Q4 2021 M/I Homes Inc Earnings Call
Ladies and gentlemen, thanks for your patience with school districts talking a couple of minutes time.
[music].
Hello, and welcome to the <unk> fourth quarter Conference call. My name is elliott's might be COVID-19, you'll call. Today. If you would like to register a question. During your presentation you might take to strike by pressing star followed by one on your telephone keypad.
I would now like to hand over to our host Phil Creek at that mine.
Please go ahead when you're ready.
Thank you. Thank you for joining us today, joining me on the call is Bob Schottenstein, our CEO and President Susan Crony, our SVP and Chief Legal Officer, Derek <unk> President of our mortgage company and Marie Hunker, Our VP, Chief Accounting officer, and Mark <unk>, our VP and Treasurer <unk>.
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, Bill Good afternoon, and thank you for joining us today.
2021 was an outstanding year for <unk> homes highlighted by record revenue record homes delivered record income and record year end backlog.
We are very proud of our results.
They are a clear reflection of strong Matt.
Macro housing conditions as well as the extraordinary effort put forth by our entire <unk> team across all of our markets.
The strength of the U S housing markets is well documented.
Although mortgage rates have recently been on the rise they remain at or near historical lows.
In addition inventory levels are at or near historical lows.
More and more millennials are moving into home ownership in fact recent Freddie Mac data suggests that during the past year.
The percentage of first time buyers securing a mortgage reached a near 25 year high approaching 45% fuel.
Fueled by ever increasing millennial participation and homeownership.
And we continue to see a shift in buyer preference towards single family homes and away from our more densely populated areas further driving demand.
The quality of our buyers is as good as it's ever been in terms of credit worthiness in downpayment.
Taken together all of these factors have created the strongest and highest quality demand for new homes that we've ever seen.
It was that way throughout all of 2021 and continues today.
At the same time, our industry is dealing with unprecedented challenges in the construction and supply chain part of our business.
And we continue to deal with inflationary pressures with nearly all of the materials and components that go into our homes.
So far we have been able to navigate these challenges although they have had a noticeable impact on our cycle and delivery times.
So as we begin 2022.
We are dealing with very robust and very healthy housing demand exceptionally well qualified buyers and persistent construction and supply challenges against this backdrop just as we did in 2021, we believe M. I homes is well positioned to deliver another year of strong.
Performance in 2022.
Looking back for a moment or 2021, we achieved record revenues of $3 7 billion, 23% better than 2020.
Record pretax income of $509 million, 64% better than 2020 and record closings of 8638 homes, 12% better than 2020. These.
These results contributed to a strong return on equity approaching 28%.
Our gross margins of 24, 3% or 210 basis point improvement over last year, and our overhead expense ratio improved by 130 basis points to 10, 4% for the year.
We also achieved record performance from our mortgage and title operations. All of this resulted in our full year pre tax income margin improving by 340 basis points to 13, 6%.
We sold 9084 homes during the year a decline of 4% from the record 9427 homes that we sold in 2020.
Our monthly sales pace during 2021 averaged $4 one sales per community the highest pace for any year over the past decade, and this compares to a sales pace of three seven homes sold per community.
On a monthly basis during 2020.
We accomplished our sales with an average of 15% less communities during the year and throughout the year, we were limiting monthly sales and roughly half of our communities or more at times in order to best manage construction costs and deliveries.
In the fourth quarter, we sold 1744 homes, a decline of 18% from the fourth quarter record sales that we achieved in 2020.
Terms of sales, our smart series, which is our most affordable <unk> affordably priced product.
To have a very positive impact not just on sales, but our overall performance.
At the end of 2021, our smart series homes were offered more than 40% of our communities companywide.
And our Smart series sales also comprised slightly more than 42% of total company wide sales in the fourth quarter.
This number compares to 36% in the fourth quarter of a year ago.
As we continue to grow our smart series within our company. It's important to note that our smart series communities generally produce on average greater sales pace.
Better gross margins better cycle time, and better overall bottom line returns.
Companywide, our backlog sales value at the end of 2021 increased by 29% to $2 $4 billion, which is an all time year end record.
Units in backlog were up 10%.
The level of 4835 homes with an average sales price in backlog increased 17% to a record $490000.
As I mentioned earlier, our mortgage and title operations also recorded strong performance in 2021 with a record number of loans originated record revenue and record pre tax income for the year of $58 $4 million.
We ended the year with 175 active communities. This was down 13% from the end of 2020.
During the year and we shared this in earlier quarterly calls we sold out of communities faster than anticipated.
Clearly increasing our community count is a major area of focus and in that regard we expect to open a record number of new communities in 2022 growing our community count by 15% by the end of 'twenty two to more than 200 communities companywide.
Our financial condition is the strongest it's ever been with $1 $6 billion in equity at December 31, which equates to a book value of nearly $57 per share.
We ended the year with a cash balance of $236 million and zero borrowings under our $550 million unsecured revolving credit facility. This all resulted in a in an improved ratio of debt to capital of 30% compared to 34% a year ago.
Now I'd just like to provide a few comments on our markets.
We experienced strong performance from our divisions in 2021 with substantial income contributions across the board led by Orlando, Tampa, Minneapolis, Dallas and Columbus.
For the year, new contracts decreased 5% in our southern region and 2% in our northern region.
For the year, our deliveries homes, delivering increased 9% in the southern region and 17% in the northern region.
Our owned and controlled lot position in the southern region increased by 17% compared to last year.
And increased 2% in the northern region compared to 2020.
We have a very strong land position highlighted by a number of premier communities in outstanding locations.
Companywide, we own approximately 24600 lots of this total 31% of the owned lots are in the northern region with the balance being 69% in the southern region.
This equates to roughly a three year supply of owned lots.
On top of the owned lots we control the option contract an additional 19400 logs. So in total we own and control approximately 44000 single family lots up 11% from a year ago and this equates to about a five year supply.
Most importantly about 44% of our lots are controlled under option contracts, which gives us significant and important flexibility to react to changes in demand or individual market conditions.
At the end of the fourth quarter, we had 85 communities in the southern region down from $1 12, a year earlier and 90 communities in the Northern region, which was the same as it was at the end of 2020.
Before I turn it over to Phil for more financial results. Let me just make a few closing comments.
Our company is in the best shape, we've ever been in both financially and otherwise we have noticeable operating momentum in all of our markets and are excited about opening up in Nashville later this year.
So the supply chain and construction challenges are likely to persist throughout the year. We begin 2022 with an excellent balance sheet strong backlog very robust housing demand and plans to open a record number of new communities.
We believe M. I homes is very well positioned to continue growing our business and look forward to 2022 being a year of continued solid performance.
Thanks, Bob for his financial results, our new contracts in the fourth quarter were 1744, 18% below last year's record fourth quarter.
New contracts were down 14% in October down, 21% in November and down 20% in December our sales pace was three three in the fourth quarter compared to $3 five in last year's fourth quarter and our cancellation rate for the fourth quarter was 10%.
As to our buyer profile about 53% of our fourth quarter sales were to first time buyers the same as a year ago.
And in addition, 45% of our fourth quarter sales were inventory homes compared to 43% last year.
During the quarter, we opened nine new communities, while closing 10 and for the year. We opened 72, new communities and closed 99, we delivered a record 2000 and 316 homes in the fourth quarter and for the year, we delivered 8638 homes, which is 12% better than the last year and.
An all time record for our company.
Revenue increased 16% in the fourth quarter of 2021, reaching an all time quarter record of $1 1 billion and for the year. Our revenue reached $3 7 billion up 23% from last year a record annual amount.
Our average closing price for the fourth quarter was 443000, a 14% increase compared to last year and our backlog average sale price is 490000 up 17% from a year ago, our backlog average sales price of our smart series homes is 388000 or <unk>.
Margins for the fourth quarter were 23, 2% up 20 basis points year over year and for the full year 2021, our gross margin was $24 three versus the prior year 'twenty two two.
Our fourth quarter and full year SG&A expenses were nine 8% and 10, 4% a 190 basis point improvement for the quarter and 130 basis point improvement for the year when compared to last year interest expense decreased slightly for the quarter decreased seven five.
$5 million for the year interest incurred for the quarter was $9 4 million compared to $10 million a year ago and for the year interest incurred was $39 million versus $42 million in the prior year. We are very pleased with our improved returns for the year. Our pretax income was $13 six versus 10.
Two.
And our return on equity was 27% versus 22% the prior year.
During the fourth quarter, we generated $155 million of EBITDA compared to $127 million in last year's fourth quarter.
And for the full year 2021, we generated $568 million EBITDA up 48% over last year.
We used $17 million of cash flow from operations in 2021 compared to generating $168 million in 2020 cash flow was impacted by higher land spend in 2021.
We had $24 million in capitalized interest on our balance sheet about 1% of our assets and our effective tax rate was 20% in the fourth quarter compared to 21% in last year's fourth quarter.
Our annual effective rate for 'twenty, one was 22% compared to 23% for 2020.
Our fourth quarter and annual tax rate benefited from energy tax credits from prior years and.
And our earnings per diluted share for the quarter increased 41% to $3 83 per share from $2 71 in last year's fourth quarter and increased 61% for the year to $13 28 per share from <unk> 23 per share last year.
During the quarter, we repurchased 600000 of our outstanding common shares for $36 million, bringing our total share repurchases up to $52 million for the year that leaves $48 million available under our current repurchase authorization and our current plans based on the existing market conditions.
Our to continue repurchasing shares now Derek <unk> will address our mortgage company results. Thanks, Phil in the fourth quarter, our mortgage and title operations achieved pre tax income of $10 8 million.
Down $4 million from 2020 and revenue of $22 9 million down 10.
Percent over last year, primarily as a result of lower pricing margins for the year pretax income was $58 $4 million and revenue was $102 million, both all time records.
The loan to value on our first mortgages for the fourth quarter was 82% down from 2024th quarter of 83%.
81% of the loans closed in the fourth quarter were conventional and 19% were FHA or VA compared to 74% and 26% respectively for 2020 same period.
Our average mortgage amount increased to $360000 in 2021 fourth quarter compared to $319000 in 2020.
Loans originated in the quarter decreased 3% from seven 746 to 692.
And the volume of loans sold increased by 19%.
Our borrower profile remains solid with an average down payment of almost 18% and for the quarter. The average borrower credit score on mortgages originated by <unk> financial was 749 compared to 751 last quarter.
Our mortgage operation captured 83% of our business in the quarter down from 85% in 2024th quarter.
Now I'll turn the call back over to Phil Thanks, Derik as far as the balance sheet. We ended the fourth quarter with no borrowings under our unsecured revolving credit facility.
Total homebuilding inventory at year end was $2 5 billion, an increase of 536 million above prior year levels. During 2021, we spent $630 million on land purchases and $422 million on land development for a total land spend of $1 1 billion. This was up.
$733 million in 2020.
At December 31, 21, we had $682 million of raw land and land under development and $423 million of finished unsold lots. We owned 5700 unsold finished lots with an average cost of 74000 per lot and this average lot cost is 15% of our $4 90.
<unk> thousand dollars backlog average sale price in 2021, we purchased 16900 lots compared to 2000, Twenty's 11, 500 lots our goal is to own a two to three year supply of land and we feel very good about our strong land position at.
At the end of the year, we had 99 completed inventory homes about one per community and 1266 total inventory homes and at December 31, 2020, We had 225 completed inventory homes and 1131 total inventory homes.
This completes our presentation and we'll now open the call for any questions or comments.
Thank you for our Q&A, if you would like to ask a question. Please press star followed by one on your telephone keypad now.
Change your mind. Please press star followed by two one.
When preparing to ask a question. Please ensure your phone is on mute locally.
Our first question comes from Jesse Letterman from Zelman and Associates Jesse The line is now open.
Hi.
Thanks for taking my questions.
My first question pertains to the sequential decline in gross margin I'm, assuming part of that impact was from peak lumber flowing through.
Just wanted to understand the moving pieces here and whether there are other mix mix impact and if the margin of homes in your backlog is stronger than those that you delivered during the fourth quarter.
The answer to the first part of the question, Yes, we did get more impact from lumber in the fourth quarter overall.
Still pleased about the strength of our margins.
We don't really give any margin guidance.
But we are focused every day on continuing to have strong margins.
If you look at from the cost side.
In the fourth quarter, it looks like our sticks and bricks went up 3% to 4% markets are a little different.
Prices are our costs have been moving up a little bit. This year also but again, we feel very good about where we are from a pricing standpoint et cetera.
I just would like to add something as your first name Jesse.
Yes.
Jesse it's nice to meet you I'm not sure we've spoken before.
So this is Bob schottenstein, and the only thing I'll add to what Phil said is that we.
We're very pleased with our margins for the year with our growth and our margins and I just want to underscore that as we look at our backlog and where we sit today.
We feel we feel really good about the return profile for the year.
Awesome, Thanks for that and nice to meet you too.
Second question is more so a little bit higher level.
Has the increase in rates or anything youre seeing on the ground today changed the way youre thinking about price increases or your ability or willingness to push price I remember last quarter. You mentioned, you were raising prices and about 15% to 35% of your communities.
Just wondering.
How youre thinking about pricing at this point in time.
Well.
Couple of things on that first of all it's something that you react to every single day.
If you decide not to pay attention to it for a week or two.
May be you may be dealing on.
On that data.
A year ago. If you would have said to me what do you think's going to happen if rates go from.
Whatever they were then roughly 3% to banging on the door for I would have said, it's going to have an impact on demand.
And I would have been wrong.
<unk>.
So.
<unk>.
With that comment made.
As I said in my opening remarks.
When you look at all the factors together on the demand side of our business. These are the best and healthiest conditions.
I've ever seen and we've ever seen.
It was that way as we ended last year and it remains unabated today.
If you look at the down payment and their credit scores.
Eric clutch or the head of our mortgage operation spoke about our average down payment being.
The 18%, 19% then you've taken into account how many of our buyers are utilizing FHA.
That are going conventionally are probably putting over $100000 down on average.
It's a big number.
We're very encouraged by that.
Levels of inventory as you know you guys follow this as close as anyone the levels of inventory across the markets, we do business in.
Fairly certain this way everywhere I've never seen it this low I am talking about used home listings.
Most of most of the markets. We're in the lifting levels today are lower than they were even a year ago and they were at historic lows then.
You basically can't find a house.
And the millennials continue to move from renting to owning the.
Latest data I referred to for Freddie Mac I found very compelling it was the high the 45 or so percent of all the mortgages secured were first time buyers.
So much of that was fueled by the large population of millennial households that are going from the rent to the owned side.
Having said all that we're going to keep raising prices, where we can if we werent limiting sales we would be selling a whole lot more homes every month.
We're limiting sales today and just under half of our communities.
And that's all about deliveries of managing cost and managing.
Trying to manage pricing.
But having said that if rates continue to go up up and up I guess, you and others.
He even if that's going to have a pretty chilling impact on demand and you might be right. We haven't seen it yet you got to come down somewhere.
We're much more optimistic about the business then.
And our good friend IV in her cohorts are.
And.
We'll see I mean.
We we've never had a crazy long land position, we've always managed pretty conservatively.
We pressure test our backlog pretty regularly.
With various rising rate assumptions, we think it's in great shape.
Super Super excited about all the new communities, we've got coming on later this year as I talked about our community growth should be right around 15% or more for the year hopefully it will be more.
The delays associated with home construction have found their way into the opening of communities too. So everything has been stretched out but if you want to.
There's never been a better time to sell a home and there's never been a more difficult time to build one.
But we'd rather have it that way than the other way, obviously or the tone of this call would be radically different.
So.
That's sort of how we see things Jeff.
I appreciate the time, thanks, so much and congrats on the quarter.
Hey, Thanks, a lot.
Our next question comes from Alex Barron from housing Research Center, Alex Your line is now open.
Yes, thanks, guys and great job on the quarter and for the year.
I wanted to.
I wanted to congratulate you on buying back your stock here, because I think that's a bit different.
Then in the past and just wanted to get your current thoughts around.
Further share buybacks given the stock is sitting here below one spoken around three times earnings.
How you guys are looking at that going forward.
Yes, Alex I appreciate the comment as I said in my previous comments.
We do plan on continuing to buy shares back we've been very pleased with our earnings book value is up to 57 Bucks a share.
The stock was at 75, the middle of last year. So we did buy back about $50 million of shares last year, and we do plan on continuing to buy back shares.
But I'm, saying are you guys looking at it.
Depending on the valuation itself or is this more of a systematic thing youll be doing every quarter going forward.
Alex.
That depends on a lot of factors as I assure you know.
We are focused on growing the business as Bob said, we're opening a lot of new stores, we're focused on continuing to grow our.
Bottom line, our units and so forth, but we think we can do all those things <unk>.
Including.
Buy shares back, but again that just depends on market conditions demand out there how fast we can get houses built through the system those type thing.
Got it.
Another question Phil.
G&A was.
Better not just in percentage terms, but even in dollar terms than a year.
A year ago.
The increase in the revenue so I'm curious.
What what contributed to that saving.
On the corporate side.
That's something we've been working on for a long time, our scale has improved when you look at our now 16 housing divisions counting Nashville.
We're just getting better scale in our operations.
Our head count is up today about 9%.
Obviously, our revenue for the year was up over 20%.
So we've been able to get the benefit of scale, which we've been working on so.
We were really really excited.
Now to see those SG&A percentage has come down.
Again been spending a lot of time on that.
Theres always a to use thanks quarter to quarter.
Incentives.
It is kind of recorded based on when we make the money.
And so every year is a little different as far as which quarters you tend to make the money or whatever but nothing real big in there, but again, we're very pleased with the scale we're getting.
To underscore what Phil said, Alex so much of SG&A.
It's really.
Controlled by scale.
Obviously, it's not 100% controlled by scale we have.
There's things we can do.
Hopefully to be prudent when it comes to expense management.
Sort of how I think about it.
Our revenues around $4 billion to go back and look at some of our bigger competitors and see what.
Their SG&A level, we like when they were doing.
$4 billion in revenue and then see what ours are today.
And quite honestly in most cases ours are lower.
But maybe I like when I look at that.
Stated differently. If our revenues were 8 billion I would expect our SG&A to be noticeably lower as a percentage than it is today.
Okay.
There are things we can control.
We're constantly looking for ways, whether it's on selling commissions or or.
All kinds of overhead to to control that even further it's been a very intense area of focus for us for the <unk>.
Frankly, almost eight years.
No that's great to see the progress.
If I could ask one more on the tax side it looks like your tax rate was.
A bit lower this quarter was there some one time tax credit or anything that contributed to that.
Bill you want me it benefit.
Sure go ahead.
Yes.
Energy tax credit and we had a change in estimate when we.
Sure sure it out for 18 and 19 return so that's reflected in that 'twenty, one tax rate in the fourth quarter.
Yes.
Thank you very much alright, guys well best of luck for this year.
Thanks, Alex.
Our next question comes from Jay Mccanless from Wedbush.
Your line is now open.
Hey, good afternoon, guys great year.
Sticking on tax for a minute.
Yes, absolutely absolutely.
On tax what rate should we use for 'twenty two.
24%.
Okay.
Okay.
Did you hear Ann Marie.
Yes, 24%.
Yes, yes, we are in different locations and I just wanted to make sure you've heard Ann Marie Yeah, a little higher than the current rate Jay where they can maybe 'twenty three 'twenty four or something like that.
Okay sounds good.
Excited and thank you for giving us the details around community growth.
How how do you expect that to flow through the year is it going to be back loaded or pretty consistent each quarter.
Backloaded.
We thought it would be a little bit more consistent but it's going to be back loaded but.
But we'll start to see the effects of it I think.
Begin to take shape here.
Little by little in the first half and then pick up steam in the second half.
One of the things also Jay is that we didn't close 99 stores in 2021.
We don't expect to close out that many stores next year.
So as Bob said, we intend to open a record number so hopefully that gets us to around a 15% higher number.
By the end of the year. So we're really excited about that.
And 15% higher to stop the woods.
<unk> hundred 76 still had at the end of <unk>.
<unk> I think what I'd say.
Yes, we should.
Yes, Jay we should have.
Hopefully 200 or more communities open and operating by.
The fourth quarter, yes.
Okay.
And then if we look at cycle times, what did those do during the quarter and how did that compare to <unk> and maybe <unk> 20.
If you look at cycle times in the fourth quarter.
'twenty one it was up about 60 days from the fourth quarter of 'twenty.
Just got a little worse as the year went on.
The fourth quarter was a few days worse than the third.
Our current view Jay is that.
I mean, we're working hard to make it better.
We're thinking realistically it may not get any better.
But.
We're still hoping and planning on having a record year in many ways. We do have some tough sales comps in the first quarter of last year. We sold over 3000 houses had a tremendous first quarter sales.
But again, we're hoping to have a record year in many ways.
Hum.
On the supply chain is it.
Is it strictly just the suppliers not being able to get you enough goods or is it little bit more tightness on the labor.
Sure.
It's everything.
At one time or another.
Don't think there is one component.
Or one part that has been immune from some irritating slowdown during the last 12 months. The only good news is is they all have it happened on the same day at the same time.
I don't know I was listening to one of the other builders, it's like that I think they used the whack a mole term.
It's cabinets one month, it's appliances. The next then appliances gets fixed and then duck tour than something else and it's pipe. Then you can't find paint then you can't find correctly you can find brick here, but you can't find it there. It is just one thing after another.
And.
The.
The only good part about all of it is it's against the backdrop of I think some of the best demand our industry has ever seen.
Absolutely.
I won't.
I won't ask you for numbers in January but could you maybe talk about what youre hearing from the field in terms of.
Pushback around the higher rate or people may be trading down a little bit lower square footage.
What I said in my opening comments, which I'll repeat is that throughout all of 2021 demand was as good as we've ever seen it and that continues today.
So far we've pushed back on rate on rates and.
I think that in terms of product selection square footage.
No nothing meaningful there I think it's pretty apples to apples from a year ago.
The only difference is we have a few more smart series communities now than we did so.
That would skew, but thats not a change such as being Theres more.
Theres more affordably priced product being offered.
The fact that it's more affordably priced is oftentimes related to the size.
Do you think Bob you're going to be honest <unk>.
Not buyers.
It's not a buyer deciding to buy at 'twenty 400 square foot house instead of a 2008 because of interest rates, we have not seen that yet.
Okay.
Okay.
Where do you think as a percentage of total Khameni smart series could be by year end.
I think it's going to be around that mid forty's.
It's been going up about 4% to 5% a year since 2016, when it was like one community.
Last year at this time, but within the mid Thirty's I think last year at this time, we said we thought it could get to the <unk> a little bit over 40.
It will go up another 345% here.
Everything is selling.
That we're building in.
We don't want to become.
We don't want to we don't need to put all our eggs in one basket, we don't tend to.
Jay We've also been pleased that we have been able to start more houses.
Started at about 9500 houses in 2021 and in 2020, we started at about 8600. So we started almost a 1000 more houses.
Again, there are different stages of construction et cetera.
But even with all the issues going on we have been able to get more houses in the field. We do have a few more spec homes out there not only backlog homes that are in the field.
So we do feel good about where we are again, there is always some issues quarter to quarter in this crazy world, but we feel like we're really good shape going into this year.
Okay, that's great to see those numbers going up.
And I know you said earlier that.
<unk> got sales taps on at about 50% of the communities, but could you talk about what percentage of communities you are able to raise price in <unk>.
I don't have it.
That's a really hard number because as a subdivision by subdivision basis, I mean overall, our average sale price.
It continues to go up on a monthly basis, we talked about it being $4 90, and backlog and the average sale price in backlog of Smart series is 390.
So.
We're pushing price everywhere, we can.
Not really having any significant appraisal issues not really having any customer pushback.
Backlog is very strong over 5000, so we just continue managing it as best we can we just don't want to get too far ahead of our sales I mean, lumbers kind of getting back up began and like Bob said Theres always things happening. So it's just something you've got to manage every day.
Yeah, I mean, one of your competitors earlier.
Said that rising lumber prices, probably start to hit a little bit on the gross margin in the back half of the year.
Doing most of the homes build to order would you say thats, probably a safe assumption.
With the homes that yourself and how much I mean, the way all.
The way our business is now Jay.
Every market is a little different.
Pretty much got to get the houses in the field by April or may to get them closed.
And in most situations from the time, it start which like.
50 to 100 days before you get the lumber out there and so forth. So I would guess, it's going to be some in the third and fourth quarter or whatever we have been trying to build in.
A higher contingent Sam out for things in general things like lumber when they go.
But.
It's definitely been a challenge.
Gotcha.
And then one other question for me on the mortgage side I know the capture rate was down a little bit just wondering with.
What we've seen with Refis starting to drop off are you all seeing more competition for purchase mortgages as it's harder to get people to want to go with MRI for their mortgage just would love a couple of comments on that from there.
Yes, sure absolutely Jay Yes, we did see the capture rate drop and it's exactly what you you mentioned refinanced business went away.
Other lenders that were doing the refi business didn't go out of business didn't shut their doors. They are coming after our so it is more challenging.
Every contract we write we're competing with more and more outside lenders for that business. So it's going to be a more difficult year for capture rate coming out.
Margins.
And pricing margins. We also saw that we're having to price more aggressively to compete with those lenders or the core of the business. Our goal is to have an 85% capture rate.
That's our clear internal goal.
And it's a goal that we hope to achieve but we did see a little movement lately year last year and you saw it in our results last year, Jay the mortgage company results last year in the first half bottom line, we're a lot better than the second half and again that was just all due to margin pressure and it's interesting because without getting into too.
Too much of the weeds some of our we have an MRI financial branch if you will.
And all of our divisions.
And some of those branches our capture rate is in excess of 90% probably about a third of them.
So you say well if you can do it there why can't you do it in all of them, though they all have the same competitive issues. The answer is yes, but sometimes it's also relates to the type of product that we offer in that particular city.
Where theres more smart series, you might have an opportunity to have a higher capture rate for example.
Then if you have more move up first or second time, where that buyer may have previous banking contacts.
But.
Our goal is to be at 85% or more everywhere.
Got it.
One other one that popped in and then I really will give it up.
Any any evidence of competitors.
Using incentives, whether it's an extra.
Dollars on closing costs people trying to buy down mortgage rates are you seeing any evidence of that in the field.
Your competitors not yet.
No not yet I mean, we've looked at buying down rates, but it doesn't seem to make economic sense yet.
But no we've seen nothing.
Which is great congrats shocked.
I would be shocked and disappointed if we saw it.
Got you.
Again, thanks for all the time.
Okay. Yeah. Thanks, Thanks Jay.
Okay.
As a reminder to ask any questions. Please press star followed by one on your telephone keypad now.
Our next question comes from Adam Starr from Golf side asset management. Please go ahead.
Hello, Congratulations on a very good year and thank you for taking my question.
I'm, just wondering what kind of.
Can you hear me okay.
Hear you great I'm wondering you.
Okay.
I'm wondering what kind of your pricing assumption are you, making when you price and build land how are you underwriting.
You see continued price increases or are you holding.
At today's level.
Just like some color on that.
The underwriting really.
Great question and it's one that we think about a lot frankly right now.
First of all the land market is.
Believably competitive.
If you stumble onto a piece.
Theres not a lot of demand for you probably don't need to do any underwriting you just walk away from it but.
But the good pieces there is intense demand and for the most part we really haven't changed our underwriting in quite some time, we have minimum rates of return thresholds.
And we.
We take the conditions as they are today, we don't assume.
Any inflation on the pricing side or on the costing side with one exception.
On deals that were internally developing we have been incorporating greater and greater contingencies.
Due to the likely inflation that we'll see on land development.
Might work in pipe.
<unk> Street Street to improvement.
So other than trying to build in a little bit more inflation on land development deals just because we think those are.
The longer it more risky.
We're pretty much saying the conditions as they are today.
Is the way we want to analyze it.
And even with that said, there's a lot of intuition and it's not just like arithmetic and you tightened into computer and you say, yes or no.
Awful lot of conversation, particularly on larger deals.
The larger the deal the more concerned about price point the larger deals are more concerned about the time you might be in it.
The larger the deal the questions that might come up about should we look to sell off a part of this or bring in a partner and flipped a lot.
All kinds of factors.
Way into any land deal that go well beyond what is a pretty I think appropriate and rigorous underwriting process.
Thank you very much I appreciate the answers.
Thanks.
Our next question comes from Art Winston from pilot advisors.
Your line is now open.
Alright. Thank you. Thank you very much for a great year for our stockholders great result.
Two questions on queue.
You commented that approximate 70 play.
Places, where open already in 2021, 20, new ones and I Wonder if you could comment at all how.
It's progressing in relation to prior openings and what you might have anticipated very generally.
If you are still as far as <unk> 'twenty one.
We opened 72 stores at the first of last year, we can I thought we would be north of 80%. So.
So we did open a few less last year than we thought.
This year as we said for 'twenty two we expect to open a record number that is something we track constantly.
And so far we're on target.
Yet all of those communities open is something we revisit all time, it's so important to us.
Thank you also ask start this is Bob Schottenstein I think you also Bob.
How does this how do you wanted to know how those communities have done is that correct.
In relation to what you had anticipated openings in prior years.
Generally yes.
Yes.
Pretty good grades.
Almost all of them are performing at or above plan, yes, we track every month.
Every store that opens and how is it doing versus what we approved at so as Bob said, we're very pleased with that.
Excellent.
My last question.
I think it's terrific that you're sustaining your underwriting standards with some caveats as you mentioned to the last.
Question is is it possible or probable that the amount of land that you purchased this year.
Lots that you purchase could be flat or down as opposed to being up compared to 2021.
The way it looks.
We expect to spend more this year on land development that we did last year.
As far as actual purchases of lots, yes, it could be less than what we did last year.
Theres about three or four or five factors you got to look at because.
Even if you did exactly the same number of law not all lots of the same a 50 foot lot might be worth X 60 foot lot might be worth X plus 10% and if you do the same number of lots, but theres more $50 $60 youre going to spend more there has clearly been inflation on land development. So even if you did.
<unk> the same exact number of lots this year as last year, it's going to cost more.
So if you take all that out.
So Phil to underscore Phil's point, whereas land spend.
Likely could go up.
Out of lots purchased could trail off.
But not.
That'd be great.
Certainly not enough to share the future, but it.
When it's taking longer to get things through the system, we're trying to take that into account with what we've got coming up I mean, we still like to stay in the area of one and two to three years of current closing rate.
And Bob talked about at the end of 'twenty. One we owned about 25000 lots and of course, our closing rate. This past year was Lola 9000, So we were a little bit south of three which is good.
So that's kind of an overall thing we try to watch.
Art series in general tends to be a little bigger communities a few more lots.
Also almost all of the Smart series communities, we tend to develop the land also.
So again I do expect to land development spend to go up this year.
But the number of lots, we bought like Bob said may very well come down.
It sounds like the land that you have under option, but don't know lots you have under option, but do not own.
Bigger factors, but when do you own it sounds like is that true.
A factor in what I want to make sure I understand the other way.
You have five years worth of.
Lots that you own and have under option, but you're only related to the ones that you own in your last comment.
Well the risk the risk is definitely more around the ones you own.
So we don't want to get too far out the issue would get too far out is where are the jobs. What are the income levels, what's the competitive landscape.
Start buying land today, you can't consume for four or five years, you are taking market risk and a lot of other risk. So again, we like to kind of be a little bit short in that two to three year supply of what we actually own I mean, the demand for housing continues to be very strong as we've said a couple of times notwithstanding rates going from roughly.
Three to almost four.
If the demand it dropped off by 10 or 15% and it hasnt, but if it had we might start looking at some of those deals we have under option I can't say, which one but hypothetically we would probably be have been looking at things.
And.
That's the kind of thing that we're constantly focused on.
As soon as you start to get the first sign of sales slowing.
Usually that's not a false positive that usually tells you something and we've not seen any of that yet.
Great. Okay. Thank you. Thank you very much.
Yes, Thanks art.
We've come to the end of our Q&A I will now hand back to the management team for closing remarks.
Thank you for joining us look forward to talking to you next quarter.
This concludes today's call. We thank you for joining you may now disconnect your lines.
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