 per home. It looks like about 70% material, about 30% labor. I also made the comment that we are seeing more pressures in certain areas such as lumber, also certain materials and so forth, every market is a little bit different.

But overall we have been pleased with our margins, always trying to work hard and improve those, but there are you know a few more pressures out there today than there has been..

The other thing I’d add is I think it’s been pretty well documented and commented on by other builders here over the last week or so, and I would concur with much of what’s been said in terms of the impact, at least in Houston and some of the Florida markets from the hurricane on what it’s doing with labor and cost pressures in those impacted markets.

The other thing I’d say is at the beginning of the year if someone had said you believe that your third quarter gross margins would be higher than the third quarter of last year, I would have thought no, because we were beginning to see pricing pressures then and while demand was good, we weren’t sure if it was enough to give us pricing power.

I think we’ve see a little bit of pricing power, but it’s very, very hard to draw a clear reason why you see at certain places and not others.

I think it’s very subdivision specific and the other area where we’re seeing continued pricing pressure and I think where we’re seeing it now where I think it will continue and I believe we commented on this during the last quarter’s call is on the land development side, which is a combination of both impact these, but also just the direct heart land development costs associated with excavation and pipe and sewer and water lines..

Got it. I appreciate all that detailed response there guys. So then on the land side, if I could segway, I think Phil you mentioned you’re probably going to come in at the lower end of the range for community count growth closer to 5% for the year, but you’ve made some nice progress on continuing to grow the lot count.

You have been trending up double digits there. So I was curious if maybe you could just spend a minute talking about what you’re seeing on the land market. You mentioned the development cost going up, but you have been successful optioning almost 60% of your land.

So are you seeing a continued willingness from developers to do the development work and auction you those lots on decent terms or has that tightened up at all given the increase in inflation..

Let me say something about the community count and Bob can talk about the land side. As far as community count Alan, you know we are now saying about a 5% adverse for the year. Previously we had it at 5% to 10%. We thought we would open a few more communities in the third quarter than we did. We did have a little bit of impact from the hurricanes.

Also had a couple of site development that didn’t quite get done as soon as we thought, but also we have been selling out of certain communities faster than we thought you know with our strong sales. So that’s kind of led us overall to that 5% growth for the year. As far as the land side of it, I’ll let Bob take that..

You know I mean I think – I don’t think it’s really changed much over the last number of quarters. In most of our markets intensely competitive, it’s increasingly more difficult to find finished lot deals.

There are certain markets and you know for the most part they tend to be in Texas where we think we have some pretty good and are excited about coming on communities that our master-planned developments were able to buy lots on a takedown basis. But, we haven’t changed our strategy.

We are focused first and foremost on trying to get the best locations we can and if it means you know not being able to buy finished lots, if the deal still cancels and meet our hurdle rates and so forth, you know then we’re going to go at them very strong.

But we really feel good about our land position, particularly the fact that we control, I think a very appropriate number of lots with less than half of them on our books today and I think that that compares very favorably with the industry in terms of, just balancing of the risk associated with land.

You know we have been and I think always will be a location driven business. It’s not the only thing that matters but you know I guess in gone with the wind land was the only thing that matters.

But it matters a hell of a lot in home building as well and with the right locations you can get a lot done and then it’s a big focus on our business, but very competitive. I don’t think it’s likely that our ability to buy finished lots is going to increase. We hope we can keep it where it is..

Great, thanks a lot guys. I’ll get back in the queue..

[Operator Instructions] Your next question is from Jay McCanless from Wedbush..

Hi, good afternoon everyone..

Hey Jay..

Hey. The first question I had and you talked a little bit about this in the prepared remarks, but SG&A in total is up about $5.5 million versus last year’s third quarter.

Is the $1.3 million in land charges and the $700,000 of hurricane remediation, is it included as part of that increase year-over-year?.

Jay to answer the first part, the land related increase of $1.3 million is all in SG&A. Again that’s abandoned projects, higher real estate taxes, HOA dues, those types of things. The $700,000 of community clean up model, the majority of that went through the margin line, but some did go through the SG&A line.

Also impacting that percentage is if we had delivered those 20 or so drop closings, again that would have been another you know $7 million or $8 million of revenue that would have helped. But our variable selling was a little bit higher if you higher commissions this year from last year. So all those things kind of contributed to that SG&A number..

Okay, and that actually leads into my next question I was going to ask.

Are you guys trying to pay a little more co-broker in some markets to drive demand and actually – well I’ve got another one for that, but are you guys paying up in certain markets to get some projects completed?.

Not really. We’re not really doing any. Jay, its Bob Schottenstein. We’re not really doing anything differently when it comes to that. I really appreciate your question about SG&A.

It remains – it’s come down quite a bit over the last few years as we’ve grown some of our newer divisions and are increasingly getting scale in some of our newer divisions and we still have two or three or four divisions that are less than a couple of years old and we remain very focused on continuing to get operating leverage as we go forward..

Got it, okay. And then just a modeling question.

With the redemption of the preferred is there going to be any preferred dividend that comes through in the fourth quarter or is third quarter going to be the end of this?.

Jay, its Kevin. We accrued the amount of dividend that would be paid when we took it out, which was October 15, so there will be none in the fourth quarter..

Okay, great. That’s all the questions I had, thank you..

Thank you so much Jay..

Your next question is a follow up of Alan Ratner of Zelman & Associates..

Hey guys, thanks for taking another question for me. I just wanted to ask about the balance sheet and obviously you guys made some great strides to simplify and improve the liquidity position this quarter.

As I look forwards you have the converts that you know if the stock continues on this nice run here, we’ll be in a position to convert the equity next year and that would bring your leverage ratio you know kind of into the 30’s, which is one of the lower levels we’ve seen in quite a while.

So just curious kind of how you’re thinking about the business right now? With the liquidity you have, you know how does the M&A environment look right now? I know you’ve been inquisitive in the years and also ventured in a number of new markets organically.

So curious if that’s something that your looking to pursue with the extra liquidity or if there is some other use of the cash that we should be thinking about?.

Well, I’m going to take a crack as far as that and then Kevin and Phil may want to jump on this Alan.

You know at the beginning of the year we said that we expected to increase community count by 5% to 10% and spend between $500 million and $550 million on land and we believe that housing conditions are good right now and are likely to remain so, at least over the next year or two.

Maybe in the longer – nobody knows for sure, but you got to come down somewhere in terms of how your operating a business and we were optimistic not just about our own business, but we’re optimistic about housing conditions over the next several years.

If you look at our growth rate over the last few years, we would like to believe that we can continue to grow and add that much in terms of units and so forth as we look out here over the next 12 to 24 months and that’s our goal. So, having a strong balance sheet that will allow us to do it.

I think you know job one is to continue to gain market share in our existing markets which I’m not going to say we’re doing that at all 15, but we’re doing that in almost all of them and we’d like to think we can continue to do that and we also continue opportunistically as we have in the past to look at additional markets.

I mean there’s a lot of places that we aren’t and where we believe we could be very competitive and contribute you know to the growth of the company. So that sort of an overall strategic assessment of how we think about things. Kevin, I don’t know if you want to add anything to what I said..

No, I mean we – you know just in terms of convertibles next year, we share your enthusiasm for the shares moving, up but still it would be about $32 before they converge, so we’ll have to wait and see, but did those actually convert to equity.

We’re generally comfortable whit where we are right now, but we do – even without standing over here and she was probably seeing for the open ended markets fairly steadily looking for opportunities.

We don’t feel we have to do anything, but even in our current plans for our current markets we do expect to continue to grow, so we’ll have a look through next year where we see our leverage going, but we are very comfortable with it currently in sort of the low 40’s..

Right, okay guys. Thanks a lot and good luck..

Thank you..

There are no further questions..

Thank you very much for joining us. We look forward to talking to you at year end..

Thank you. That does conclude today’s conference call and you may now disconnect..