Q2 2023 M/I Homes Inc Earnings Call
We encourage you to ask any questions regarding issues that you consider material during this call.
We are prohibited from discussing significant nonpublic items with you directly.
It's too far we're looking statements want to remind everyone that the cautionary language about forward looking statements contained in todays 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 I will now turn the call over to Bob.
Thanks, Phil Good morning, everyone and thank you for joining us today.
We had a very strong second quarter.
Despite higher interest rates and uncertain economic conditions.
Ari pleased with our new contracts homes delivered margins and income.
And we ended the quarter with our balance sheet in excellent shape.
In terms of our new contracts.
<unk> 2197 homes during the quarter.
One 1% better 1820 homes that we sold during 2022 second quarter.
Smart series, which is our most affordable line of homes continues to be an important contributor to our sales performance.
During the quarter, our smart series sales comprised about 55% of total company sales roughly the same percentage as a year ago.
During the quarter, we were operating on 15% more communities on average than we were a year ago.
Our sales pace equaled $3 seven homes sold per community per month.
You are on track to open a number of new communities. This year.
Back to increase our community count for 2023 by approximately 15%.
196 communities that we had opened at the end of 2022.
Closed 1990 homes in the quarter and continued to improve our construction cycle time throughout all of our divisions.
Gross margins for the quarter were a very solid 26%.
Considerably better expected going into this year.
Our pretax income for the quarter was $155 million.
Down from last year's record level still very pleased to produce pretax results of 15, 3% of revenue.
Now I will provide some additional comments on our markets.
Our division income contributions in the second quarter were led by Dallas Tampa Columbus.
<unk> soda Raleigh and Orlando.
New contracts for the second quarter in the northern region increased by 31%.
Contracts in our southern region increased by 14%.
Our deliveries in the southern region reached by six 7% from last year.
Our deliveries in the northern region decreased by 22% from last year.
61% of our deliveries came out of the southern region and the balance of our deliveries 39% out of the northern region.
Our owned and controlled lot position lot position in the southern region.
Decreased by 18% compared to last year.
Creased by 4% from last year in the northern region.
36% of our owned and controlled lots are in the northern region, while the other 64% are in our southern region.
Very strong land position companywide, we own approximately 23000 single family lots, which is roughly a three year supply.
Regards to our balance sheet, we ended the second quarter of 2023 with an all time record.
$3 billion of equity, which equates to a book value per share of $83.
We also ended the quarter with a cash balance of nearly $670 million and zero borrowings under our $650 million unsecured revolving credit facility.
This resulted in a debt to capital ratio of 23% down from 28% a year ago and a net debt to capital ratio of just 1%.
I conclude let me just state that we are in the best financial condition in our company's history.
Very good about our business and are well positioned to have another year of very strong results.
That I will turn it over to Phil.
Thanks, Bob our new contracts were up 6% in April up 21% in May and up 46% in June and our cancellation rate for the second quarter was 10%.
58% of our second quarter sales were to first time buyers and 55% where inventory homes. Our community count was 195 at the end of the second quarter compared to $1 68, a year ago and the breakdown by region is 100, and the northern region and 95 in the southern region during.
During the quarter, we opened 15, new communities, while closing 20.
Currently estimate ending 2023 with about 225 communities.
We delivered 1990 homes in the second quarter, delivering 60% of our backlog.
And at June 30, we had 4500 homes in the field versus 6300 homes in the field a year ago.
We started 2400 homes in the second quarter and 1600 homes in the first quarter.
Revenue decreased 3% in the second quarter.
And our average closing price for the second quarter was a second quarter record 493000, which was a 3% increase compared to last year's closing price of $4 77.
Backlog average sale price is 507000 down from 519000, a year ago are.
Our second quarter gross margin was 25, 5% down 180 basis points year over year and up 200 basis points from our first quarter. Our construction costs were flat in the second quarter compared to the first quarter and we are starting to get some improvement in our building cycle time.
Our second quarter SG&A expenses were $10 six of revenue compared to $9 seven a year ago.
Our second quarter, SG&A expenses increased 6% versus a year ago.
Due primarily to higher third party broker costs and expenses related to our higher community count intra.
Interest income for the quarter was $4 7 million and our interest incurred was $9 4 million.
We are pleased with our returns for the second quarter, our pre tax income was 15% and our return on equity was 23%.
During the quarter, we generated 164 million of EBITDA compared to $1 95 last year and our effective tax rate was 24% in the second quarter compared to 25% a year ago, our earnings per diluted share for the quarter decreased to $4 12 per share from $4 70.
Nine last year and our book value per share is now $83, a $17 per share increase from a year ago.
Now Derek <unk> will address our mortgage company results.
Thanks, Phil our mortgage and title operations achieved pretax income of $11 2 million, a 29% increase from $8 $7 million in 2020 two's second quarter revenue.
Increased 30% from last year to $25 $3 million due to higher margins on loans sold and an increase in the average loan amount.
The average loan to value on our first mortgages for the second quarter was 84%, which was slightly higher than last year.
71% of the loans closed in the quarter were conventional and 29% FHA or VA compared to 80% and 20% respectively for 2020 two's second quarter.
Our average mortgage amount increased to $402000 in 2023 second quarter compared to $384000 last year.
Loans originated decreased to 1281, which was down 5% from last year, while the volume of loans sold increased by 4%.
Our borrower profile remains solid with an average down payment of over 16% and an average credit score of 743 compared to $7 48 in 2022 second quarter.
Our mortgage operation captured 81% of our business in the second quarter compared to 77% last year.
Also we maintained two what we maintain warehouse facilities that provide us with funding for our mortgage originations at June 30, we had $186 million outstanding under these facilities now.
Now I'll turn the call back over to Phil.
Thanks, Derek for the balance sheet, we ended the second quarter with a cash balance of $668 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 late 2026, and our public debt matures in 2028, and 2030 and as interest rates below 5%.
Our unsold land investment at June 30th is one 3 billion compared to $1 1 billion a year ago and at June 30, we had $673 million of raw land and land under development and $587 million of finished unsold lots during the second quarter, we spent $96 million.
Land purchases and $109 million on land development for a total of $205 million and at June 30, we owned 23000 lots and controlled 41000 lots at the end of the quarter. We had 303 completed inventory homes and 1730.
Seven total inventory homes and of the total inventory homes 827 are in the northern region and 910 are in the southern region.
And at June 30 of last year, we had 91 completed inventory homes and 1732 total inventory homes, we spent $15 million in the second quarter repurchasing our stock and have $78 million remaining under our current board authorization and since the start of two.
22, we have repurchased 8% of our outstanding shares.
This completes our presentation, we will now open the call for any questions or comments.
Thank you Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number two and if you are using a speaker phone. Please lift your handset before pressing any keys.
One moment. Please for your first question.
Your first question will come from Alex Barron. Please go ahead.
Yes. Thank you.
Great job on the quarter guys.
Thank you.
You can see the market is starting to reward your final.
Yes, I was hoping you could.
Walk us through the improvement sequentially in the gross margin anything that.
Drove that was it just started you started to raise prices or lumber costs were lower or anything that explains the big jump sequentially.
Yes.
I'll start that and maybe Phil will have some comments he'd like to add to it.
At the beginning of the year I think the entire industry was quite concerned with rapidly rising rates and how much pricing.
Beverage, we might have and we had frankly.
Frankly.
<unk> our margins to be.
Somewhat lower than they obviously have turned out to be.
Slide the higher rates and has been quite solid and remains so today throughout almost all of our markets.
Act.
Throughout all of our communities.
Currently limiting sales and and about 15% of our communities, which is an indication of the demand.
And various places pink.
I think our communities are exceptionally well located.
Very strong product offering.
Smart series has is exceptional in terms of its appeal to first time buyers.
Really good about our move up product as well as our attached town homes.
And the combination of all those things, including the level of demand strength of our buyer profile given us.
Ability.
Which margins where appropriate.
As we've said over the years.
Manage the company on a subdivision basis.
A number of communities throughout.
Our company, where our margins are considerably higher than the 26%.
Also have some that are lower.
Division by subdivision basis.
While no one knows what the future will bring.
It continues to stay about where it is today.
A fair amount of confidence that we'll continue to have margins that are there.
Very acceptable level Bill do you want to add anything to that.
I don't think I would add Bob is we talked about opening 15 stores in the second quarter and we had opened 19 the first.
So the 34 new stores. We've opened this year are performing very well, even a little better than we thought they would we also talked about.
Costs being flat and so forth and again just a lot of time as you said on product every subdivision is a little different trying to open these new stores to right way really tried to emphasize sales pace.
So we just continue to be focused on that.
Okay, Great and then obviously.
Obviously your cash balance is pretty significant compared to any time in your history.
Was curious.
What you guys have that invested in because it looks like you generated almost $5 million of interest.
I'm, assuming that that's going to go higher unless you put money to work and if you aren't going to put the money to work, what's what's the most likely use of it.
Find more land or is it just.
Pay down debt at some point does it to buying back your stock like how are you guys thinking about uses of that cash.
The first part of that.
Job one for US is to continue to grow our business.
We think we have gained market share in nearly all of our markets over the last number of years.
And we expect to continue to growing market share.
So job one for us.
Job one for us would be to to invest in our divisions and that's how we'll likely be deploying most of the cash flow you want to comment on the rest of that.
Yes, I agree with that Bob we.
We do expect to spend more money on land.
Second half then we have the first half we did.
Pushed back a number of land transactions in the second half of last year when the business slowed down. So we do expect land span to accelerate we feel very very strong about our land position.
As far as stock repurchase we continue to look at that what is the best use of our capital as I've mentioned, we did buyback a $15 million of stock in the quarter.
And in the last few quarters, we bought back 8% of the outstanding shares. So we will continue to balance all those things, we do not have any debt due.
As far as the public debt until 2028, and this below 5% so.
We'll still have some cash and we will continue to put that to the best use we can Alex.
Alright, guys, we will keep it up and I'll get back in the queue. Thanks.
Your next question comes from Jesse Letterman Zelle.
Zelman <unk> associates. Please go ahead.
Hi, Congrats on a great quarter and thanks for taking my questions.
Thanks Jesse.
I remember last quarter, you talked about your expectations for closings through the year not necessarily follow the typical sequential increase through the year and your second quarter closings were roughly flat from the first quarter can you talk a little bit more about like how you see that cadence trending through the.
Balance of the year given.
The deviation or at least with stronger results in <unk> than at least we were expecting and maybe you were even expecting as well.
Well one thing I would say that has I think helped our closings and I suspect we will continue to.
As we noted improvement in cycle time.
And that varies by division of.
There are a number of divisions, where we've improved our cycle time by more than 30 days year over year, some have improved by <unk> <unk>.
15 to 20 days and we expect to continue to improve cycle time.
And hopefully get it back to those pre COVID-19 levels that we were that we were seeing in the year.
2019 than before and that will certainly contribute to getting the homes in the field closed at a more rapid pace fill you want to add anything to that.
Yes, as we disclosed Jesse we do have less houses in the field at mid year than a year ago. We did start a lot of houses in the second quarter and we're pleased with that also about 50% of our business is specs and some of those houses do sell and close in.
Quarter.
We were a little surprised pleasantly we closed more houses in the first quarter that we thought we would and we had a similar good experience in the second quarter closing more houses than we thought but again, we're trying to get all the good quality fully completed homes closed we can every quarter, but.
It is going to be a challenge for us.
As many houses in the second half as we did the first half, but we're doing all we can.
Thanks, that's helpful.
And as he mentioned was likely on last quarter's call your land spend nearly doubled sequentially, but it's still a little bit below the run rate over the last couple of years.
The percentage of communities that you are limiting sales it <unk>, a little higher to 15% of communities.
From 10% last quarter.
What do you need to see for that percentage to trend lower here and is there a risk that that moves meaningfully higher.
Over the near term at least until some of these recent deals.
And thats being community openings.
Jesse could you sort of re clarify the question I'm not sure I completely understood. It.
Yes.
Recognizing that the percentage of communities that you had to limit sales an increase a little bit sequentially here.
What are you is there any risk to that percentage of communities that you are limiting sales and increasing in the near term.
As you wait for these more recent land deals to filter through to community openings.
Well first of all the reason that we're limiting sales where we are is is simply.
Two to control are the deliveries in a way that we think we can best manage we don't want to get too far out over our skis so to speak.
And then and then those communities, where we are limiting sales.
We're also getting very strong margins.
And we just think that's the smartest way to run the business.
The decision to limit sales has little if anything to do with new communities coming on.
Bill I don't know if you want to add anything to that and I don't know if that answered.
Now every community is different and it's a combination of.
The number of finished lots we have.
The amount at times to get the houses built.
When you like a price into a customer today.
You got to make sure you can get the houses built on a timely basis at the costs do you have kind of locked up so it's kind of good news when we are having to limit sales.
That number kind of moves around every quarter based on whats going on in the local subdivisions, but that would be a really hard number to project, but again I will say that the new stores, we're opening which are a big part of our business last year and this year, we're very pleased with the way they are performing.
Great. Thank you for clarifying that I appreciate it and just one last one on the cost side of the business you've mentioned costs are stabilizing or they've been relatively flat. The last few quarters here and you are seeing some cycle time improvements, but you ramp starts pretty significantly and the industry broadly.
Also trying to increase their share of speculative starts.
What are your expectations for <unk>.
Costs, and even labor and material availability over the next couple of quarters do you expect to see any hiccups as it pertains to the supply chain just with the industry broadly ramping their starts base or have you been relatively insulated from that just because you are relatively larger size.
Well.
First of all.
To know what's going to happen on the cost side is always a toughie, but I feel really good about the supply chain issues throughout nearly every one of our markets and with regard to almost every part of our business.
The one issue that continues to be.
A concern I think for all the builders.
Is is on the land development side and the time it takes to get all of the approvals and the entitlements to bring deals to market and even.
It's well documented the issues that that a lot of the builders, including us have had in certain markets with getting.
All the utilities in place, particularly Transformers that continues to be somewhat of an issue I think it's getting a little bit better.
But I I I feel pretty good about the supply side of the business and I think that will continue to see improvement in cycle time across all of all the parts of our business and I think that the cost side.
I I don't see a lot of risk and big cost increases right now Phil do you have anything you want to add to that.
The only thing I will add is we do when we build houses and develop land build in a certain contingency for cost that could be 2% that could be 5%.
We are hopeful like Bob said of not having anything significant the rest of the year, but we will continue to keep those contingency amounts in our cost.
Great. Thanks, so much for all the insights I appreciate it.
Thanks.
Your next question comes from Jay Mccanless at Wedbush. Please go ahead.
Hey, good morning, Thank you for taking my questions.
The first one I had just wanted to.
Get your take on the Sushi, we've heard from a couple of your competitors.
Gross margins at least in the back half of 'twenty, three maybe a little bit softer just because they're there.
Finishing up the last of the closings for.
For homes that they sold back in the fourth quarter 'twenty two when there was a lot of price competition.
Just wondering how you're feeling about gross margins for the back half of the year and any commentary you could give around that.
Phil.
No.
Jay Thats, a hard estimate to give.
As Bob said, our margins have been better the first two quarters than we thought when you look at what's in our backlog our backlog margins are relatively flat again, we're selling about 50% specs. We plan on opening more stores the second half than we did the first.
That's kind of a hard number to come at.
But I want answered the same way Bob did that we still think our margins will be good and respectable.
It's hard to pin down a number we have a lot of emphasis and focus on margins because it is so important to us.
We will continue to do all we can to keep those margins as strong as we can issue its really hard to estimate what they'll be.
Okay.
And then could you talk about pricing power or maybe how many communities.
On a percentage basis, where you were able to raise price or cut back on incentives this quarter.
Phil.
Yeah.
That's it's hard Jay to have that exact number.
<unk>.
No what we tend to do more than anything in every sub divisions a little different.
Is help people with an interest rate again, even though we have strong down payments, we are still in the payment business.
And.
Buying the rate down a little bit is very effective to get those people's payment down and even though rates have been a little bit sticky, it's still not that expensive to buy down rates.
30, 45, 60 days prior to closing in general.
The incentives have.
Lessen some.
But again every community is a little bit different but I would say in general incentives have come off a little bit.
And the only thing I'd add to that is.
Obviously, we're in a time of the year, where seasonally and typically falls off a little.
Haven't seen much of that and well.
We're no longer in the spring selling season.
The demand for these summer months has held up quite well.
And there's nothing happening right now suggests that incentives are going to increase.
So you actually stole my next question, Bob I was going to ask if there's any commentary you could offer us.
Offer up around July and what Youll seen month to date.
I mean things are holding steady.
And then the last one Jay Jay you know as well as anyone.
The inventory levels.
Are at or near record lows.
Somewhere between 50, and I don't know maybe 75% of all the homeowners in this country are living in the home where their mortgages.
Maybe 5% or lower probably even lower than four.
And the likelihood that those homes are going to come to market anytime soon.
Is not great.
And as a result.
And thats out there.
As largely buying new and I think thats going to continue for quite some time and I think thats very strong tailwind for our industry, which is why I think.
Others in general are producing.
A stronger results than anyone would have thought eight months ago.
J J.
We're excited about the opportunity we have with all of the stores you know that we are opening.
We're obviously focusing on sales pace that really matters of course, if you look at Comparables last year in the second quarter, we sold 1800.
Third quarter last year, we sold <unk> hundred in the fourth quarter last year. We sold 1000. So our sales decreased significantly last year, we are trying to catch up as far as you know houses in the field. We did start a lot of houses in the second quarter.
Bob talk about cycle time cycle time is improving.
Our spec level is about the same it was a year ago. We do have a couple of hundred more finished specs than we did a year ago. We're obviously, hoping to get the majority of those the big majority of those sold and closed the third quarter.
The big swing item on our closing how many of those you know finished specs and specs that are almost finished today that we can get close to can we get through the third quarter and those are all the things that we're focused on.
Okay great.
And then the last one is kind of a two part question I guess number one maybe for people who are newer to the story could you walk through the smart series and some of the the pace and gross margin advantage of Smart series has versus your traditional product.
And then also as you think about the community openings you talked about.
Is there a path to getting smart series above 55% are getting to a bigger percentage with openings youre going to do through the rest of this year and into 'twenty four.
So the smart series has been a.
A grand Slam home run for our company.
Just opened in Tampa in 2016.
Loan to over half of our business.
Yeah.
I think that this that the 55% or so of our business that it represents today.
It may go up a little.
But I think it will hover between 50 and 60% here for quite some time.
Premier primarily caters to a first time buyer.
A very well designed lineup of homes, it's a tight line up not a lot of opportunity for I would call non standard changes.
The selection process is very efficient.
Smart series buyers do not go through a design studio per se.
They select their options off of a pre.
Redesigned menu.
Which gets homes from sale to start much quicker.
And then once the homes start because.
Average square footage on the Smart series home, probably around 2000 square feet versus maybe 'twenty four 'twenty 500 for the rest of our product line, we're able to build these homes quicker.
This contributes to returns.
And frankly.
While we didn't expect that when we first designed it to sell for.
Better margins.
In many many of our smart series communities.
Our margins are better and I think it's just because of the appeal and the quality of the product.
And the other thing is we're getting better pace.
So cycle time better.
The sale of <unk>.
Sales of start quicker.
Better pace.
Streamlined offerings.
<unk> way of running that part of our business all of that has contributed to our topline and our bottom line.
That's great. Thank you for taking my questions.
Thanks Jay.
Yeah.
Your next question comes from Carl Reichardt at <unk>. Please go ahead.
Thanks, Ed Thanks for taking my questions guys nice to talk to you Jade just stole that one was going to ask on smart series. So I wanted to ask another sort of one bigger picture one so no maturities until 2028.
And.
Reasonably concentrated in some markets as you look out at the opportunity set over the next five years to grow the business.
We expect you to try to deepen share in existing markets.
Is new expansion to new markets on the table for you.
And then how are you thinking about the acquisition environment right now.
Private is really what I'm focused on but even if public I'm just curious your thoughts there. Thanks a bunch.
Good questions.
First of all.
We're just getting started in Nashville, we have a number of homes under construction and we will be generating our first sales in that market. This year.
We're in Nashville to grow over the next several years to three to 500 homes a year Nash.
Nashville is going to be a big contributor to growth.
As we move on down the line here over the next couple of years Likewise in Fort Myers and Naples, We just got opened there within the last year, we've got several communities and we expect to have.
A significant operation in Fort Myers, Naples, as well, we're very bullish about that particular part of Florida and think it will be just a stronger contributor to homes is Tampa Orlando and Sarasota have been so.
In terms of expansion, we have a lot of work to do.
To get scale and we're confident we'll be able to do so in a lot of work to get scale, both Nashville, and Fort Myers, Naples as far as additional expansion beyond that no real plans at this point.
But in five years, if we're in 17 markets today I should say in five years might we be in perhaps another 118 or maybe 19 I think it's possible, but I also think that we have the ability and we've said this before.
Our current run rates around 8000 homes within the markets. We're in we think we can get to 12 13, 14000 homes and are poised to do so and that is a very strong.
Goal of our company.
As far as the acquisition side.
Small privates or what have you.
Possible.
It's not something that we're laser focused on.
If an opportunity presented itself in a market that we're in or perhaps even a market that we're not.
I always would look at it but I think that.
In general organic growth rather than acquisition, we've done both.
<unk> had more success with organic very very candidly and.
And we're really excited about the teams that we have on the field and the well first of all of our all of our markets, but in particular, Nashville, and Fort Myers, Naples, and that's very exciting for the company as we go forward.
Bill I don't know if <unk>.
That sounds great Bob.
Thank you Bob and thank you Phil.
Carl.
Your next question comes from Alex Barron at Herc. Please go ahead.
Mr. Barron. Your line is open did you have a question.
Yes can you hear me.
Now we can.
Okay, sorry about that another call was China and are accepting my question.
I wanted to focus on the.
We're outside broker commissions I think you mentioned they went up.
This quarter and I guess as a percentage of revenues it seems they were.
Five 3% versus four 5% a year ago do you see this as just a temporary thing due to the slowdown that happened in the last.
At the end of 2022.
In other words.
Percentage likely to trend back down or is this kind of.
Normal for some reason.
Bill you want to take that.
You know Alex that's something we've worked very hard on the last few years and we had some divisions that get outside broker rates down two 2% two and a half.
Especially with sales toughening.
The last half of last year and the first of this year being a little slow also so some of those rates have gone back up in certain markets, where we're kind of getting started up like Bob mentioned some of those realtor rates have moved up a little bit as far as percent of business.
Hard to predict what thats going to be it is something we obviously focus on as a big item to us but.
Now we try to manage that just like we do all of our other expenses.
We think we're doing a pretty good job on SG&A you know today, we have about 9% less people than we did a year ago.
So we focus always on our cost structure, including all those items and the other thing of course is having 15% more stores, that's driving the non variable selling so.
So we will continue to focus on all of those things.
Okay great.
I guess on that thing fronts.
Just wondering what percentage of your sales generally come from brokers and also.
What are you guys doing in terms of digital marketing effort.
Can you talk about that.
As far as the broker if you look at the broker commissions go ahead for the last.
The last few years every market's a little different but we've been in the 65% to 75% range.
On the digital side.
The biggest part of our marketing nothing even comes close.
Uh huh.
Orbis area of emphasis for close to four years five years now since you know that part of our business has changed so much.
Everything that we can possibly do.
Maximize.
Found online.
Search engine optimization, and all the things associated with that.
Giant area of focus in every one of our divisions there are people exclusively dedicated to that.
Significant.
Vintage of all of our leads are all start online.
Barry.
And so we manage that online part of our business.
As much.
As much a part of the blocking and tackling of our business is constructing a home is.
Net marketing online marketing.
Digital side.
Of our business.
Yes.
That's it.
Critical key part of our business I can't emphasize it enough.
Yes, and I'm sure, it's only getting more competitive alright, well, thanks, again and great job.
Thanks.
There are no further questions on the phone line. So I will turn the conference back to Phil Creek for any closing remarks.
Thank you very much for joining us look forward to talking to you next quarter.
Ladies and gentlemen, this does conclude your conference call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.
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