M/I Homes Inc. Q1 2023 Earnings Call
Speaker 1: questions and answers at the end. If you would like to queue for a question on today's call, you can do so by dialing star 1. I would now like to pass the conference over to Phil Creek with MI Homes. Thank you, you may proceed.
Speaker 2: Thank you. Appreciate you joining us today. On the call from Columbus, Ohio, is Bob Shotenstein, our CEO and President, and Derek Clutch, head of our mortgage operations. First to address regulation for fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call.
Speaker 2: because we are prohibited from discussing significant non-public items with you directly.
Speaker 2: 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.
Speaker 2: With that, I'll turn it over to Bob. Thanks, Phil. Good afternoon and thank you for joining us today.
Speaker 3: We had very strong first quarter results, highlighted by record revenue, record income, and a 10% increase in homes closed.
Speaker 3: We were particularly pleased to deliver these strong results against an always changing macroeconomic landscape marked with uncertainty.
Speaker 3: As everyone knows, housing conditions today are materially different than a year ago.
Speaker 3: The best example being that today's home buyer is facing significantly higher interest rates than they were a year ago.
Speaker 3: Despite these changes in housing conditions, it is clear that there remains a strong, consistent desire for home ownership.
Speaker 3: Since January 1, demand for new homes has been considerably stronger than I suspect most anyone anticipated, underscoring the strength and resilience of the consumer.
Speaker 3: We feel very good about our business and believe the home building industry will continue to benefit from strong fundamentals including increased household formations and other favorable demographic trends.
Speaker 3: as well as an under supply of housing and low inventory levels.
Speaker 3: In terms of our results, our pre-tax income for the quarter increased 11% to a first quarter record of $136 million.
Speaker 3: Net income increased 12% to a first quarter record of $103 million. Revenue driven by the previously mentioned 10% increase in closings.
Speaker 3: along with a 6% increase in average sale price, increased 16% to a first quarter record of $1 billion.
Speaker 3: So our gross margins declined by 130 basis points to 23.5%.
Speaker 3: They frankly held up better than we had expected going into this year.
Speaker 3: The decline was primarily due to mortgage rate incentives selectively employed by us to help drive sales and closings during the first quarter.
Speaker 3: Offsetting the decline in our gross margins, our S, G, and A expense ratio improved by 50 basis points to 10 percent, and that is a first quarter record.
Speaker 3: Our pre-tax income margin declined by 60 basis points year over year to 13.6 percent, still a very solid bottom line return considering the housing conditions. And we were proud to achieve a strong 26 percent return on equity during the quarter.
Speaker 3: From a sales standpoint, during our last earnings call, we shared that January of this year was our best sales month since April of 2022.
Speaker 3: I am pleased to report that February was even better than January and we are further encouraged, we were further encouraged I should say, by the continued sales improvement and demand that we saw in March. Thus far, I am pleased to report that April is in line with March.
Speaker 3: With that said, we sold 2,171 homes during the quarter, a decline of 14% from last year.
Speaker 3: As mentioned in my opening comments, despite the current interest rate environment, we are seeing strength in buyer demand and traffic, and that traffic is very solid and high quality, both in our communities and online.
Speaker 3: During the quarter we were operating on average in 13% more communities than a year ago.
Speaker 3: We are on track to open a number of new communities this year and expect to increase our community count for the year by 15% over 2022.
Speaker 3: Now I'll provide some additional comments on our markets.
Speaker 3: Our division income contributions in the first quarter were led by very strong performance in Dallas, Columbus, Tampa, Charlotte, Orlando, and Sarasota.
Speaker 3: Sales for the first quarter in the northern region decreased by 30 percent, while sales in the southern region increased by 1 percent.
Speaker 3: To provide a bit more color on our sales, we have seen good consistent demand in all of our Florida markets.
Speaker 3: as well as in Charlotte and Raleigh.
Speaker 3: Texas has also been very steady, with the exception of Austin.
Speaker 3: which was red hot a year ago and has been a bit choppy thus far in 2023.
Speaker 3: The Midwest is a bit of a mixed bag. For example, Columbus and Chicago have seen good quality consistent demand and good sales performance.
Speaker 3: while Indianapolis and Minneapolis have been slightly more challenging.
Speaker 3: Our deliveries in the southern region increased 14% from a year ago, and our deliveries in the northern region increased by 5% from last year.
Speaker 3: 60% of deliveries came out of the south, 40% out of the north.
Speaker 3: Our owned and controlled lot position in the southern region decreased by 15 percent compared to a year ago and decreased by 2 percent from last year in the northern region.
Speaker 3: 37% of our owned and controlled lots are in the north, the other 63% in the south.
Speaker 3: in terms of both the quantity of land and the quality of that land.
Speaker 3: Company-wide, we own approximately 24,000 lots, which is roughly a three-year supply.
Speaker 3: Of that total, 32% of the own lots are in the north, 68% in the south.
Speaker 3: On top of the own lots, we control pursuant to option contracts an additional 17,000 lots.
Speaker 3: In total, therefore, our owned and controlled lots increased 11 percent year over year to approximately 41,000 lots, roughly a five year supply.
Speaker 3: Significantly, almost half of the lots that we own and control, roughly 42 percent, are controlled under option contracts, which gives us that important flexibility to react to changes in demand or changes in individual market conditions. In regards to our balance sheet.
Speaker 3: Let me just simply say it has never been stronger.
Speaker 3: We ended the first quarter of 2023 with an all-time record $2.2 billion of equity, which equates to a book value per share of $79.
Speaker 3: We also ended the quarter with a cash balance of $543 million and zero borrowings under our $650 million unsecured revolving credit facility, thus giving us very significant liquidity.
Speaker 3: All of this resulted in a debt-to-capital ratio of 24%, down from 29% a year ago, and a net debt-to-capital ratio of 6%.
Speaker 3: As I conclude, let me just state that we are in the best financial condition in our 47-year history. And despite the uncertainty surrounding the general economy, MI Homes is very well positioned to have another year of strong results in 2023.
Speaker 2: With that I'll turn the call over to Phil. Thanks Bob our new contracts were down 18% in January Down 18% in February and down 6% in March and our cancellation rate for the first quarter was 13% 54% of our first quarter sales were the first time buyers
Speaker 2: and 58% were inventory homes. Our community count was 200 at the end of the first quarter compared to 176 a year ago. The breakdown by region is 104 in the north and 96 in the southern region.
Speaker 2: During the quarter we opened 19 new communities and closed 15. We currently estimate ending 2023 with about 225 communities.
Speaker 2: We delivered 2,007 homes in the first quarter, delivering 64% of our backlog. And at March 31st, we had 4,100 homes in the field versus 5,700 homes in the field a year ago.
Speaker 2: Revenue increased 16% in the first quarter, reaching a first-quarter record of $1 billion. Our average closing price for the first quarter was a first-quarter record of $486,000, a 6% increase when compared to last year's first quarter's average closing price of $457,000.
Speaker 2: and backlog average sale price is $522,000.
Speaker 2: which is also a first quarter record up from 505,000 a year ago.
Speaker 2: Our first quarter gross margins were 23.5%, down 130 basis points year over year. Our construction costs were flat in the first quarter compared to last year's fourth quarter, and we are starting to get improvement in our building cycle time.
Speaker 2: Our first quarter SG&A expenses were 10% of revenue, a first quarter record improving 50 basis points compared to 10.5 a year ago.
Speaker 2: Interest income for the quarter was $1.3 million, and our interest incurred was $7 million.
Speaker 2: Our pre-tax income was 14% and our return on equity was 26%. We're pleased with our returns.
Speaker 2: And during the quarter we generated $147 million of EBITDA compared to $135 million in last year's first quarter. Our effective tax rate was 24 percent in the first quarter compared to 25 percent in last year's first quarter.
Speaker 2: Our earnings per diluted share for the quarter increased to $3.64 per share from $3.16 per share last year, up 15%. Our book value per share is now $79, a $19 per share increase from a year ago.
Speaker 2: We did not buy any stock back during the first quarter. Since 2021's third quarter, we have repurchased 2 million shares, spending $107 million, and we bought back about 7% of the outstanding shares.
Speaker 2: Now, Derek Clutch will address our mortgage company results.
Speaker 2: Thanks, Phil. Our mortgage and title operations achieved pre-tax income of $12.6 million.
Speaker 1: compared with $13.1 million in 2022's first quarter.
Speaker 2: Revenue increased 5% from last year to $25.3 million due to slightly higher margins on loans sold and an increase in the average loan amount compared to the prior year.
Speaker 2: The average loan to value on our first mortgages for the first quarter was 83%, which was slightly lower than last year.
Speaker 2: 81% of the loans closed in the quarter were conventional and 19% FHA or VA, compared to 77% and 23% respectively for 2022's first quarter.
Speaker 2: Our average mortgage amount increased to $393,000 in 2023's first quarter, compared to $377,000 last year.
Speaker 2: Loans originated decreased to 1,258, which was down 1% from last year, while the volume of loans sold decreased by 7%.
Speaker 2: Our borrower profile remains solid, with an average down payment of over 17 percent and an average credit score on mortgages originated by MI Financial of 746.
Speaker 2: compared to 747 in 2022's first quarter. Our mortgage operation captured 78 percent of our business in the first quarter, compared to 82 percent last year, and we maintained two separate mortgage warehouse facilities that provide us with funding for our mortgage originations
Speaker 2: prior to the sale to investors.
Speaker 2: At March 31st, we had a total of $224 million outstanding under these facilities.
Speaker 2: which expire in May and October this year.
Speaker 2: Both facilities are typical 364 day mortgage warehouse lines that we extend annually. Now I will turn the call back over to Phil. Thanks, Derek. As far as the balance sheet, we ended the first quarter with a cash balance of $543 and no borrowings under our unscrewed revolving credit facility.
Speaker 2: We have one of the lowest debt levels of the public home builders and are positioned well with our maturities. Our bank line matures in late 2026.
Speaker 2: and our public debt maturities are in 2028 and 2030 with interest rates below 5%.
Speaker 2: Our Unso land investment at the end of the quarter is 1.3 billion compared to 1.1 billion a year ago.
Speaker 2: We had 650 million of raw land and land under development and 600 million of finished unsold lots.
Speaker 2: During the first quarter we spent $46 million on land purchases and $92 million on land development for a total of $138 million.
Speaker 2: And at the end of the quarter we owned 24,000 lots and controlled 41,000 lots.
Speaker 2: Also, at the end of the corridor we had 432 completed inventory homes and 1,551 total inventory homes.
Speaker 2: And of the total inventory, 730 are in the northern region and 821 are in the southern region.
Speaker 2: A year ago we had 75 completed inventory homes and 1,224 total inventory homes.
Speaker 2: This completes our presentation. We will now open the call for any questions or comments.
Speaker 1: We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two.
Speaker 1: Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate in queue.
Speaker 1: The first question is from the line of Jesse Letterman with Zelman and Associates. You may proceed.
Speaker 4: Thanks for taking my questions and congrats on the strong quarter.
Speaker 4: Thanks for taking my questions and congrats on the strong quarter. Thanks Jesse.
Speaker 4: So last quarter you noted you were limiting sales in a small number of communities, so my first question is kind of twofold. One is how is pricing power today across your footprint and are you able to maybe quantify the share of communities in which you're increasing prices or even...
Speaker 4: You know, pulling back on incentives. And the second part of that question is, you know, limiting sales perhaps suggests you are worried about land availability and lot availability going forward, but your land acquisition and lot acquisition spending declined again during the quarter as you just mentioned. So what will it take for you to return to the land market with a little more vigor?
Speaker 3: of communities where we think we have pricing power, but there are some where we're starting to get it. I think the markets are settling a bit, settling into buyers getting used to these interest rates in the upper 5s to mid-6s. We're really...
Speaker 3: pleased with the level of demand and traffic that we've seen essentially since the very end of December of last year. And it's continued as I mentioned thus far in April . A little bit of choppiness in a few markets. As far as limiting sales go, it's a handful of communities. We've got over 200 communities. It's in less than 10%.
But in those communities, we could have sold more. And the reason we haven't is not because of land and lot availability. It's strictly because of delivery and supply chain and being able to protect our costs. And even though I think that that problem has peaked, we're going to have to be able to get it back to the public.
and it's gotten considerably better.
inflationary pressures that come out of nowhere. You know, lumber's been a bit of a roller coaster. It's good now, but it could just as quickly turn back up and there's some indications that it might be. So we don't want to get too far out ahead of ourselves. We're very pleased with our margins for the first quarter.
We did have to discount a little to get some people across the closing line with financing and so forth. And I mentioned that in my comments. The majority of our markets, by a lot, were in 17 markets. We're not quite officially open yet for sale in Nashville. And we've just sold less than four or five in Fort Myers, Naples. So we are actually open there. But it's.
Charlotte, Columbus, Chicago, Indianapolis and Minneapolis were a little up and down. I think they're heading back towards to where they should be.
We're very, very pleased with where things are. We did not think we would be able to say all the good things we said three months ago. But we know we've got good communities. We knew they would hold up well, whether the market was thick, thin, or really thin.
And right now, I would say demand is about anywhere from a B- in some markets to a B- in others. And it's very manageable and hence, you know, I think we're able to post some pretty strong numbers in the bottom line.
Thank you. Just one quick follow up on that before my second question. Are you actually raising prices in any of your markets given that, you know, stronger than expected demand that you're seeing?
It's a subdivision business and you know,
I suspect there's a few communities where we're raising prices.
I don't think it's a significant percentage.
My guess is it's, I'm guessing a little bit, because I don't know the exact number, but I'm guessing it's somewhere between five and 10%. And we have new community openings, so those communities, it's important to know, we don't have to worry about the backlog, and we're able to open up it at plan four targeted margins.
at which they were underwritten. And our new communities were very pleased with how they were performing.
I think housing in general is underappreciated by the market and you know hopefully you and your cohorts can convince the market that this is a pretty damn good industry and it should be for the next, most of the years during the next ten I bet on housing.
Thanks for that.
My last question is just in terms of, you know, as you mentioned, your closings increased by a pretty healthy percentage in the first quarter, which was very impressive. And, you know, we assume a lot of that was driven by specs that you kind of had built up late last year and throughout the first quarter. I think I missed some of your numbers there related to homes in the field and whatnot, but I think it would be helpful just to understand.
know, the kind of run rate on deliveries for the rest of the year, you know, that's pretty dependent on how many specs you've got built up and your ability to continue ramping those to the extent you did, you know, for your first quarter deliveries. You kind of talk about, you know, the cadence and maybe your spec supply and how you see that kind of playing out for the rest of the year.
Yeah, well, what basically happened was that with sales being weak, the second half of last year...
you know, we significantly slowed down starts. We also ended up with a little higher level of finish specs.
And one of the reasons our first quarter was stronger than we thought was with our sales picking up the first quarter, we talked about 58% of our first quarter sales being specs.
And a number of those specs, we not only got sold, we got closed. We are increasing starts more now.
But we did in the quarter, as I said in my remarks, with 4,100 houses in the field versus 5,700 a year ago.
So, first quarter closings again, we're stronger than we thought. We're doing all we can to close as many houses as we can, obviously in the second quarter, third quarter, etc. But it will be a little bit of an unusual year in that, you know, normally closings kind of.
tend to increase as you go through the year. The second and third quarter will be a little bit choppier for us because we have 1,600 less houses in the field. But again, with the demand we're seeing that Bob talked about and store count increasing on average about 15% in most of our divisions, if we get houses in the field in May and June , we can still get.
I appreciate the color.
Thanks.
Thanks. Thank you.
The next question is from the line of Jay McCandless with Wedbush Securities. You may proceed. Hey, thanks for taking my questions. Phil, you actually you didn't realize it, but you actually answered my first question. I was going to ask you if we should expect a little dip in closing sequentially. It sounds like that's how it's lining up.
Yes, I mean if you look at it Jay again, you know with having 1,600 houses less in the field at 331 versus a year ago, now we do have 400 or so finished specs and we're doing all we can to get those sold and closed. But we will be a little challenged in the second and third quarter.
it would go back up. Got it. So where are you? I mean, sounds like you're down to maybe six, seven months based on what bob said about if you get a house in the field by mayor June , you can still close it this year. Yeah, it depends. I actually didn't say that I did. I did.
It depends on the... But I agree with it. It depends. When you look at, you know, Houston and San Antonio with primarily Smart Series type houses, you know, you can see some houses start even in June and July and get closed.
Some of our larger houses, etc., they may need to be in the field in April or May, so it depends a little bit. But again, we're still expecting to have a strong year.
That's great. And then on Smart Series, and I apologize if I missed it, did y'all give the percentages this quarter of what percentage for Smart Series sales?
I didn't but I'm happy to do it right now. It continues to go up. A year ago it was in the low to mid 40s and today it's in the low to mid 50s.
I think it's like 53, 54 percent. I've got it here somewhere. And last year at this time I think was around 43, 44 percent. It continues to be, you know, a very important part of our business. But by the way, I mean the other way to think about it is half of our business is not. So that's also important.
And we love the diversity of our product offering and we think it's a strength and we'll continue to push it as hard as we can push it. And if you look at the average sale price of the Smart Series J these days, it's a little over $400,000 and it continues to be above company average in GP and also in PACE.
We love the diversity of our product offering and we think it's a strength and we'll continue to push it as hard as we can push it. And if you look at the average sale price of the Smart Series, Jay, these days it's a little over $400,000 and it continues to be above company average in GP and also in PACE. So that's a good thing.
Absolutely. And then going back to I think the opening comments where you said that the gross margin in one queue was came in better than what you were expecting. What were you guys expecting for the quarter?
Well, look. The same thing everyone else was expecting. We weren't really sure. You know, the last three months of 2022.
Demand was significantly more challenging than it turned out to be beginning in January . And sticker shock from rate increases was in full bloom. And we weren't sure what we'd have to do to hold the backlog together.
And, you know, we didn't know if they would drop 200 basis points, perhaps as much as three in certain markets. And as it turned out, we didn't know if they would drop 200 basis points, perhaps as three
We didn't know if they would drop 200 basis points, perhaps as much as three in certain markets. And as it turned out, I'd like to think.
It's due to several factors.
several factors.
has been huge for the industry.
and us.
If you'd have said to me back in the fourth quarter you think your margins will be approaching 24% in Q1 knowing what I knew then I would have said no shot. And I think by the way we did get that question asked during our last call, maybe the one before, and we talked about things trending down closer to 21-22%.
the additional closings. Yeah, if you look at it Jay, if you look at the fourth quarter of last year, excluding the 20 million dollars of impairments we took in the fourth quarter of last year, the GP was 24-1.
We were 23.5 the first quarter, so we were only down 60 basis points.
I mean, like Bob said, we thought that might be 150, 200 basis points. We just weren't sure. We are selling and closing more spec homes than we have in the past, and that's kind of hard to estimate. As far as the ASP on closings, you know, it was 492 in the fourth quarter of last year, 486 the first quarter down 1%.
You know, we thought that might be down a little bit more, so that benefited us. When you look from a sales standpoint, the first quarter sales, the ASP was 480.
So, things like things have stabilized a little bit, a little more than we thought.
You know, a big thing to us is those 19 stores we opened, you know, are doing even a little better than we thought. And we obviously have plans to increase the number, you know, of stores this year new because we're going to increase stores by 15% on average. So we'd like to be closing more houses in the second and third quarter, but we still should have good...
have been asked by Zelman, by Jesse, had to do with do you think you're going to get back in the land business? We never got out of the land business.
We're in the land business. We're looking for deals. We intend to grow the company and we may intend to grow it more than we thought we could six months ago now over the next couple of years. So I didn't want to let that go unsaid. We are in the land business.
We're looking for deals and we're pushing divisions that are in a position to do so to you know to to grow in a manageable healthy way.
Got it. Sorry. And then, no, no worries. So, where, I guess, where is the differential now on spec gross margin versus to be built?
You know, the last couple of quarters in general, this has been about 200 basis points.
You know, the last couple of quarters in general, this has been about 200 basis points as far as specs being lower than to be built.
But again, that moves around some, but that's kind of what it's been recently.
And then last question for me, I guess if you look at what's in backlog right now, is it still that same 58% that you did in terms of spec for the first quarter or is that a lower number and...
Do you think carrying the same type of gross margin sequentially is that possible achievable etc? You know that's it's hard I mean obviously what's in backlog, you know, or sold houses as far as Specs we feel good about our spec levels
As I said before, we have whatever, over 400 finish specs. We are trying to move those finish specs through the system sooner because we have 1,600 less houses in the field.
So it's always hard to predict what margins and what ASP are going to be on the specs. Our hair is not on fire. It's not like we have to do anything.
But we'll just continue making the best decisions that we need to, to get through that spec inventory.
Okay, great. Thanks for taking my question.
Thanks for taking my questions.
Thank you. There are no further questions in queue, so as a reminder, if you'd like to ask a question, you can dial star 1.
There are no further questions in queue. I would like to turn the call back over to Phil Creek for concluding remarks. Thank you very much for joining us. Look forward to talking to you next quarter.
That concludes today's MI Homes first quarter earnings conference call. Thank you for your participation. You may now disconnect your lines.