Q4 2022 M/I Homes Inc Earnings Call
10% to a record $4 $1 billion increased pretax income by 25% to a record $635 million and improved our operating margin by 160 basis points to 15, 4%.
In addition, we ended the year in the best financial condition in our 46 year history.
With the cash balance over $300 million zero borrowings under our $650 million credit facility.
And a debt to capital ratio of 25%.
We were particularly pleased to deliver such strong operating and financial results in the face of challenging market conditions.
As has been well documented the rapid rise in interest rates over the past nine months.
As materially impacted demand for new homes and demand for existing homes.
The other hand, the demand for homes has not vanished.
Instead, the higher rates have resulted in potential buyers, taking a pause and moving to the sidelines.
There remains very tangible homebuyer demographics, particularly among millennials and Gen Z individuals.
And the prolonged under supply of homes that has persisted for years, all gives us great confidence in the long term outlook for the housing market and our industry.
Our new contracts for the full year of 2022 decreased by 27% compared.
Compared to the record sales we posted in 2021.
For the fourth quarter, our new contracts were down 44% compared to a year ago. However.
However, as Phil will outline in a few minutes, we saw our sales and demand begin to improve during the latter part of the fourth quarter, despite the higher rate environment.
Moreover, and importantly, the improvement in strength in buyer demand traffic and sales.
<unk> has continued into 2023 specifically.
Specifically.
With notice noticeably stronger levels of traffic both in our models and online.
We sold 633 homes in January .
This is our best sales month since April of last year.
And though down 18% from a year ago. This represents an approximate 60% sequential improvement over the average monthly sales we recorded during the last half of 2022.
Clearly we are encouraged by this recent material improvement in our traffic and sales.
And similar commentary from select other builders adds to this encouragement.
While there remains much uncertainty in the market.
And no one really knows whether this recent strengthening and improvement in demand and sales will continue we do believe it underscores and confirms the underlying home buyer demographics and desire for a new home.
Now I'd like to provide some comments on our specific markets.
We experienced strong performance from our divisions in 2022 with substantial income contributions across the board.
Led by Dallas, Tampa, Columbus, Orlando, Raleigh, and Charlotte.
In our southern region, which consists of 11 markets in Texas, Florida, North Carolina, and Tennessee are deliveries increased 4% over last year's fourth quarter, comprising 1413 deliveries or 59% of the total.
Northern region, which consists of our other six markets located in Ohio, Indiana, Illinois, Michigan and Minnesota.
<unk> contributed 971 deliveries, which was an increase of 2% over last year's fourth quarter.
For the year homes delivered decreased 5% in the southern region and were flat in the northern region.
Our fourth quarter, new contracts in the southern region decreased by 41%.
And decreased by 48% in the northern region.
For the year, new contracts decreased 28% in the southern region, 25% in the northern region.
Our owned and controlled lot position in the southern region decreased by 8% compared to a year ago and increased by 3% in the northern region when compared to 2021.
Companywide, we now own approximately 25000 single family lots are lot equivalents of this total 32% are in the northern region, 68% in the southern region. This equates to roughly a three.
Three year supply of owned lots.
On top of the owned lots, we control pursuant to option contracts, an additional 17100 lots.
In total we own and control roughly 42000 single family lots, which is down 4% from <unk> from a year ago and equates to about a five year supply.
Most importantly about 41% of our lots are controlled under option contracts, thereby giving us significant and important flexibility to react to changes in market conditions.
Before I turn the call over to Phil Let me just close with a few additional comments.
We are very excited about our business as we look ahead to 2023.
The new communities that we opened in 2022 are performing well and the planned new community openings for 2023 should further contribute to the strength of our operation.
Building upon the long term success of our Orlando, Tampa and Sarasota operations, We recently announced our entry into the Fort Myers Naples market.
This will allow us to continue our growth along the southwest coast of Florida.
As I mentioned at the beginning of my remarks, our financial condition is excellent as strong as it's ever been.
With low debt levels significant cash and a well balanced land position.
The operating strategy, we have employed is very well suited to respond to current macroeconomic conditions for all these reasons. We believe <unk> homes is very well positioned for 2023 and beyond.
I'll turn the call over to Phil Thanks, Bob our new contracts were down 45% in October down 51% in November and down 35% in December for a 44% decline in the quarter compared to last year's fourth quarter and our sales pace was one eight in the fourth quarter compared to <unk>.
Three three and last year's fourth quarter, and our cancellation rate for the quarter was 30% as to our buyer profile about 58% of our fourth quarter sales were to first time buyers compared to 53% a year ago and 64% of our fourth quarter sales were inventory homes compared to <unk>.
45% in last year's fourth quarter.
Our community Count was 196 at the end of 2022 compared to $1 75, a year ago. During the quarter, we opened 25, new communities while closing seven.
For the year, we opened 101, new communities compared to opening 72 in 2021.
We currently estimate we will end 2023 with about 225 communities.
We delivered an all time quarterly record 2384 homes in the fourth quarter.
Delivering 53% of our backlog compared to 43% a year ago.
And revenue increased 16% in the fourth quarter of this year, reaching an all time quarterly record $1 2 billion.
Our average closing price for the fourth quarter was 492011% increase when compared to last year's fourth quarter average closing price of 443000.
And our backlog average sale price is 541000 up 11% from a year ago.
The fourth quarter, we recorded a pre tax charge of $18 4 million for impairment or 50 cents per diluted share. This charge consisted of $10 2 million of pre acquisition land cost and $8 2 million of inventory valuation charges are.
Our gross margin exclusive of the impairment charge was $24 one for the quarter up 90 basis points year over year and for the full year, our gross margins improved 140 basis points to 25, 7% exclusive of the impairment charge are.
Our fourth quarter and full year SG&A expenses as a percent of revenue or nine 1% and nine 8% of revenue.
A $70 60 basis point improvement compared to the prior year.
Reflecting greater operating leverage and our lowest percentage ever.
Constantly review, our cost structure and due primarily to our lower year end backlog, we reduced our head count by 8% in January of 2023.
Interest expense decreased 400000 for the quarter and increased slightly for the year interest incurred for the quarter was $9 2 million compared to $9 4 million a year ago and for the year interest incurred was $38 million versus $39 million last year.
We are pleased with our improved returns for the year. Our pre tax income was 15, 4% versus $13 six last year and our return on equity remained a strong 27%.
During the fourth quarter, we generated $196 million of EBITDA compared to $155 million in last year's fourth quarter and for the full year 2022, we generated $705 million of EBITDA up 24% over the prior year.
Generated $184 million of cash flow from operations in 2022 compared to used in $17 million in 2021, our effective tax rate was 21% in the fourth quarter compared to 20% in last year's fourth quarter.
Our annual effective rate for 2022 was 23% compared to 22% the year before we expect 2020 threes effective tax rate to be around 24%.
Our earnings per diluted share for the quarter increased 21% to $4 65 per share from $3 83 per share in last year's fourth quarter and increased 30% for the year to $17 24 per share from $13 28 per share last year.
During 2022, we repurchased one 2 million of our outstanding common shares for $55 million, leaving $93 million available under our current repurchase authorization, we did not repurchase any shares in the fourth quarter now Derek <unk> will address our mortgage company results.
Thanks, Bill in the fourth quarter, our mortgage and title operations achieved pretax income of $9 7 million.
Down $1 1 million from 2021 and revenue of $22 6 million.
Down 1% over last year, which.
It was primarily a result of lower pricing margins and fewer loans closed and sold.
For the year pre tax income was $39 $3 million and revenue was $86 2 million.
Loan to value on our first mortgages for the quarter was 82% the same as 2020 one's fourth quarter.
79% of the loans closed in the fourth quarter were conventional and 21% were FHA or VA compared to 81% and 19% respectively for 2021 same period.
Our average mortgage amount increased to $392000 in 2020, twos fourth quarter compared to $360000 in 2021.
Loans originated in the quarter decreased 12% from 692 to <unk> thousand 597, and the volume of loans sold decreased by 4%.
Our borrower profile remains solid with an average down payment of over 18%.
For the quarter the average borrower credit score on mortgages originated by <unk> financial was 746.
Our mortgage operation captured 77% of our business in the quarter, a decrease from 83% in 2021 fourth quarter.
Finally, we maintained two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors at December 31, we had a total of $246 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'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. Our total homebuilding inventory at year end was $2 8 billion, an increase of $400 million above prior year levels, and we had 4700 homes under construction at year end.
Which includes our backlog and inventory homes that is down 12% from 12 $31 21 to 5300 houses.
During 2022, we spent $341 million on land purchases and $496 million on land development for a total land spend of 837 million. This was down from $1 1 billion in 2021 and.
In 2022, we purchased 8000 lots compared to 2021 17000 lots.
At 12, 31, 2002, we had $625 million of raw land and land under development and $684 million of finished unsold lots. We own 8500 unsold finished lots with an average cost of 80000 per lot and.
And this average lot cost is 15% of our 541000 backlog average sale price and at the end of the year. We had 485 completed inventory homes and 827 total inventory homes of the total inventory, aged 90 or in the North region and 937 are in the southern region and <unk>.
<unk> 31, 21, we had 99 completed inventory homes and 266 total inventory homes.
This completes our presentation.
Now open the call for any questions or comments.
We will now begin the Q&A session.
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Your first question comes from the line of Jesse Letterman with Zelman and Associates. Please proceed.
Hi, Thanks for taking my questions and congrats on the strong results.
I appreciate all the color you provided in your prepared remarks.
Thanks Jesse.
But my first question pertains to the pricing side of the equation.
Dave some good color on demand thus far into January in the step up from December can you talk a little bit about how your pricing philosophy is reacting to that demand or is the demand.
We're doing relative to December because of the pricing initiatives you've taken in other words as demand has pricing firmed up at all.
First of all I think there's no one thing I think it's a combination of a number of things.
I do think that there could be some.
Group of buyers that are beginning to settle in with rates now hovering in that low to mid sixes.
Having said that.
We have.
<unk>.
Aggressively tried to generate traffic.
By selectively promoting bought down interest rates not in every community are in every market, but in enough divisions that we can headline advertise that on our website.
That has helped draw traffic and gotten people into the models.
We have we do expect our margins to come down this year. We've historically said that this is a 'twenty one 'twenty 2% business.
And of course, we were running at 25% or 26% across the board for quite some time.
It is.
This is strictly intuition, it feels like things might be leveling off somewhat.
Every market is different.
There appears to be more strength in certain of the Texas, and Florida and Carolina markets than perhaps in some of the others.
But as I said in.
In my comments.
Even though for weeks does not a season make.
It is a strong start to the year.
We had averaged during the last six months of last year, you can do the math about 390 sales a month from July through December and we sold 633 in January and some of our Midwestern markets posted very strong sales.
And we saw a noticeable uptick in traffic.
Both website and foot traffic beginning during the latter part really the secondary so we could December through the rest of the month and then it's picked up even more so in January and seems to be leveling off now.
At a level that <unk>.
Produced 633 sales.
It was down 18% from January of a year ago.
That was a runaway month in many respects we were limiting sales in virtually every one of our communities.
Youll remember those days so.
And now.
Cros are near 200 or so communities.
I am happy to report that we are limiting sales at a couple of spots but.
<unk> 90, plus percent of our communities. There is no limitation of any type.
But.
It could be a little bit of a leveling off.
But it's too it's too soon to really know for sure. There's so much uncertainty you know more about it probably than most you follow all the macro data and.
We will see I think we'll know when we know but I do know this.
It's got a great land position, we've got great communities.
Our new communities that we opened in 2022, we're performing very well.
The strict underwriting I think has served us well and will continue to the diversity of our product is an important ingredient in our company. We don't have all of our eggs in any one basket nor will we ever unless we have to we don't have to we've got a very strong entry level line of homes that we've talked about for many years call or <unk>.
<unk> series that continues to perform well.
We've introduced some more affordable smart product in many of our markets.
And we think we're getting better with managing online leads.
We thought we were good a year ago, we're better today.
<unk>.
There's a lot of operational initiatives that are in place for this year from reducing cycle time getting houses to the closing quicker.
Which could all help make this year look a little better than we might or might all have thought it was going to look here just even a month ago.
That's all extremely helpful. Thank you just a quick follow up when you said demand has kind of leveled off here, albeit at the high level, especially relative to the second half of last year. How are you kind of reacting to that do you plan on continuing to push price because you on orders to continue to accelerate.
Through the spring selling season.
Price lower that is or are you.
On the content.
Yeah, Alan used to ask that question a lot.
And the answer is.
It's a lot more art than science look we tried to we tried to get two to three on average it's first of all it's a subdivision business.
Some communities you want more pace than two to three.
But whatever the desired pace is based upon the underwriting we try to find.
Try to find that price point, where we think we can hit that pace.
And.
We.
And we come into this year, maybe a little bit more aggressive with with with our pricing to try to see if we can hit that but I will tell you. We're very pleased with how January has ended up.
So you want to answer that one of the things also as I said, we opened 100, new stores last year with about half of those opening the second half.
When things started getting difficult.
So not having to deal with any kind of big backlog and so forth and we did focus on what's the right product, what's the right specification level, let's get the best price point, we can be competitive and get decent pace and margin.
This many new stores as we had last year plus opening a number of new stores. This year, we think that gives us a pretty good opportunity also so we're pretty excited about where we are.
I appreciate that color.
One more just on you mentioned, 64%.
Kind of your spec breakdown and 64% of our inventory homes versus 45% last year.
Is that.
A conscious effort of yours too.
Start specs, maybe given the preference of the homebuyer and wanting a quicker close and if so can you talk about your plans for that moving forward and do you see that moving even higher in the months ahead.
Look.
This goes back to what I said a minute ago, we're not in all spec builder and whatnot. When we're not in all to be built builder. We never have been we've always tried to have a mix.
Turing is the demand ramped up its such a torrid pace through the better part of it through all of 2021 frankly in the first parts of 2002, we increased our spec levels in every community to try to help us.
Better managed deliveries.
All of the subcontractor trade pricing issues and so forth.
<unk>.
On a go forward basis, I think that percentage could move a little bit.
You know.
My guess is that throughout the year will be a little bit higher than 50% on the spec side and a little bit below 50% on the to be built side, there may be some intra quarter volatility there.
Where we were successful in buying up bought down rates the value of those down rates was not only in drawing traffic, but you had those rates were only available with relatively quick closing in other words only on specs, we couldnt hold those rates for six or seven or eight months. So most of those.
Bought down rates had to close within 30 60, maybe 90 days. So those were particularly suitable for specs Phil I don't know if you want to add anything the last couple of years, we were kind of running specs in the five six per community with maybe one or two finished.
And it happened for different reasons with all of the supply chain issues that kind of get to the point, where you kind of had to get the house in the field by March or April and get it close now we have seen a slight improvement in cycle time, and we were thinking we should get further improvement this year, which should help us but it still takes a fair amount of.
Time to get houses finished.
Also we're doing a few more attached.
Townhouse communities and by its nature, you get a few more specs there and in general the Smart series, our most affordable offerings, we put a few more specs on the ground, but interestingly. If you look at the last couple of quarters margins really have not been very different at closing between specs and to be built.
So we do want a good mix of business and some customers do want to go through the selection process and go to our design center and personalize the home some people want to do that so we try to have.
Diversity in our price points, our product offering we think that really helps us, but having a few more specs right now.
We think that's really beneficial we're managing it very closely but like Bob said I think youll see us continue to have 789 specs per community.
As long as Thats working.
Understood. Thanks again for all the color.
Thanks Jesse.
Thank you.
Your next question comes from the line of Jay Mccanless with Wedbush. Please proceed.
Hey, good afternoon.
I guess, maybe just.
Well time question, Hey, how are you all today.
Okay.
Todd.
Good thank you.
So with the cycle time.
On your build to order right now.
Is that looking for.
<unk> time versus where it might've been a year ago.
Great question.
We expect to see cycle time improvement.
And almost all of our markets.
2023 versus 2022.
We have started to see a little bit of that during the last part of 2022, it's different in every market because frankly, some some some needs need to improve more than others.
But my guess is.
That will see anywhere from one week to four weeks and all of our markets. This year.
And if the average is two or three.
That's.
We're going to try to get more we're trying to get back to the pre pandemic levels.
And there's a there's a lot of land mines. Some are on the land development.
<unk>.
Municipal side some are on the supply chain side, although a lot of that has really gotten it's not completely behind us, but a lot of it is.
That's good to hear.
What about any.
Any benefit from lumber prices coming in.
As part of that.
Is it likely that the gross margin in the front half of the year is going to be probably at the low end of that range that you talked about just because youre, having to resell some of these canceled or items.
Just a couple of thanks, Jay when you look at the fourth quarter compared to the.
A year ago from that our fourth quarter sticks and bricks were down a couple a couple of percent overall.
Our expecting not.
We will have in our numbers or anything, but we are expecting cost to come down a little bit this year.
When you look at.
Lumber coming down we really wont be getting any benefit of that toward until like second and third type quarter as far as margins our margins did come down from the fourth quarter versus the third.
I've mentioned before we kind of bleed the way the business candidate is 2021 22.
We kind of expect margins to be under pressure this year.
But having said that we still expect to.
Have decent margins, but we do expect margins to be more under pressure.
Okay.
Then in terms of getting those cancellations resold.
Any issues with that or has that been a.
Pretty orderly process.
It's actually been pretty early process I mean, we manage the whole thing as far as.
What we have in the field I said in my remarks, we had 4700 homes in the field at the end of the year down 12% from a year ago.
Depending on the product price point, we may need to get the house in the field by April to get it closed. This year. Some products are June July . So that's just a process you manage overall in every subdivision is little bit different.
Like Bob said.
Being able to improve cycle time by a couple of weeks really really helps us, but we think we're doing a pretty good job at managing the whole flow of no.
Sales construction, we do keep and every division a certain amount of permit ready specs. So if we do have an uptick in sales.
You can put a few more specs out there that's just part of managing the business.
Alright, what.
And then on the land side are you seeing any.
Maybe a little softer pricing or is pricing.
Any areas retreated.
Just wondering if some of the lots you may have walked away from youre getting to look at potentially a little bit better products.
That's very sub.
Its very market and sub market dependent.
<unk>.
No.
What youre seeing.
Well, let me start with this.
When things get tough.
A lot yet revealed.
They say in life.
And one thing that gets particularly revealed in our business is whether or not a locations are really a locations.
So when things get difficult.
You really find out what youre a locations are because they still perform at a pretty darn good level.
All of those other deals that you thought were as Ray minuses are probably sees.
And.
So what you've seen.
And you've seen this with us and I suspect from others. Most of the stuff that people are walking away from.
Our our deals that really don't pencil well or at least it's perceived will not pencil well under current conditions. I think you may see a little relief on those.
Because no one's going to buy it.
And.
There is there is there is an anecdotal.
There is a small example here or there.
Of some moderation or more terms you don't have to close and you don't have to take it down over three years, you can take it down over five years and there is no escalator.
That to me is a is a relaxation of terms so.
We're starting to see a few examples of that.
But.
For the sites that we believe in our competitors believe raise I think there'll be very competitive.
But for the stuff that's the more.
Normal normally be kind of locations I think that there may be some some advantages there, but we'll just have to see how that plays out.
We have a great land position, we don't need to buy.
A whole lot.
We're very well positioned this year next in the following year.
Vintage of almost everything we have on our books as a good vintage by that I mean, unlike when we bought it.
And.
But we'll watch and wait.
<unk>.
We've always been able to get it to generate a good return paying retail as they say.
So we don't we don't have to go up by a whole lot now, but we're looking at things and if theres bargains out there we're going to jump all over him our financial condition is the strongest it's ever been our debt levels, we have zero borrowings on our bank line.
And we're sitting on a lot of cash.
I mean, we own 25000 lots and we always talk about we like to own a two to three year supply based on current run rate.
Right now, we're a little bit above that but we feel really good about those 25000 lots and of course, we have 17000 behind that we did the last half of last year dramatically cut back what we purchased we were careful on how many developed lots we put on the ground.
We did have as I said about $10 million of walkaway cost.
Number of those deals wasn't a contract issue is just we don't think those deals are going to work under current terms. So we are renegotiating certain things, but we're really in good shape.
We don't have any you know land banking a lot of difficult agreements to work through when you look at the 17000 lots we have off the books.
The risk dollars are like 75 million box. So that's not a big number so we very much like the land position that we have don't feel like we need to do much of anything but certain markets. We are look and there's always issues here and there, but we feel really good about our land position.
Got it and then my last question is on Smart series, just maybe talk about where that is the percentage of orders for closings now.
It might be for the next couple of years.
Sure a year ago, I think we were in the low low forty's.
The most recent quarter I think our smart series was in the low fifties. So it jumped up quite a bit during these difficult times, we disproportionately sold even more than we thought smart series homes. My guess is for this year. It will settle in at that $50 $50 to 55% and we're very comfortable with it being there we've put out some.
New Smart series plans, we've got some new community openings. This year that will be there are fresh off the shelf that we're really excited to get open in the during the first few months of the year and a number of our markets. We've got some narrow or lot smart series stuff coming on in select markets. So.
Yes, it's a big part of our strategy on a go forward basis, it's not the only thing we do but it's something that we think we.
Even though we were little we wish we'd started earlier, we launched it in 2016 and it's been a huge plus for the company.
Absolutely sounds good thanks for taking my questions.
Sure. Thanks J J.
Thank you.
Again to ask a question please press star one.
There are no additional questions at this time I will pass it back to the management team for any further remarks.
Thank you very much for joining us look forward to talking to you next quarter.
Okay.
That concludes today's conference call. Thank you you may now disconnect your line.