Q3 2022 M/I Homes Inc Earnings Call
Made during this call with that I'll turn the call over to Bob. Thank you Phil Good afternoon, and thank you for joining us today.
We are pleased to report record financial results for the third quarter of 2022 highlighted by record revenue record income and record earnings per share.
Revenue increased by 12% to $1 billion pretax income increased by 43% to $167 million.
Net income increased 45% to $132 million and earnings per share increased by 54% to $4 67.
We were also pleased to report very strong margins and returns for the quarter.
Gross margins improved by 230 basis points to 26, 8%.
Pre tax operating margins improved by 270 basis points to 16, 5%.
And our SG&A overhead expense ratio improved by 40 basis points to 10, 3%.
All of this resulted in a very strong return on equity of 27% during the quarter.
Our record setting financial results reflect the strong market conditions and demand for new homes that we experienced throughout all of 2021.
For the quality and quantity of new home demand within our markets was as good as we've ever experienced.
On the other hand things have changed dramatically since the beginning of this year due primarily to the unprecedented rapid rise in mortgage rates.
In response to the federal reserve's actions, increasing the benchmark federal funds rate mortgage rates have more than doubled since the beginning of the year and now exceed 7%.
This has significantly impacted demand across all markets and all price points.
Clearly there are many factors that influence demand for homes, including job growth consumer confidence and general economic conditions. However, this recent very rapid and significant rise in rates is the primary reason why we and the entire industry has seen a notice.
<unk> pullback in demand.
During the quarter, we sold 1349 homes.
31% decline from the 1964 homes that we sold in the third quarter of 2021.
During the quarter, we were operating in 2% fewer communities than a year ago.
Given current conditions and the general uncertainty concerning the overall economy, we have over the past nine months shifted from what was a predominantly offensive operating strategy focused mostly on growth.
Now a predominantly defensive operating strategy.
Focused on carefully monitoring and controlling all expenses.
Consuming and conserving cash and maintaining our strong balance sheet with low debt levels.
Reexamining every pending land deal and taking the necessary steps to either buy time, renegotiate terms or perhaps even cancel the deal if it no longer meets our current underwriting standards.
And we're also taking steps aggressively to adjust pricing <unk> provide incentives on a subdivision by subdivision basis across all of our markets in order to try and meet the current state of demand.
Every subdivision within every market is different and our approach is certainly not a one size fits all and never has been.
As we've done in the past, we try to be very strategic and very careful about our pricing within a particular community.
Simply put some communities require more incentives than others some required no incentives at all.
Past number of quarters, our companywide gross margins have averaged between 23 and 27% with many of our communities achieving gross margins in excess of 30%.
As these current conditions persist margins will be dropping.
In that regard, we have not and will not be providing any margin guidance other than to say as we have repeatedly said over the past five years.
And that is that homebuilding has historically been roughly a 20% to 22% gross margin business.
Turning to deliveries or closings declined by 1% from a year ago, primarily due to the impact of hurricane in and our and our Florida markets. During the last 10 days of the quarter.
Where we saw approximately 75 delivery shift from the end of the third quarter to the fourth quarter.
Now I will provide some additional comments on our markets.
Our division income contributions in the third quarter were led by Dallas, Raleigh, Columbus, Tampa, Orlando and Minneapolis, However, given the decline in market conditions that I discussed earlier, new contracts for the third quarter in the southern region decreased by 26%.
And decreased by 40% in the northern region.
Deliveries in the southern region increased 1% year over year, while deliveries in the northern region decreased 3% year over year.
50% of our deliveries came out of the southern region.
42% out of the northern region.
Our owned and controlled lot position in the southern region increased by 6% compared to a year ago and increased by 10% in the northern region.
34% of our owned and controlled lots are in the northern region. The other 66% in the southern region. We.
We do fully expect to open a record number of new communities in 2022 and to further grow our community count in 2023.
We are excited and feel very good about our communities.
We have a strong land position companywide, we own approximately 25000 lots, which is roughly a three year supply.
Of this total 31% are in the northern region, 69% in the southern region on top of these owned lots, we control via option contracts and additional 21000 lots in total our owned and controlled lots increased 7% year over year.
<unk> to approximately 46000 lots or roughly a five five year supply.
Importantly.
Almost half of the lots that we own and control or about 46% are controlled pursuant to option agreements, which give us significant flexibility to react to changing market to the changing market conditions as I noted earlier in my comments.
In terms of our balance sheet, our financial condition is very strong in fact, we are in the best shape ever.
Specifically, we ended the quarter with record shareholders' equity of $1 $9 billion.
An increase of 26% over last year, a book value of $71, a share cash of $68 million and zero borrowings under our $550 million.
<unk> revolving credit facility.
This resulted in a debt to capital ratio of 26% down from 31% last year and a net debt to capital ratio of 24%.
And some there is much uncertainty concerning the general economy.
And it is unclear when demand for new homes will improve.
However, we strongly believe that over the long term housing markets will benefit from strong fundamentals, including favorable demographic trends and a general under supply of housing throughout our markets.
We are well positioned to manage through these changing and uncertain times given the strength of our balance sheet low debt levels diverse product offerings and well located communities with that I'll turn it over to Phil Thanks, Bob our new contracts were down 40% in July down 19%.
And in August and down 35% in September and our cancellation rate for the third quarter was 17% as to our buyer profile about 51% of our third quarter sales were first time buyers.
<unk> to 50% in last year's third quarter.
In addition to 56% of our third quarter sales were inventory homes compared to 51% in the second quarter.
Our community Count was $1 78 at the end of the third quarter compared to $1 76, a year ago and the breakdown by region is 91 in the northern region and 87% in the southern region and during the quarter. We opened 25, new communities. While closing 15, we currently estimate ending 2012.
Two with about 195 communities.
We delivered 2026 homes in the third quarter, delivering 39% of our backlog compared to 37% a year ago, and our third quarter deliveries were negatively impacted by hurricane Ian.
We started 1563 homes in the third quarter down 30% from last year's third quarter.
At September 30, we had 5800 homes in the field versus 5300 homes, a year ago, which is up 10%.
Over 20% more homes in the field at 630 versus the prior year.
We continue to focus on balancing our production with our sales pace and market conditions.
Revenue increased 12% in the third quarter, reaching a third quarter record $1 billion.
Our average closing price for the third quarter was an all time record 487, a 13% increase compared to last year's third quarter average closing price of 430 <unk>.
And our backlog average sale price is 533000 also an all time record up from 471000, a year ago and our backlog average sales price of our Smart series product line is 429000.
The average sales price of our third quarter, new contracts was 518000.
Our third quarter gross margin was 26, 8% up 230 basis points year over year and down 50 basis points from the second quarter.
Our third quarter results included the write off of $1 million of deposits and pre acquisition expense for land deals that we are no longer pursuing.
Our third quarter SG&A expenses were $10 three of revenue, improving 40 basis points compared to $10 seven a year ago.
Interest expense for the quarter was 700000, and our interest incurred for the quarter was $9 million.
We are pleased with our returns for the third quarter, our pretax income was 16% and our return on equity was 27% during the quarter, we generated $179 million of EBITDA compared to $132 million in last year's third quarter.
Our effective tax rate was 21% in the third quarter compared to 22% in last year's third quarter. The decrease was due to the extension of the energy tax credits.
Our earnings per diluted share for the quarter increased to $4 67 per share from $3 three per share last year up 54%.
Our book value per share is now $71 and $18 per share increase from a year ago.
Spent $15 million on share buybacks in the third quarter and during the first nine months of this year, we repurchased one $2 million of our outstanding shares for $55 million.
This leaves $93 million available under our current repurchase authorization and.
In the last five quarters, we've spent $107 million buying stock back repurchasing 7% of our outstanding shares now Derek <unk> will address our mortgage company results.
Thanks, Phil our mortgage and title operations achieved pretax income of $7 9 million.
Compared with $9 9 million in 2021 third quarter revenue.
Decreased 3% from last year to $20 $1 million due to a lower volume of loans closed and sold and we continue to experience lower pricing margins due to competition for purchase business.
Average loan to value on our first mortgages for the third quarter was 82% the same as last year.
79% of the loans closed in the quarter were conventional and 21% FHA or VA compared to 81% and 19% respectively for 2020 one's third quarter.
Our average mortgage amount increased to $385000 in the quarter compared to $349000 last year.
However loans originated decreased to 1263 loans, which was down 19% from last year, while the volume of loans sold decreased by 1%.
Our borrower profile remains solid with an average down payment of over 18% and an average credit score on mortgages originated by <unk> financial of 745.
Finally, our mortgage operation captured 76% of our business in the third quarter compared to 85% last year.
Now I'll turn the call back over to Phil Thanks, Derik as far as the balance sheet. We ended the third quarter with a cash balance of $68 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 mid 2025, and our public debt matures in 2028, and 2030 and as interest rates below 5%.
Our unsold land investment at September 30 is $1 2 billion compared to $990 million a year ago.
At 930, we had $725 million of raw land and land under development and $509 million of finished unsold lots during the third quarter. We spent 75 million on land purchases and $142 million on land development for a total of $217 million.
September 30th we own 25000, unsold lots and controlled 46000 lots.
Breakdown of the 25000 unsold lots that we own is about 7000 finished 7000 underdevelopment and 11000 rall.
With current challenging market conditions, we are closely monitoring our land spend.
And for the 21000 lots that we control, but do not own or risk dollars for those deals totaled $75 million.
At the end of the quarter, we had 200 completed inventory homes and 1855 total inventory homes.
The total inventory 946 are in the North region and 909 are in the southern region at.
At last year's $9 30, we had 62 completed inventory homes and 1042 total inventory homes.
This completes our presentation and we'll now open the call for any questions.
Thank you.
You would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to turn it makes that question. Please press star followed by two again to ask a question. Please press star followed by one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
The first question today comes from the line of Jesse Ladyman from Zelman.
Please go ahead. Your line is now open.
Hi, Thanks for taking my questions and congrats on a strong quarter.
Just curious what would what would you estimate your net pricing is down sequentially when factoring in both base price reductions and incentive.
You could give a little color on what.
Each market, which community.
Seeing incentives not needed and which youre seeing the most because I know Bob you mentioned earlier in your prepared remarks that it really is on a community by community basis.
Yes, that's a great question and a really hard one to answer.
As you know we don't give I know you know, we don't give guidance because you point that out in every one of your releases.
And so but I'll try to be.
Try to be really responsive to what is really a good question.
I think of the markets that we're in Austin is clearly the one that's under the most.
Pressure, if you will in terms of having gone through incredibly rapid rise in prices and runaway margins not just for us but for all the builders and now we're beginning to see inventories rise there.
<unk>.
That market's a tougher nut to crack right now.
What we will do there is going to be different than what we might do in Dallas as an example.
Which seems to be holding up considerably better.
Yes.
There are so many factors that influence our pricing strategy.
How much land, we owned in that community.
Are we buying lots of the finished takedown.
Is there a competitor right next door that is sitting on too much land and is doing some deep discounting because they believe that's in their best interest.
Pricing.
Look.
I don't know if there were any smarter than anybody else, but I'm going to be really blunt with you pricing is all art and very little science and if it was easy the average builder sales wouldn't be down 20% to 50%.
Would have dealt with it sooner.
It's very very difficult to know exactly where to price to meet demand. We know that prices are going to come down and we know margins are going to come down are they going to come down 200 basis points 300 basis points 400 basis points more than that.
No I don't think so, but I think theyre going to settle somewhere company wide for us in that 22, or so percent range, that's not guidance, but that's just intuition I am just trying to be realistic about what we see.
How much land to build their own companywide.
Some builders zone of four to five year supply, we barely one to three year supply. Some builders have some callable debt, we have zero or.
<unk> is not on fire that doesn't mean, we're sitting on our hands, but we're trying to be prudent we're trying to protect the backlog I think job one for us and most of our competitors is to get that high margin backlog closed without disrupting it too much and I think so far we've been very successful in being able.
To do that.
But clearly most of the Incentivising that we have done up until recently has been with buying down mortgage rates on specs and other homes that can close within 30 60 or 90 days.
That work quite well in August not quite as well in September .
And now we hope to be able to incentivize exclusively by doing just that without impacting base prices are messing around too much with competitive appraisals.
Now, we're having to go to price reductions in new communities. We've got some new communities coming on you can open up fresh and a new price and not in any way disrupt the backlog.
And having said all that I can tell you that there are communities within a certain division, where we're maintaining our pricing and it's at premium margins. We may not sell for a month, but we're still selling two or two and a half and thats and that still meets underwriting.
And yet in the same city, there may be others, where we're having to discount.
Well below 20%, but the averaging as I think is going to come close to what I've said.
We will know if I'm right next a year from now but.
I'm just trying to be very Frank with you. Your question I think is the biggest question that a lot of investors have may be next to how much right off slash impairments, where the builders have and that is where will the margin settle in.
Was.
25%, 28% business will it be at 22, or 24, or an 18% business and we just don't know that yet.
Right Yeah, no I really appreciate all the color you're you are able to provide there just a quick follow up on one point I know you said that there are some newer communities without having to risk backlog you can.
Lower prices without it being a price cut necessarily so if you were to compare the new price on those communities that are opening up to an existing community that may be in a similar area.
How far below that existing community are those home pricing.
I don't know that I can give you a really accurate answer on that Phil Phil though has something he wants to say one thing interesting, yes. It did surprise us a little bit you know the closing price in the third quarter was 487000.
If you look at the average sale price on new contracts in the third quarter was $5 2018 and.
And again.
We're opening a fair amount of stores and by and large you know as Bob said, our new stores are actually performing pretty well during the third quarter, we opened 25 new stores.
So I mean, you got to kind of come down somewhere I mean are we kind of expecting again not guidance.
Asps to come down next year, so the answer yet probably will.
We're trying to stay as affordable as we can but obviously land prices have gone up the last couple of years.
But it's just so much a subdivision business I mean, there's one issue opening a new store. Its one issue if you've got a subdivision with the free amount of backlog.
Another issue of around the tail land with five or 10 lots left we'll probably get pretty aggressive to move through that.
So every community is just a little bit different right now, but we are.
Paying very close attention to all of them. The other factor in there is just so many things, but we had this come up yesterday.
We're re.
Reevaluating as I I hope I made clear in my remarks every land deal.
Almost in the same way that we did.
During the two to three week period following the March of 'twenty.
Pandemic, where every single land deal of our company went went into a pause reset mode.
Luckily we didn't have to do too much other than spent the time figuring out what we might do it.
The Sky fell but now we're back in that same mode and reevaluating everything and just yesterday, we were looking at a deal where we intended to put a certain higher price line of homes in a particular community.
And in looking at how we might renegotiate or handle that deal.
Question is should we try to put our more affordable smart series in that community instead, because on average our smart series houses sell for about $100000 less.
In our more premium line and so things like that.
Also create a lot of muddled comparisons.
You are trying to compare apples to apples.
And.
<unk>.
Maybe just get a different variety of Apple.
The builder with an average price around $500000. My guess is somewhere between 20% and 50 Grand and price reductions are going to take place.
Think with margin reduction over the next 12 months.
I think thats, what youre starting to see in here.
<unk> from just some of the things that are happening in the field.
That's really helpful Bill and Bob Thanks.
One more quick one are there any community existing now that you kind of have on your watch list that may.
Youre watching for potential impairment.
Yes, but I don't think it's in any way material.
It could be one community here one there but.
Uh huh.
It's it'll be a very very small fraction of our land holdings.
There might be a few dollars here and a few dollars. There theyre also will likely be some write offs from some walkaways.
We did cancel some deals in the third quarter.
And we're likely to if we are unable to renegotiate or extend cancel some of these under option.
<unk> earned the right to walk away, we don't want to but if we had to as Phil shared in his primary remarks, if we had to walk away from every single deal. That's a manageable number I mean, we don't want to spend $75 million to $80 million, but we could write a check for it tomorrow and not have to borrow a penny from the bank to do it.
So you know.
Not bragging about being in that position Im just want to make it clear that's the position we're in.
There will be.
I don't know, a 5% or 10% of the deals we will walk away from maybe more than 10, if we can't if we can't get them re priced or extended to buy more time, we'll see we've always said, we feel great about our land position and we do we've got a lot of time, a lot of sweat equity a lot of effort in.
In addition to expense and getting these deals tied up we didn't do so because we didn't like them. We did it because we love these deals but you know.
If they don't make sense under the current environment, we will take the action necessary.
That's very helpful. Thank you.
Wanted to just underscore because sometimes people hear different things I don't think.
I don't see any any material impairments.
Sure.
Very insignificant compared to our total land holdings.
Understood. Thank you again.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
There are no further questions registered at this time, so I'd like to pass the conference call back over to Phil Creek for any closing remarks.
Thank you very much for joining us looking forward to talking to you next quarter.
Yes.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Okay.