M/I Homes, Inc. (NYSE:MHO) Q4 2022 Earnings Call Transcript

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M/I Homes, Inc. (NYSE:MHO) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good afternoon, ladies and gentlemen. Thank you for joining today's M/I Homes' Fourth Quarter and Year Ending Earnings Conference Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. . I would now like to pass the call over to our host, Phil Creek with M/I Homes. Please proceed.

Phil Creek: Thank you. And thanks for joining us today on the call. In Columbus is Bob Schottenstein, our CEO and President; Susan Krohne, our SVP and Chief Legal Officer; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP, Chief Accounting Officer and Controller; and Mark Kirkendall, VP and Treasurer. 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 non-public items with you directly. 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 that call. With that, I'll turn the call over to Bob.

Bob Schottenstein: Thanks, Phil. Good afternoon, and thank you for joining our call. We are pleased to report our fourth quarter and full year 2022 results highlighted by record revenue, record income and very strong returns. We increased our revenue by 10% to a record $4.1 billion, increased pre-tax income by 25% to a record $635 million and improved our operating margin by 160 basis points to 15.4%. In addition, we ended the year in the best financial condition in our 46-year history with the cash balance over $300 million, zero borrowings under our $650 million credit facility, and a debt to capital ratio of 25%. We were particularly pleased to deliver such strong operating and financial results in the face of challenging market conditions.

As has been well documented, the rapid rise in interest rates over the past nine months has materially impacted demand for new homes and demand for existing homes. On the other hand, the demand for homes has not vanished. Instead, the higher rates have resulted in potential buyers taking a pause and moving to the sidelines. There remains very tangible homebuyer demographics, particularly among millennials and Gen Z individuals, and the prolonged undersupply of homes that has persisted for years, all gives us great confidence in the long-term outlook for the housing market and our industry. Our new contracts for the full year 2022 decreased by 27% compared to the record sales we posted in 2021. For the fourth quarter, our new contracts were down 44% compared to a year ago.

However, as Phil will outline in a few minutes, we saw our sales and demand begin to improve during the latter part of the fourth quarter despite the higher rate environment. Moreover, and importantly, the improvement and strength in buyer demand, traffic and sales has continued into 2023. Specifically, with noticeably stronger levels of traffic both in our models and online, we sold 633 homes in January. This is our best sales month since April of last year. And though down 18% from a year ago, this represents an approximate 60% sequential improvement over the average monthly sales we recorded during the last half of 2022. Clearly, we are encouraged by this recent material improvement in our traffic and sales and similar commentary from select other builders adds to this encouragement.

While there remains much uncertainty in the market and no one really knows whether this recent strengthening and improvement in demand and sales will continue, we do believe it underscores and confirms the underlying homebuyer demographics and desire for a new home. Now I'd like to provide some comments on our specific markets. We experienced strong performance from our divisions in 2022 with substantial income contributions across the board, led by Dallas, Tampa, Columbus, Orlando, Raleigh and Charlotte. In our Southern region, which consists of 11 markets in Texas, Florida, North Carolina and Tennessee, our deliveries increased 4% over last year's fourth quarter, comprising 1,413 deliveries, or 59% of the total. Northern region, which consists of our other six markets located in Ohio, Indiana, Illinois, Michigan, and Minnesota, contributed 971 deliveries, which was an increase of 2% over last year's fourth quarter.

For the year, homes delivered decreased 5% in the Southern region and were flat in the Northern region. Our fourth quarter new contracts in the Southern region decreased by 41% and decreased by 48% in the Northern region. For the year, new contracts decreased 28% in the Southern region, 25% in the Northern region. Our owned and controlled lot position in the Southern region decreased by 8% compared to a year ago and increased by 3% in the Northern region when compared to 2021. Companywide, we now own approximately 25,000 single family lots or lot equivalents. Of this total, 32% are in the Northern region, 68% in the Southern region. This equates to roughly a three-year supply of owned lots. On top of the own lots, we control pursuant to option contracts, an additional 17,100 lots.

So in total, we own and control roughly 42,000 single family lots, which is down 4% from a year ago and equates to about a five-year supply. Most importantly, about 41% of our lots are controlled under option contracts, thereby giving us significant and important flexibility to react to changes in market conditions. Before I turn the call over to Phil, let me just close with a few additional comments. We are very excited about our business as we look ahead to 2023. The new communities that we opened in 2022 are performing well. And the planned new community openings for 2023 should further contribute to the strength of our operation. Building upon the long-term success of our Orlando, Tampa and Sarasota operations, we recently announced our entry into the Fort Myers/Naples market.

This will allow us to continue our growth along the southwest coast of Florida. As I mentioned at the beginning of my remarks, our financial condition is excellent, as strong as it's ever been, with low debt levels, significant cash and a well balanced land position. The operating strategy we have employed is very well suited to respond to current macroeconomic conditions. For all these reasons, we believe M/I Homes is very well positioned for 2023 and beyond. With that, I'll turn the call over to Phil.

Phil Creek: Thanks, Bob. Our new contracts were down 45% in October, down 51% in November and down 35% in December for a 44% decline in the quarter compared to last year's fourth quarter. And our sales pace was 1.8 in the fourth quarter compared to 3.3 in last year's fourth quarter. And our cancelation rate for the quarter was 30%. As to our buyer profile, about 58% of our fourth quarter sales were to first-time buyers compared to 53% a year ago, and 64% of our fourth quarter sales were inventory homes compared to 45% in last year's fourth quarter. Our community count was 196 at the end of 2022 compared to 175 a year ago. During the quarter, we opened 25 new communities while closing seven. For the year, we opened 101 new communities compared to opening 72 in 2021.

We currently estimate we will end 2023 with about 225 communities. We delivered an all-time quarterly record 2,384 homes in the fourth quarter, delivering 53% of our backlog compared to 43% a year ago. And revenue increased 16% in the fourth quarter of this year, reaching an all-time quarterly record 1.2 billion. Our average closing price for the fourth quarter was 492,000, an 11% increase when compared to last year's fourth quarter average closing price of 443,000. And our backlog average sale price is 541,000, up 11% from a year ago. In the fourth quarter, we recorded a pre-tax charge of 18.4 million for impairments, or $0.50 per diluted share. This charge consisted of 10.2 million of pre- acquisition land costs and 8.2 million of inventory valuation charges.


Our gross margin, exclusive of the impairment charge, was 24.1 for the quarter, up 90 basis points year-over-year. And for the full year, our gross margins improved 140 basis points to 25.7, exclusive of the impairment charge. Our fourth quarter and full year SG&A expenses as a percent of revenue were 9.1% and 9.8% of revenue, a 70 and 60 basis point improvement compared to the prior year, reflecting greater operating leverage and our lowest percentage ever. We constantly review our cost structure and due primarily to our lower year-end backlog, we reduced our headcount by 8% in January of 2023. Interest expense decreased 400,000 for the quarter and increased slightly for the year. Interest incurred for the quarter was 9.2 million compared to 9.4 million a year ago.

And for the year, interest incurred was 38 million versus 39 million last year. We are pleased with our improved returns for the year. Our pre-tax income was 15.4% versus 13.6% last year, and our return on equity remained a strong 27%. During the fourth quarter, we generated 196 million of EBITDA compared to 155 million in last year's fourth quarter. And for the full year 2022, we generated 705 million of EBITDA, up 24% over the prior year. We generated 184 million of cash flow from operations in 2022 compared to using 17 million in 2021. Our effective tax rate was 21% in the fourth quarter compared to 20% in last year's fourth quarter. Our annual effective rate for 2022 was 23% compared to 22% the year before. We expect 2023's effective tax rate to be around 24%.

Our earnings per diluted share for the quarter increased 21% to $4.65 per share from $3.83 per share in last year's fourth quarter and increased 30% for the year to $17.24 per share from $13.28 per share last year. During 2022, we repurchased 1.2 million of our outstanding common shares for 55 million, leaving 93 million available under our current repurchase authorization. We did not repurchase any shares in the fourth quarter. Now Derek Klutch will address our mortgage company results.

Derek Klutch: Thanks, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $9.7 million, down $1.1 million from 2021 and revenue of $22.6 million, down 1% over last year. It was primarily a result of lower pricing margins and fewer loans closed and sold. For the year, pre-tax income was $39.3 million and revenue was $86.2 million. Loan to value on our first mortgages for the quarter was 82%, the same as 2021's fourth quarter. 79% of the loans closed in the fourth quarter were conventional and 21% were FHA or VA compared to 81% and 19%, respectively, for 2021's same period. Our average mortgage amount increased to $392,000 in 2022's fourth quarter compared to $360,000 in 2021. Loans originated in the quarter decreased 12% from 1,692 to 1,497, and the volume of loans sold decreased by 4%.

Our borrower profile remains solid, with an average down payment of over 18%. And for the quarter, the average borrower credit score on mortgages originated by M/I Financial was 7.46. Our mortgage operation captured 77% of our business in the quarter, a decrease from 83% in 2021's fourth quarter. Finally, we maintain two separate mortgage warehouse facilities that provide us with funding for our mortgage originations prior to the sale to investors. At December 31, we had a total of 246 million outstanding under these facilities, which expire in May and October this year. Both facilities are typical 364-day mortgage warehouse lines that we extend annually. Now I'll turn the call back over to Phil.

Phil Creek: Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with no borrowings under our unsecured revolving credit facility. Our total homebuilding inventory at year end was 2.8 billion, an increase of 400 million above prior levels. And we had 4,700 homes under construction at year end, which includes our backlog and inventory homes. That is down 12% from 12/31/21's 5,300 houses. During 2022, we spent 341 million on land purchases and 496 million on land development for a total land spend of 837 million. This was down from 1.1 billion in 2021. In 2022, we purchased 8,000 lots compared to 2021's 17,000 lots. At 12/31/22, we had 625 million of raw land and land under development and 684 million of finished unsold lots.

We own 8,500 unsold finished lots with an average cost of 80,000 per lot, and this average lot cost is 15% of our 541,000 backlog average sale price. And at the end of the year, we had 485 completed inventory homes and 1,827 total inventory homes. Of the total inventory, 890 are in the North region and 937 are in the Southern region. And at 12/31/21, we had 99 completed inventory homes and 1,266 total inventory homes. This completes our presentation. We will now open the call for any questions or comments.

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