Q4 2023 M/I Homes Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to <unk> homes fourth quarter and year end earnings conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
Operator: Good morning, ladies and gentlemen, and welcome to MI Homes' fourth quarter and year-end earnings conference call. At this time, all lines are in listen-only mode.
As a reminder, this call is being recorded on Wednesday January 31st 2024.
Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. As a reminder, this call is being recorded on Wednesday, January 31st, 2024. I would now like to turn over the conference to Phil Creek. Please do so.
I would now like to turn it over to conference to fail quake.
Please go ahead.
Thank you for joining us joining me on the call today is Bob Schottenstein, our CEO and President and Derek <unk> President of our mortgage company.
First to address regulation fair disclosure, we encourage you to ask any questions regarding issues that you consider material. During this call because we are prohibited from discussing significant nonpublic items with you directly.
Phillip G. Creek: Thank you for joining us. Joining me on the call today is Bob Schottenstein, our CEO and president, and Derek Klutch, the president of our mortgage company. First, to address the Fair Disclosure regulation, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant non-public items with you directly.
And as to forward 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.
Phillip G. Creek: And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I'll turn the call over to Bob.
With that I'll turn the call over to Bob Thanks, Phil Good morning, and thank you for joining our call as we highlight our fourth quarter and full year 2023 results.
We had an outstanding year in 2023, one of the best in our 47 year history.
We are particularly pleased with our results given the significant headwinds the housing industry faced as we entered 2023 as well as a rising interest rate environment throughout most of the year together with inflationary pressures and general uncertainty within the economy.
Robert H. Schottenstein: Thanks, Phil. Good morning, and thank you for joining our call as we highlight our fourth quarter and full year 2023 results. We had an outstanding year in 2023, one of the best in our 47-year history. We are particularly pleased with our results, given the significant headwinds the housing industry faced as we entered 2023, as well as a rising interest rate environment throughout most of the year, together with inflationary pressures and general uncertainty within the economy. For the year, we had a very strong income in return. Pre-tax income equaled $607 million, with a pre-tax return of 15%.
For the year, we had very strong income and returns pretax income equaled $607 million with a pre tax return of 15%.
Gross margins for the year came in at 25, 3%. The same as last year. We were pleased to see our gross margins hold steady notwithstanding the choppy market conditions and rising rates return on equity was a very solid 22%.
Robert H. Schottenstein: Gross margins for the year came in at 25.3%, the same as last year. We were pleased to see our gross margins hold steady. Notwithstanding the choppy market conditions and rising rates, return on equity was a very solid 20.2%. Strength of our communities and product offerings, along with our selective and very targeted use of below-market financing incentives, contributed to our strong fourth quarter and full year sales performance. In the fourth quarter, we sold 1,588 homes, a 61% increase over last year, with significantly better per-community absorption. Clearly, as rates began to fall in the fourth quarter, we saw a pick-up in both traffic and demand. Notably, our December sales were the best month of the fourth quarter.
Strength of our communities and product offerings, along with our selective and very targeted use of below market financing incentives contributed to our strong fourth quarter and full year sales performance.
In the fourth quarter, we sold 1588 homes, a 61% increase over last year with significantly better per community absorptions.
Clearly as rates began to fall in the fourth quarter, we saw a pickup in both traffic and demand notably.
Notably our December sales were the best month of the fourth quarter.
For the full year, we sold 7977 homes, an increase of 20% over 2022.
Our monthly sales pace during the year averaged three three homes per community compared to a sales pace of three one homes per community during 2022.
Robert H. Schottenstein: For the full year, we sold 7,977 homes, an increase of 20% over 2022. Our monthly sales pace during the year averaged 3.3 homes per community, compared to a sales pace of 3.1 homes per community during 2022. And the quality of buyers that we're seeing continues to be strong, with average credit scores of 747 and an average down payment of above 18%. Our Smart Series, which is our most affordably priced product, continues to have a very positive impact, not just on our sales but our overall performance.
And the quality of buyers that were seeing continues to be strong with average credit scores of 747, and an average down payment above 18%.
Our smart series, which is our most affordably priced product continues to have a very positive impact not just on our sales, but our overall performance.
Smart series sales comprised 53% of total company sales in the fourth quarter compared to 52% in the fourth quarter a year ago.
And I am pleased to report that the improvement in traffic and demand that we saw in the fourth quarter has continued as we begin this year with our January sales with our January sales exceeding last year we.
Robert H. Schottenstein: Smart Series sales comprised 53% of total company sales in the fourth quarter, compared to 52% in the fourth quarter a year ago. And I'm pleased to report that the improvement in traffic and demand that we saw in the fourth quarter has continued as we begin this year, with our January sales exceeding last year. We are very optimistic about a good sales season. We continue to see improvement in our construction cycle time. During the fourth quarter, our cycle time improved by an additional 10 days sequentially. Year over year, our cycle time has improved by more than 60 days. Improvement in cycle time remains a major area of focus for us.
We are very optimistic about a good selling season.
We continue to see improvement in our construction cycle time.
During the fourth quarter, our cycle time improved by an additional 10 days sequentially.
Year over year, our cycle time has improved by more than 60 days improvement in cycle time remains a major area of focus for us.
In terms of deliveries given that we began 2023 with roughly 15% fewer homes in the field. We were very pleased to close 8112 homes for the year, 3% less than 2022.
Robert H. Schottenstein: In terms of deliveries, given that we began 2023 with roughly 15% fewer homes in the field, we were very pleased to close 8,112 homes for the year, 3% less than 2022. Now I will provide some additional comments on our mark. Our division income contributions in 2023 were led by Dallas, Tampa, Columbus, Orlando, Raleigh, Sarasota, and Charlotte. All had very strong years.
Now I will provide some additional comments on our markets.
Our division income contributions in 2023 were led by Dallas, Tampa, Columbus, Orlando, Raleigh, Sarasota, and Charlotte all had very strong years.
New contracts for the fourth quarter in our southern region increased 44% and 89% and our northern region.
For the year, new contracts increased 18% in our southern region and 22% in northern Northern region.
Robert H. Schottenstein: New contracts for the fourth quarter in our southern region increased 44% and 89% in our northern region. For the year, new contracts increased 18% in our southern region and 22% in our northern region. Our deliveries decreased 17 percent over last year's fourth quarter in the Southern region, comprising 1,171 deliveries, or 58 percent of our total. The Northern region contributed 848 deliveries, a decrease of 13% over last year's fourth quarter.
Our deliveries decreased 17% over last year's fourth quarter in the southern region, comprising 1171 deliveries or 58% of our total <unk>.
Northern region contributed 848 deliveries a decrease of 13% over last year's fourth quarter.
For the year homes delivered as I mentioned before rather homes delivered increased 3% in the southern region, but decreased 12% in the northern region.
Our owned and controlled lot position in the southern region increased by 12% compared to last year owned and controlled lots increased 3% in the northern region.
Robert H. Schottenstein: For the year, homes delivered, as I mentioned before, or rather, homes delivered increased 3% in the southern region but decreased 12% in the northern region. Our owned and controlled lot position in the southern region increased by 12% compared to last year. Owned and controlled lots increased 3% in the northern region. We have an excellent land position. Company-wide, we own approximately 24,400 lots, which is roughly a three-year supply. Of that total, 28% of the lots are in our northern region, with a balance of 72% in the southern region.
We have an excellent land position companywide, we own approximately 24400 lots, which is roughly a three year supply.
Of that total 28% of the lots are in our northern region with a balance of 72% in the southern region.
On top of our own lots, we controlled via option contracts and additional 21300 lots. So in total we own and control approximately 45700 single family lots, which is up 9% from a year ago and equates to about a five year supply.
Robert H. Schottenstein: On top of our own lots, we control via option contracts an additional 21,300 lots. So, in total, we own and control approximately 45,700 single-family lots, which is up 9% from a year ago and equates to about a five-year supply. Most importantly, about 47% of our lots are controlled pursuant to option contracts. This gives us significant flexibility to react to changes in demand or individual market conditions. With respect to our balance sheet, we ended the year with an all-time record $2.5 billion of equity, which equates to a book value of $91 per share. We also ended the year with $733 million of cash and zero borrowings under our $650 million unsecured revolving credit facility.
Most importantly about 47% of our lots are controlled pursuant to option contracts. This gives us significant flexibility to react to changes in demand or individual market conditions.
With respect to our balance sheet. We ended the year with an all time record $2 $5 billion of equity, which equates to a book value of $91 per share.
Also ended the year with $733 million of cash and zero borrowings under our $650 million unsecured revolving credit facility. This.
This resulted in a debt to capital ratio of 22% down from 25% a year ago, and a net debt to capital ratio of minus 2%.
So I conclude let me just state we are in the best financial condition in our history.
Phillip G. Creek: This resulted in a debt-to-capital ratio of 22%, down from 25% a year ago, and a net debt-to-capital ratio of minus 2%. As I conclude, let me just state we are in the best financial condition in our history. We feel very good about our business and fully expect to deliver another year of strong results in 2024. With that, I'll turn it over to Phil. Thanks, Bob.
We feel very good about our business and fully expect to deliver another year of strong results in 2024 with that I'll turn it over to Phil Thanks, Bob Our new contracts were up 35% in October of 92% in November and up 64% in December for a 61% improvement in.
In the quarter overall, our sales pace was $2 five in the fourth quarter compared to one eight in last year's fourth quarter and our cancellation rate for the fourth quarter was 13%.
Phillip G. Creek: Our new contracts were up 35% in October, up 92% in November, and up 64% in December for a 61% improvement in the quarter overall. Our sales pace was 2.5% in the fourth quarter compared to 1.8% in last year's fourth quarter, and our cancellation rate for the fourth quarter was 13%. As to our buyer profile, 53% of our fourth quarter sales were to first-time buyers compared to 58% a year ago. In addition, 62% of our fourth quarter sales were inventory homes compared to 64% in last year's fourth quarter. Our community count was 213 at the end of 2023 compared to 196 at the end of 22. During the quarter, we opened 20 new communities while closing 11, and for the year, we opened 76 new communities. We currently estimate that our average 2024 community count will be about 10% higher than 2023. We delivered 2,019 homes in the fourth quarter, delivering 59% of our backlog compared to 53% a year ago.
As to our buyer profile, 53% of our fourth quarter sales were to first time buyers compared to 58% a year ago.
In addition, 62% of our fourth quarter sales were inventory homes compared to 64% in last year's fourth quarter.
Our community Count was 213 at the end of 2023 compared to 196 at the end of 'twenty two.
During the quarter, we opened 20, new communities, while closing 11 and for the year, we opened 76 new communities.
Currently estimate that our average 2020 for community count will be about 10% higher than 2023.
We delivered 2019 homes in the fourth quarter, delivering 59% of our backlog compared to 53% a year ago.
And as we stated in our third quarter Conference call. We entered the fourth quarter with 200 less homes in the field and a year ago.
And at December 31st we had 4400 homes in the field versus 4500 homes in the field a year ago.
Phillip G. Creek: And as we stated in our third quarter conference call, we entered the fourth quarter with 1,200 fewer homes in the field than a year ago. And at December 31st, we had 4,400 homes in the field versus 4,500 homes in the field a year ago. Revenue decreased 20% in the fourth quarter to $973 million.
Revenue decreased 20% in the fourth quarter to $973 million, our average closing price for the fourth quarter was 471000% to 4% decrease when compared to last year's fourth quarter average closing price of 492000.
Our gross margins were 25, one for the quarter up 250 basis points year over year and for the full year. Our gross margins were flat at 25 three.
Phillip G. Creek: Our average closing price for the fourth quarter was $471,000. This was a 4% decrease when compared to last year's 4th quarter average closing price of $492,000. Our gross margins were 25.1 for the quarter, up 250 basis points year-over-year. And for the full year, our gross margins were flat at 25.3. Our SG&A expenses increased by 4% in the fourth quarter, due primarily to higher incentive compensation, increased real estate taxes on our inventory levels, and the cost of having more communities.
Our SG&A expenses increased by 4% in the fourth quarter due primarily to higher incentive compensation increased real estate taxes on our inventory levels.
And the cost of having more communities.
Interest income increased to $8 3 million for the quarter due to our higher cash balances and our pretax income was $15 one versus 15, 4% last year and our return on equity remained strong at 20%.
During the fourth quarter, we generated $153 million of EBITDA and for the full year, we generated $648 million of EBITDA Jenna.
Phillip G. Creek: Interest income increased to $8.3 million for the quarter due to our higher cash balances, and our pre-tax income was $15.1 versus $15.4 percent last year, and our return on equity remained strong at 20 percent. During the fourth quarter, we generated $153 million of EBITDA, and for the full year, we generated $648 million of EBITDA. We generated $552 million of cash flow from operations this year, compared to generating $184 Our effective tax rate was 24% in the fourth quarter, compared to 21% in last year's fourth quarter.
We generated $552 million of cash flow from operations this year compared to generating $184 million last year.
Our effective tax rate was 24% in the fourth quarter compared to 21% last year's fourth quarter and our effective rate for the year was 23%.
<unk> 2024 is effective tax rate to also be around 23% are.
Our earnings per diluted share for the quarter decreased to $3 66 per share from $4 65 per share in last year's fourth quarter.
Derek Klutch: And our effective rate for the year was 23%. We expect 2024's effective tax rate to also be around 23%. Earnings per diluted share for the quarter decreased to $3.66 per share from $4.65 per share in last year's fourth quarter and decreased 6% for the year to 1621 from 1724 last year. We spent $25 million repurchasing our shares. We currently have $128 million available under our repurchase authorization, and in the last three years, we have repurchased 9% of our outstanding shares. Now Derek Klutch will address our mortgage Thank you, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $4.7 million, down $5 million from 2022 on revenue of $19.7 million, down 13% over last year, primarily as a result of lower pricing margins, lower average loan amounts, and fewer loans closed. Over the year, pre-tax income was $38.4 million, and revenue was $93.8 million.
And decreased 6% for the year to <unk> 21 from $17 24 last year.
During the fourth quarter, we spent $25 million repurchasing our shares and for the year. We spent $65 million. We currently have $128 million available under our repurchase authorization and in the last three years, we've repurchased 9% of our outstanding shares now Derek <unk> will address our mortgage company.
Results. Thank you Phil.
The fourth quarter, our mortgage and title operations achieved pretax income of $4 $7 million down $5 million from 2022 on revenue of $19 $7 million down 13% over last year.
Primarily as a result of lower pricing margins lower average loan amounts and fewer loans closed for.
For the year pretax income was $38 $4 million and revenue was $93 $8 million.
Loan to value on our first mortgages for the quarter was 82% in 2023, the same as 2020 twos fourth quarter.
66% of loans closed in the fourth quarter were conventional and 34% were FHA or VA.
Impairs to 79% and 21% respectively for 2020 twos same period.
Derek Klutch: Loan-to-value on our first mortgages for the quarter was 82% in 2023, the same as 2022's fourth quarter. 66% of loans closed in the fourth quarter were conventional, and 34% were FHA or VA. This compares to 79% and 21%, respectively, for 2022's same period. Our average mortgage amount decreased to $383,000 in 2023's fourth quarter, compared to $392,000 in 2020. Loans originated in the quarter decreased 7% from $1,497 to $1,387.
Our average mortgage amount decreased to $383000 in 2023 fourth quarter compared to $392000 in 2022.
Loans originated in the quarter decreased 7% from 40, 597% to 30 587.
The volume of loans sold increased by 9%.
I mentioned earlier, the borrower profile remains solid with an average down payment of over 18% for the quarter and an average credit score on mortgages originated by <unk> financial of 747.
Our mortgage operation captured 88% of the business in the quarter, an increase from 77% in 2020 twos fourth quarter.
To maintain a separate mortgage repurchase facility that provides us with funding for our mortgage originations prior to the sale to investors.
At December 31, we had a total of $166 million outstanding under this facility, which expires in October of this year.
Derek Klutch: The volume of loans sold increased by 9%. As mentioned earlier, the borrower profile remains solid, with an average down payment of over 18 percent for the quarter and an average credit score on mortgages originated by MI Financial of 747. Our mortgage operation captured 88% of the business in the quarter, an increase from 77% in 2022's fourth quarter. A mortgage repurchase facility that provides us with funding for our mortgage originations. At December 31st, we had a total of $166 million outstanding under this facility, which expires in October of this year. The facility is a typical 364-day mortgage repurchase line that we extend annually. Now, I'll turn the call back over to Phil. Thanks, Derek. As far as the balance sheet is concerned, we ended the fourth quarter with a cash balance of $733 million and no borrowings under our unsecured revolving credit facility.
Ability as a typical 364 day mortgage repurchase line 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 a cash balance of $733 million and no borrowings under our unsecured revolving credit facility, our credit facility matures in late 2026, and our public debt with interest rates below 5% mature in 2000.
28, and 2030, our total homebuilding inventory at year end was $2 8 billion, which was flat with the prior year level.
During 2023, we spent $344 million on land purchases and $512 million on land development for a total land spend of 856 million. This was up from $837 million in 2022.
At December 31, 23, we had $715 million of raw land and land under development and 721 million of finished unsold lots we own 8724 unsold finished lots.
Phillip G. Creek: Our credit facility matures in late 2026, and our public debt with interest rates below 5% matures in 2028 and 2030. Our total home building inventory at year end was $2.8 billion, which was flat with the prior year level. During 2023, we spent $344 million on land purchases and $512 million on land development for a total land spend of $856 million. This was up from $837 million in 2022. At December 31-23, we had $715 million of raw land and land under development and $721 million of finished unsold lots.
We have a very strong land position at year end controlling 46000 lots, we own 24400 lots, which is about a three year supply of lots controlled 53% are owned which is about a five and a half year supply.
And at the end of the year, we had 592 completed inventory homes about three per community in 2023 total inventory homes.
Now the total inventory of 912 are in the northern region and 1100 elevens in the Southern region and at December 31, 22, We had 485 completed inventory homes and 1827 total inventory homes.
This completes our presentation will now open the call for any questions or comments.
Phillip G. Creek: We own 8,724 unsold finished lots. We have a very strong land position that you're in, controlling 46,000 lots. We own 24,400 lots, which is about a three-year supply, and of the lots controlled, 53 percent are owned, which is about a five-and-a-half-year supply. And at the end of the year, we had 592 completed inventory homes, about three per community, and 2023 total inventory. Of the total inventory, 912 are in the northern region, and 1,111 are in the southern region.
Thank you, ladies and gentlemen, we will now conduct the question and answer session.
If you have a question. Please press star followed by the number one lender thought Tibet.
If you wish to cancel your request please press star two.
Please ensure to lift the handset if you're using a speaker phone before pressing the keys.
Your first question comes from Alan Ratner from.
Zelman and associates. Your line is now open.
Hey, guys. Good morning, Congrats on a great year.
Thanks for all the detail celebrating you must be celebrating your football teams performance.
Still riding high bottom I'm still writing.
Okay.
Nothing less.
Next year might look a little different but we'll see we'll worry about that then.
So a lot of great detail there.
Your margins have been pretty pretty stable in this 25% range for the last several quarters as you think about 'twenty four I know youre not going to give specific guidance, but how are you thinking about the moving pieces of margin the outlook on material and labor inflation land inflation in terms of what's going to be flowing through.
Operator: And in December 31-22, we had 485 completed inventory homes and 1,827 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments. Thank you, ladies and gentlemen. We will now conduct a question and answer session. If you have a question, please press the star followed by the number one on your touchpad. If you wish to cancel your request, please press star 2. Please ensure that you lift the handset if you are using a speakerphone before pressing any key.
And then ultimately Directionally what your views are on pricing now given what seems like a pretty pretty healthy start to the spring selling season, so far any ability to push price.
Can you just talk about the three buckets I think it'll help us directionally out.
I think on the on the cost side things have stabilized quite a bit.
Alan Ratner: Your first question comes from Alan Ratner from Bellman & Associates. Your line is now open. Hey, guys. Good morning.
Even on land development a year ago.
It was quite concerned we were quite concerned about inflation on land development and clearly there has been some but that appears to be moderating somewhat as well.
Alan Ratner: Congratulations on a great year. Thanks, Alan. Thanks for all the detail. You must be celebrating your football team's performance.
Maybe not every single aspect still probably a little bit of pressure on concrete.
Alan Ratner: I'm still riding high, Bob. I'm still riding high. I expect nothing less. Next year might look a little different, but we'll see. We'll worry about that then. So, you know, a lot of great detail there.
On the cost side, I think we feel pretty good about where that stands in terms of moderating inflation and moderating increases.
Robert H. Schottenstein: You know, your margins have been pretty stable in this 25% range for the last several quarters. As you think about 24, I know you're not going to give specific guidance, but how are you thinking about the moving pieces of margin? You know, the outlook on material and labor inflation, land inflation in terms of what's going to be flowing through, and then ultimately, directionally, what your views are on pricing now, given what seems like a pretty healthy start to the spring selling season so far, you know, any ability to push prices. So if you could kind of just talk about those three buckets, I think it'll help us directionally. Yeah,
A year ago.
As we looked at what we thought was going to happen in 2023, we thought margins would be under considerable pressure, given where rates were and the softening of demand and as it turned out.
Even though we did have to spend money.
As I mentioned on a selective basis and some of it was very targeted for certain communities to provide a more.
Marketable rate.
We were really pleased and surprised frankly that our margins held steady at just over 25% as you mentioned.
Yes.
It's very very hard to forecast margins, everybody has an opinion, but sitting where we are now as I look at demand and I look at traffic website traffic.
Robert H. Schottenstein: I think on the cost side, things have stabilized quite a bit, even on land development. A year ago, I was quite concerned, we were quite concerned about inflation on land development, and clearly there has been some, but that appears to be moderating somewhat as well. Maybe not every single aspect, still probably putting a little bit of pressure on Congress.
The way the year is starting out what we're hearing in the field.
Even in markets that might've been a little weaker throughout the early parts of last year now appear to be quite a bit stronger.
We're we're hopeful that we can continue to maintain margins in this level I don't know if they will go up we're super excited about all the new communities, we're going to be opening.
We have.
And it was reflected in the average selling price that Phil mentioned coming down slightly we.
Robert H. Schottenstein: But on the cost side, I think we feel pretty good about where that stands, in terms of moderating inflation and moderating increases. A year ago, as we looked at what we thought was going to happen in 2023, we thought margins would be under considerable pressure, given where rates were and the softening of demand. And as it turned out, even though we did have to spend money, as I mentioned, on a selective basis, and some of it was very targeted for certain communities, to provide a more marketable rate, we were really pleased and surprised, frankly, that our margins held steady at just over 25%, as you mentioned. Yeah, it's it's very, very hard to forecast margins. Everybody has an opinion.
We have a lot more affordable product offerings that we hope will provide bigger pace and strong margins coming out this year, but.
You don't know until you really know.
If you really honest about it but I guess sitting here today.
Generally pretty optimistic about.
The state of housing.
The state of demand and our ability to continue to generate what I think are very solid returns.
So our work were not expecting much erosion, frankly, and maybe will be fortunate with a little bit of uptick because we don't see the pressure on the cost side, maybe quite as much as we did a couple of years ago and frankly, the other thing is.
Robert H. Schottenstein: But sitting where we are now, as I look at demand, and I look at traffic, website traffic, the way the year is starting out, what we're hearing in the field, even in markets that might have been a little weaker throughout the early parts of last year now appear to be quite a bit stronger. We're hopeful that we can continue to maintain margins at this level. I don't know if they'll go up. We're super excited about all the new communities we're going to be opening. We have to.
For the most part the supply chain disruptions that we just couldnt stop talking about you know.
Post Covid have now seen now seem to have pretty much cleared out and dissipated.
And Thats, all really really helpful and encouraging to hear so hopefully that that momentum continues and yes, congrats on that.
And the margins look.
I don't think I don't think we're alone in this which is also comforting if youre. The only one that's experiencing something it always makes you wonder whether it's good or bad, but I think that theres a lot of momentum.
Robert H. Schottenstein: And it was reflected in the average selling price that Phil mentioned coming down slightly. We have a lot more affordable product offering that we hope will provide a bigger pace and strong margins this year. You know, you don't know until you really know if you're really honest about it.
Within the industry right now.
And we're just you sort of hear things and seeing what other builders have recently said as well it resonates with us.
Robert H. Schottenstein: But I guess sitting here today, generally pretty optimistic about the state of housing, the state of demand, and our ability to continue to generate what I think are very solid returns. We're not expecting much erosion, frankly, and maybe we'll be fortunate with a little bit of an uptick because we don't see the pressure on the cost side maybe quite as much as we did a couple of years ago. And Frankly, the other thing is:
And Alan just a couple more things just kind of follow up on what Bob said the stores, we opened last year.
Ended up performing better.
At a pace better margin than we anticipated and we talked about our current estimate of this year, having on average 10% more stores.
Over half of those expected openings are in the first half of this year, which again will not only help us with sales.
Robert H. Schottenstein: For the most part, the supply chain disruptions... just couldn't stop talking about, you know, post COVID have now seen, now seem to have pretty much cleared out and disappeared. That's all really, really helpful and encouraging to hear. So hopefully, that momentum continues, and yes, congrats on that, maintaining margin. Look, look, and I don't think we're alone in this, which is also comforting. If you're the only one that's experiencing something, it always makes you wonder whether it's good or bad.
Also with closings. This year. So we're very excited about the new stores. We're opening also.
That's great. Thanks for thanks for that addition, there Phil.
Okay.
Second question.
Round kind of spec versus bto, I mean smart series.
Obviously been a huge focus of yours for the last several years.
I think if I heard you correctly the share of spec sales actually ticked a little bit lower this quarter year on year.
And I guess I'm curious as you think about the landscape today with cycle times normalizing.
Retail inventories still so incredibly low, but maybe starting to pick up a little bit does that change your thinking at all as far as the mix of your business that stack versus eto or are you starting to see I'll, let Lori.
Robert H. Schottenstein: But I think that there's a lot of momentum within the industry right now. And, you know, we're just you sort of hear things. I think it's interesting what other builders have recently said as well, because it resonates with us.
Phillip G. Creek: And Alan, just a couple more things just kind of follow up on what Bob said. You know, the stores we opened last year ended up performing at a better pace, with better margins, you know, than we anticipated. And we talked about our current estimate of this year having on average 10% more stores. Over half of those expected openings are in the first half this year, which will again not only help us with sales but with closures this year. So we're very excited about the new stores we're opening also. That's great. Thanks for that addition, Phil. Second question around the kind of spec versus BTO.
Yes, great question, I'll, let Phil give a little more of the detail.
We've increased.
It's a subdivision business. So it's not necessarily the case in every subdivision, but on average.
Our plan is to have.
More specs than maybe we would have had three or four years ago.
We've ramped up our specs.
For all the reasons that the.
You mentioned.
And.
And then the other thing is.
In terms of mix.
With Smart series and also Townhomes attached town homes, which.
Which represent an increasing percentage of our business.
Companywide.
That will also result in more specs with these four unit <unk> unit buildings.
Phillip G. Creek: I mean, Smart Series has obviously been a huge focus of yours for the last several years. But, if I heard you correctly, the share of spec sales actually ticked a little bit lower this quarter, year on year. And I guess I'm curious as you think about the landscape today with cycle times normalizing, resale inventory still incredibly low, but maybe starting to pick up a little bit. Does that change your thinking at all as far as the mix of your business at spec versus BTO? Are you starting to see?
The most common form of Townhomes. So you start a building with one or two sales automatically a three or four specs out there.
Phil you want to add anything else to that yes, as far as spec levels again.
In general depending on the month or whatever we're selling you know 50% to 60% specs one of the good news is that the gross margin on.
Backs versus to be built.
Now is not very much in some markets matter of fact, it's like really really close so we do feel good about our spec levels.
We are doing more attached town houses, we're doing more smaller single family detached and by its nature, we're doing a few more specs in those.
Robert H. Schottenstein: Yeah, a great question. I'll let Phil give a little more detail. We've increased on, it's a subdivision business, so it's not necessarily the case in every subdivision, but on average, our plan is to have more specifications than maybe we would have had three or four years ago. We've ramped up our specs, for all to read, that you mentioned, and... And the other thing is, uh.., as in terms of the mix, with Smart Series and also Townhomes, Attached Townhomes, which represent an increasing percentage of our business company-wide, that will also result in more specifications with these four units, buildings, the most common form of town start a building. Sales Sales Sales Sales, Phil, do you want to add anything else to that?
My expects to get up to that 2200, 2300, 2400, but again as our store count moves that's about 10 per store and then having 234 finished specs again seems like a good number to us per community per community. So we do feel good about our <unk>.
<unk> levels, we want to make sure that.
We have what we need.
Makes sense, alright, well appreciated at all on the best of luck in the New York.
Thanks, you too.
Your next question comes from.
Jay Mccanless.
Wedbush.
Your line is now open.
Hey, Jay.
Hey, good morning, everyone Hope you all are doing well.
Sorry, Phil if you don't mind, what was the monthly order pace through <unk> and maybe any color you can give us on January.
Phillip G. Creek: Yeah, as far as spec levels again, you know, in general, depending on the month or whatever, we're selling, you know, 50 to 60% of the spec. One of the good things is that the gross margin on... X versus to be built is not very much in some markets. Matter of fact, it's like really, really close.
Hi.
Ill take the last part of that first and then Phil will give you the pace.
Somewhat surprising.
Just.
Let me start over.
What I mentioned was is that the increase in demand and traffic that really <unk>.
Sort of intensified during the fourth quarter and that resulted in December being our best month of the quarter.
Phillip G. Creek: So, we do feel good about our spec levels. We are doing more attached townhouses. We're doing more smaller, single-family DTACs. By its nature, we're doing a few more spec homes in those.
That has continued and that increase in traffic and demand.
And while technically January is not over our January sales will exceed last year's.
Phillip G. Creek: You know, my expectations are to get up to the 2200, 2300, 2400, but again, as our store count moves up, that's about, you know, 10 per store. And then having two, three, four finished specs, again, seems like a good number to us. Per community. Per community.
We're very pleased with the way the year, starting up and and optimistic about the selling season fill can give you the details on pace.
Yes sales pace Jay in the fourth quarter. It was two five in the fourth quarter last year. It was one eight and.
And again in.
In the third quarter, we were three four.
Again, we have been improving pace and.
Phillip G. Creek: So we do feel good about our specification levels. We want to make sure that we have what we need. Makes sense.
Have a big focus on that hope to continue improving that.
Great.
Alan Ratner: All right. Well, appreciate it all and best of luck in the new year. Thanks, you too. Your next question comes from Jay McCanless from Leadbush.
And then could you talk about the.
Community Count because all guided I think to like 225 may be and you came in at $2 <unk>, maybe what's going on there and I know you said youre going to open 50% of the new stores in the first half of 'twenty. Four I mean is it is it going to be a pretty big step up in the total community count in the first quarter.
Jay Mccanless: Your line is now open. Hey, Jay. Hey, good morning, everyone.
Jay Mccanless: Hope y'all are doing well. Phil, if you don't mind, what was the monthly order pace through 4Q and maybe any color you can give us for January? I'll take the last part of that first and then Phil will give you the pay. Somewhat surprising, well..., just start over.
Sequentially.
Yes, Jay again overall.
We expect our community count this year to be on average up about 10%.
Robert H. Schottenstein: What I mentioned is that the increase in demand and traffic that really sort of intensified during the fourth quarter and that resulted in December being our best month of the quarter, that has continued, and that increase in traffic and demand, and while technically January's not over, our January sales will exceed last year's. We're very pleased with the way the year is starting out and optimistic about the selling season. Phil can give you the details on that page.
Last year, we were a little short of where we thought we would be at year end, primarily because about 10 stores.
We're delayed most.
Most of them are just flattening into this year.
We do expect over half the stores, we're opening this year to be the first half.
So if you kind of look at that the year in general we ended the year with 213.
We expect to get to that $2 25 type level by the middle of the year.
Phillip G. Creek: Yeah, salespace J in the fourth quarter, it was 2.5. In the fourth quarter last year, it was 1.8. And again, you know, in the third quarter, we were 3-4, so, you know, again, we have been improving at a steady pace and have a big focus on that, and hope to continue. And then, could you talk about the community count? Because you got it, I think, to around 225 maybe, and you came in at 213. Maybe what's going on here?
And again, the second half of the year gets a little more difficult because it has taken a little longer to develop land and those type things, but we do feel comfortable saying today, we think will be up 10% on average.
Okay Alright.
And then I guess, yes.
Alan already asking the gross margin question, but just maybe what type of pricing power are you seeing currently maybe what percentage of your communities. During the fourth quarter were able to raise prices rates based pricing.
Jay Mccanless: And I know you said you're going to open 50% of the new stores in the first half of 24. I mean, is it going to be a pretty big step up in the total community count in the first quarter? sequentially.
I think pricing power is limited.
We can continue to stay at this 25% gross margin level.
This year.
Phillip G. Creek: Yeah, Jay, again, overall, we expect our community count this year to be up about 10%. Last year, we were a little short of where we thought we would be a year in, primarily because about 10 stores were delayed. Most of them are just sliding in this year.
We have a phenomenal year.
And that's our goal.
Don't know that.
I don't know that I can.
Yes.
Any kind of.
Certainty, whether we'll be able to grow margins.
I think that the balance between demand and price right now.
The market generally is really good and.
Phillip G. Creek: We do expect over half the stores we're opening this year to be in the first half. So if you kind of look at the year in general, you know, we ended the year with 2013. You know, we expect to get to that, you know, 225-type level by the middle of the year. And again, the second half of the year gets a little more difficult, you know, because it is taking a little longer to develop land and those types of things. But we do feel comfortable saying today that we think we'll be up 10% on average. Okay, all right.
Like I said before a year ago I thought margins were going to fall off a 100 or 200 basis points, just because of the higher rates and so forth and that didn't happen last year.
We were really pleased that our margins held steady I think thats it.
I think that strong performance I think it's a testament to our our people and our product and our communities.
But.
I think that.
I think knowing what we know today I'm not sure how much pricing power, we'll see but I think we'd be thrilled.
And I think there is good.
Good possibility that our margins will remain as we talked about with Allen and this 25% range.
Robert H. Schottenstein: And then I guess, you know, Alan already asked you the gross margin question, but this may be what type of pricing power you've seen currently, maybe what percentage of your communities during the fourth quarter were able to raise prices, raise base prices? Um, I think pricing power is limited. If we can continue to stay at this 25% gross margin level this year, we're going to have a phenomenal year, and that's our goal. I don't know that I can with any kind of certainty predict whether we'll be able to grow Mars.
Great.
And I guess from a competitive standpoint.
Saw a lot of your larger competitors.
Ziv on both based price discounts and incentives during the calendar fourth quarter of 'twenty. Three I guess what are you. What are you seeing now relative to what was going on month ago and do you feel like the pace of incentives may have to start picking up again, if mortgage rates don't start coming down.
Well I actually have a slightly contrary view on that.
I think the.
First of all it's very market specific.
Okay.
Robert H. Schottenstein: I think that the balance between demand and price right now in the market generally is really, and, Like I said before, a year ago, I thought margins were going to fall off 100 or 200 basis points just because of the higher rates and so forth, and that didn't happen. We were really pleased that our margins held steady. I think that's a strong performance, I think it's a testament to our people and our product and our community. But, you know, I think that...
It's cliche, but every market is different.
I think that in.
A number of instances, we're starting to see incentives.
Fine.
Ours have.
And the slight the the slight decline in mortgage rates that we've seen over the last 90 days.
This made it so that you don't have to spend as much where it needed to provide.
A rate neither of the low sixes or the high fives.
And.
You'd rather not spend anything on that but thats, what we have been doing and the net net of that is resulted in our 25, 3% gross margins.
<unk>.
If demand continues to stay like it does like it is now I would like to think that builder behavior will will respond accordingly, and not see as much of the need for Incentivising, that's sort of how we're thinking about it.
Robert H. Schottenstein: I think, knowing what we know today, I'm not sure how much pricing power we'll see, but I think we'd be thrilled. And you know, I think there's a possibility that our margins will remain as we talked about with Alan. Right. And I guess from a competitive standpoint, I saw a lot of your larger competitors were very aggressive on both base price discounts and incentives during the calendar fourth quarter of 2012. I guess what you are seeing now relative to what was going on a month ago? And do you feel like the pace of incentives may have to start picking up again if mortgage rates don't start coming down? Well, I actually have a slightly contrary view on that.
Jay also.
As Bob mentioned every subdivision is a little different because we're definitely in the subdivision business. If you look at the 213 communities, we have going into this year like we said 76 of them opened in 'twenty three.
100 of them opened in 'twenty two.
So how you open.
What model you have what the specification level is of those houses all of those things how many specs do you want.
No again I mean.
We're not driven solely by volume obviously, we want to continue to grow and think we are positioned to grow.
Robert H. Schottenstein: I think the first of all, it's very market specific. It's a cliché, but every market, I think that number of instances, starting to see an incentive line, ours has, and the slight, you know, the slight decline in mortgage rates that we've seen over the last 90 days made it so that you don't have to spend as much where it is needed to provide, you know, a rate in either the low sixes or the high fives. You'd rather not spend money on that, but that's what we have been doing. The net net of that has resulted in our 25.3% gross. You know, if demand continues to stay like it does, like it is now, I'd like to think that builder behavior will respond accordingly and not see as much of a need for incentivizing. That's sort of how we're thinking.
But again when you have $345 billion of revenue 15 basis points 25 basis points mean, a whole lot.
So we really try to focus on every subdivision not get too far ahead of ourselves.
Make sure we're focused on who the buyer is so every subdivisions really little differently, we don't do blanket things like Oh, let's do interest rate buy downs everywhere.
Some customers need and interest rate buy down for the payment help some customers need closing cost help.
So again, we try to deal with it more on a rifle approach as opposed to just a shotgun across the board.
Robert H. Schottenstein: You know, Jay, also, as you know, as Bob mentioned, every subdivision is a little different because we're definitely in the subdivision business. You look at the 213 communities we have going into this year, like we said, 76 of them opened in 2023, and over 100 of them opened in 22. So, you know, what you open, what model you have, what the specification level is of those houses, all those things. How many specifications do you want?
Sure.
Any notion of what you're going to spend on land acquisition and development this year.
Well, we definitely expect to spend more.
We did spend a little more than 23% in 'twenty two.
And the majority is continuing to be land development.
Land development costs as Bob says, it's not going up the way. It was the good news is kind of stabilizing.
Phillip G. Creek: No, again, I'm saying that we're not driven solely by volume; obviously, we want to continue to grow and think we are positioned to grow, but again, you have three, four, five billion dollars of revenue. 15 basis points, 25 basis points mean a whole lot.
But we do want to continue to grow have more stores. So we do expect to be spending more on land this year.
Look.
I think we've said this before.
Our goal is to grow the business, we're very bullish about housing and we're really bullish about our business.
And.
Phillip G. Creek: So we really try to focus on every subdivision, not get too far ahead of ourselves. You know, make sure we're focused on who the buyer is. So every subdivision's really a little different. We don't do blanket things like, oh, let's do interest rate buy-downs everywhere. Some customers need an interest rate buy-down for payment help; customers need closing cost help.
Our growth goals.
Went to 10% per year, hopefully closer to 10.
That remains our.
Our strategic outlook.
Okay.
And then just one other question because we've heard some builders talking about it.
And this is kind of relative to what you said, Bob about gross margins being flat at this 25 ish level land prices. We've heard have been going up for some of the builders labor prices seem to be going up I guess, what are the levers youre going to have to pull or is it going to be maybe reduction in the other input costs that are coming in.
Phillip G. Creek: So again, we try to deal with it more, you know, in a rifle approach as opposed to just a shotgun across the board. Sure. Any notion of what you're going to spend on land acquisition and development this year? Well, we definitely expect to spend more. We did spend a little more in 23 than we did in 22.
On the keep the keep your gross margin flat around this 25 level, Bob, especially with lean prices seem to move up I guess kind of what are the levers youre going to have to push and pull to hold to hold at these levels, especially.
Phillip G. Creek: And the majority is continuing to be land development. Land development costs, as Bob says, are not going up the way they were. The good news is it's kind of stabilizing.
If you don't think youre going to get much pricing power. This year, what are the things you're going to have to do to maintain at this 25% level.
Phillip G. Creek: But we do want to continue to grow and have more stores, so we do expect to be spending more on land. Look, you know, I think we've said this before. Our goal is to grow the business; we're very bullish about housing. We're really bullish about our... and our growth goals, you know, 5-10% per year, hopefully closer to 10, and that remains our strategic... Gotcha. And then just one other question, because we've heard some builders talking about it, and this is kind of related to what you said, Bob, about gross margins being flat at this 25-ish level. Land prices, we've heard, have been going up for some of the builders. Labor prices seem to be going up. I guess what are the levers you're going to have to pull?
We continue to produce.
Really high quality affordable product, whether it's attached detached.
And well located communities.
You probably would like a more.
Patrick will answer, but I think thats, what it goes back to well located communities will sell and they will sell it really good margins.
If the majority of our communities.
Check the box of being exceptionally well located and we think they do we think we can maintain our margins that way that's what happened in 2023, we expect it to happen in 2024.
And Thats I mean definitely we're all focused on that couple of details with that Jay specifications of the product.
Jay Mccanless: Is it going to be maybe a reduction in the other input costs that are coming in that keep your gross margin flat around this 25-level, Bob? Especially with land prices seeming to move up, I guess. Kind of, what are the levers you're going to have to push and pull to hold up these levels?
To make sure we're putting things in the homes that people really want that they need and they will pay for not overbuilding thats very important to us as we increase the mix of attach product in our company.
Robert H. Schottenstein: Especially if you don't think you're going to get much pricing power this year, what are the things you're going to have to do to maintain it at this 25-percent level? Continue to produce. Really high quality, affordable product, whether it's attached or detached, and a well-located community. You probably would like a more magical answer, but I think that's what it goes back to. Well-located communities will sell, and they will sell them for a really good margin. And if the majority of our communities, you know, check the box of being exceptionally well-located, and we think they do, we think we can maintain our margins that way. That's what happened in 2023. We expect it to happen in 2022.
Probably approaching somewhere around 20% companywide.
We get higher density.
And that brings even though the land may cost more all of those things hunt back into the average selling price.
If if.
I don't want to sound like a broken record, but if someone would have said a year ago. Your average price is going to come down while your margins stay the same you might go I don't think so but that's what happened.
And we may still see a slight.
Relative reduction in average price because of the continued leaning into of slightly more attach product as well as you know.
We just had a.
Phillip G. Creek: And that's, I mean, definitely, you know, we're all focused on that, a couple of little details with that, you know, Jay, specifications of the product. You know, to make sure we're putting things in the homes that people really want, that they need, and they'll pay for, not overbuilding. That's very important to us as we increase the mix of attached products in our company, probably approaching somewhere around 20% company-wide. You know, we get higher density, and that brings even though the land may cost more, all those things come back into the average selling price. I don't want to sound like a broken record, but if someone had said a year ago that your average price was going to come down, would your margins stay the same? You might have to go. I don't think so, but that's what happened.
Homerun success with our smart series and it's over half of our business.
And it will continue to be.
And then a couple more things we are focused on as far as trying to improve returns and so forth. We talked about cycle time, we have made dramatic improvements. We still think there is some improvement there we can make.
Also sales pace again make sure we have a very focused product who are the buyers that we provide you know the products they want.
Best trained sales team et cetera, but when you look at sales pay cycle time big impact on overall returns.
<unk>.
Phil and I are playing off of each other here just on the cycle time and many of our markets right now our cycle time is approaching pre COVID-19 levels, which is where it needs to be.
Phillip G. Creek: And we may still see a slight, relative reduction in average price because of the continued leaning into slightly more attached products as well as, you know, we've just had a home run success with our smart series, and it's over half of our business, and it will continue. And then a couple more things we are focused on as far as trying to, and so forth. We talked about cycle time.
We still have a little bit of room to run there and some other markets, but 60 60 day improvement on average year over year in 2023, I think was heroic.
That was our goal I thought we thought it was a stretch goal, but we hit it and as I said in my primary comments.
Cycle time remains a very very intense area of focus for us and that contributes to margins as well and returns.
Phillip G. Creek: We have made dramatic improvements. We still think there is some improvement there we can make. Also, sales pay. Make sure we have a very focused product. Who are the buyers? Provide, you know, the products they want, the best trained sales team, etc.
And you also know Jay I mean, we're just getting started in Nashville, We closed our first house in Nashville, and in the fourth quarter. We just opened for sale our second community in Nashville. So we're excited about that.
Our new Fort Myers, Naples Division also getting additional stores open.
Robert H. Schottenstein: But when you look at sales pace, cycle time has a big impact on overall sales. Yes. Phil and I are playing off of each other here just on the cycle time in many of our markets right now; our cycle time is approaching pre-COVID levels, which is where it needs to be, And we still have a little bit of room to run there in some other markets, but 60 day improvement on average year over year in 2023 would be heroic. That was our goal. I thought we thought it was a stretch goal, but we hit it.
Our sales and closings. So we're excited about those two markets contributing to our results.
Got you and then one more and I'll turn it over.
When you think about that.
<unk> home versus a detached home.
Phillip G. Creek: And as I said in my primary comments, cycle time remains a very, very intense area of focus for us, and that contributes to margins. And you also know, Jay, we're just getting started in Nashville. We closed our first house in Nashville in the fourth quarter, and we opened for sale our second community in Nashville, so we're excited about that, in our new Fort Myers Naples division, also getting additional stores open for sales and closings. So we're excited about those two markets contributing to our Gotcha. And then one more and I'll turn it over. When you think about an attached home versus a detached home, just a rough average, is there a gross margin differential on a per foot basis between those two?
Rough average.
Is there any gross margin differential on a per foot basis. So between those two.
Okay.
No.
The underwriting.
We have we haven't changed our approach and underwriting every community is underwritten to hit certain thresholds and.
We're not we're not we're not doing attach product at lower margins thats not the goal if anything hopefully with pace and so forth. It will be at least equal to if not better than what we get with single family, We've had and I don't want to.
Let this go and said either we have a lot of move up product, it's very successful for us.
So it's.
We're not we're not just.
Jay Mccanless: Okay. No. The underwriting, you know, we haven't changed our approach to underwriting. Every community is underwritten, hits certain thresholds, and we're not doing attached products at lower margins. That's not the goal. If anything, hopefully, with pace and so forth, it'll be at least equal to, if not better than what we get.
I don't have all our eggs in one basket, but about half of our business is designed to be very affordable.
Okay I'll jump back in queue. Thanks, guys.
Thanks, Jay Thanks, Jay.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star followed by the number one.
Phillip G. Creek: We've had all, and I don't want to..., let this go unsaid either. We have a lot of move-up product. It's very successful. And so it's, you know. We're not, we're not just. I don't have all our eggs in one basket, but, you know, about half of our business is designed to be, you know, very affordable.
There are no further questions at this time Mr. Craig Please.
Please proceed with your closing remarks.
Thank you for joining us look forward to talking to you next quarter.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Phillip G. Creek: Gotcha. Okay, I'll jump back in the queue. Thanks, guys. Thanks, Jay. Thanks, Jay. Ladies and gentlemen, as a reminder, should you have any questions, please press the star followed by the number one. There are no further questions at this time, Mr. Creek. Please proceed with your closing remarks. Thank you for joining us. I look forward to talking to you next quarter. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.