Q4 2023 M/I Homes Inc Earnings Call
Participants
Phil Creek
Bob Schottenstein; Chairman, President, and CEO; M/I Homes Inc
Derek Klutch; Chief Executive Officer of M/I Financial; M/I Homes Inc
Presentation
Operator
Good morning, ladies and gentlemen, and welcome to M/I Homes fourth quarter and year-end earnings conference call. (Operator Instructions) As a reminder, this call is being recorded on Wednesday, January 31, 2024.
I would now like to turn over the conference to Phil Creek. Please go ahead.
Phil 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 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. 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.
Bob 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 very strong income and returns. Pretax income equaled $607 million with a pretax 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 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 absorptions. Clearly, as rates began to fall in the fourth quarter, we saw a pickup in both traffic and demand. Notably, our December sales were the best month of the fourth quarter.
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 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'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 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 8,112 homes for the year, 3% less than 2022.
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% 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% over last year's fourth quarter in the southern region, comprising 1,171 deliveries or 58% of our total. Northern region contributed 848 deliveries, a decrease of 13% over last year's fourth quarter.
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 the balance of 72% in the Southern region. 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. 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. 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.
Phil Creek
Thanks, Bob. 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. And as we stated in our third-quarter conference call, we entered the fourth quarter with 1,200 less homes in the field than a year ago. And at December 31, 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. Our average closing price for the fourth quarter was $471,000, a 4% decrease when compared to last year's fourth 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.
Interest income increased to $8.3 million for the quarter due to our higher cash balances, and our pretax income was 15.1% 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. 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%. We expect 2024's effective tax rate to also be around 23%. 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 and decreased 6% for the year to $16.21 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 have repurchased 9% of our outstanding shares.
Now Derek Klutch will address our mortgage company results.
Derek Klutch
Thank you, Phil. In 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 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 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 2022.
Loans originated in the quarter decreased 7% from 1,497 to 1,387, and the volume of loans sold increased by 9%. As mentioned earlier, the borrower profile remained solid with an average down payment of over 18% for the quarter and an average credit score on mortgages originated by M/I Financial of 747. Our mortgage operation captured 88% of the business in the quarter, an increase from 77% in 2022's fourth quarter. We maintained 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. 20.36_____ is a typical 364-day mortgage repurchase line 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 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 2028 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 8,724 unsold finished lots we have a very strong land position at year end, controlling 46,000 lots. We own 24,400 lots, which is about a three-year supply of lots controlled 53% are owned, which is about a 5.5 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 912 are in the northern region and 1,100 elevens in the Southern region. And at December 31st, 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.
Question and Answer Session
Operator
Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by the number one on your touch bet. If you wish to cancel your request, please press star two. Please ensure you lift the handset. If you're using a speakerphone before pressing any keys.
Your first question comes from Alan Ratner from Zelman & Associates. Your line is now open.
Hey, guys, good morning. Congrats on a great year on.
Bob Schottenstein
Thanks.
For all the detail celebrating your you must be celebrating your football team's performance.
I'm still writing high, but I'm still writing. I expect 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. Yes, your margins have been pretty 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, the outlook on material and labor inflation, land inflation in terms of what's going to be flowing through? And then your 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 you have any ability to push price. So if you could kind of talking about those three buckets, I think it'll help us directionally?
Yes.
Bob Schottenstein
I think on the on the cost side, things have stabilized quite a bit on 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 a little bit of pressure on concrete. But Tom, on the cost side, I think we feel pretty good about where that stands in terms of moderating inflation and moderating increases from 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 on it, 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, 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 and now appear to be quite a bit stronger and we're we're hopeful that we can continue to maintain margins in 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. But in the end it was reflected in the average selling price that Phil mentioned coming down slightly. 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're really honest about it. But Tom, 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.
Dorrit are weak. We're not expecting much erosion, frankly. And maybe we'll 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, for the most part, the supply chain disruptions that we just couldn't stop talking about, you know, post COVID have now seen now seem to have pretty much shut cleared out an dissipated.
And that's all really, really helpful and encouraging to hear. So hopefully that that momentum continues. And yes, congrats on that maintaining margin looks like it went down.
Bob Schottenstein
And I don't think we're I don't think we're alone in this, which is also comforting. If you're the only one that's experiencing something that always makes you wonder whether it's good or bad. But I think that there's a lot of momentum within the industry right now and which as you sort of hear things and seeing what other builders have recently said as well, it resonates with us.
Phil Creek
And Alan, just couple more things. Just kind of follow up on what Bob said. You know, the stores we opened last year, ended up performing better 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 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 that Phil, on second question around kind of spec versus BTO., I mean, Smart Series is has 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, our resale inventory is still incredibly low, but maybe starting to tick up a little bit. Does that change your thinking at all as far as the mix of your business at spec versus PTO., are you starting to see causing all that yellow redos, David?
Bob Schottenstein
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 you mentioned. 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 from companywide that will also result in more specs with these four unit and six unit buildings being the most common form of townhome.
So you started building with one or two sales. You automatically have three or four specs out there. And Phil, you want to add anything else to that?
Phil Creek
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 the gross margin on banks versus to be built up, you know, is not very much in some markets. Matter fact, it's like really, really close. So we do feel good about our spec levels. We are doing more attached townhouses. We're doing more smaller single-family detached. And by its nature, we're doing a few more specs. And those you might expect to get up to that 22 hundred and 23 hundred, 24 hundred, 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 for community per community. So we do feel good about our spec levels. We want to make sure that the we have what we need makes sense.
All right. Well, appreciate that all And best of luck in the new year.
Bob Schottenstein
Thanks.
You, too.
Operator
Your next question comes from Jay McCanless from Wedbush. Your line is now open.
Ajay, I have given you.
Phil Creek
Good morning.
I want to be doing well, probably or sorry, Phil, if you don't mind, what was the monthly order pace through 4Q? And maybe any color you can give us on January?
Bob Schottenstein
I'll take the last part of that first and then Phil will give you the pace somewhat surprising.
Well, just let me start over our gen. I what I mentioned was 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 the while technically January is not over our January sales will exceed last year's. We're very pleased with the way the year starting up and an optimistic about the selling season, and Phil can give you the details on on pace.
Phil Creek
Yes, sales pace, Jay, in the fourth quarter, it was 2.5 in the fourth quarter last year was 1.8. And again, you know, in the third quarter we were three four. So, you know, again, we had been improving pace and have a big focus on that hope to continue improving that.
Great.
And then could you talk about the community count was all guided, I think like to 25, maybe you came in at two, 13 maybe what's going on there? 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 is it going to be a pretty big step up in the total community count in the first quarter sequentially?
Phil Creek
Yes, Jay, again, overall, we expect our community count this year to be on average up about 10% 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 of them are just sliding 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 the year in general, you know, we ended the year with to 13. We expect to get to that, you know, to 25 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 does take a little longer to develop land and those type things, but we do feel comfortable saying today, we think we'll be up 10% on average.
Okay. And then I guess.
Yes, Alan, RTS to the gross margin question, but just maybe what type of pricing power are you seeing currently maybe what percentage of your communities during Q4 were able to raise prices res. based pricing and I think pricing power is limited.
Bob Schottenstein
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, Martin, I don't know that I can predict with any kind of certainty whether we'll be able to grow margins. I think that the balance between demand and price right now in the market generally is really good 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 last year. We were really pleased that our margins held steady. I think that's I think that strong performance. I think it's a testament to our people and our product and our communities on but done, you know, 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's a good possibility that our margins will remain as we talked about with Alan and this 25% range.
Great.
And I guess from a competitive standpoint, I saw a lot of your larger competitors being aggressive on both base price discounts and incentives during the calendar fourth quarter of 23. I guess what do you what are you 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?
Bob Schottenstein
Well, I actually have a slightly contrary view on that. I think the first of all, it's very market-specific and it's, you know, it's cliche, but every market's different. I think that in a number of instances, we're starting to see incentives following ours have and the slight, you know, the the slight decline in mortgage rates that we've seen over the last 90 days, it's made it so that you don't have to spend as much work needed to provide you a rate near the low sixes or the high fives and dumb. You'd rather not spend anything on that, but that's what we have been doing. And the net-net of that has resulted in our 25.3% gross margins. I'm so 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 the need for incentivizing.
Phil Creek
That's sort of how we're thinking about it, Jay, also, as you know, 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 23 now over 100 of them opened in 22. So you know how you open, what model you have, what the specification level is of those houses, all 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. But again, when you have three, four, 5 billion of revenue, 15 basis points, 25 basis points mean a whole lot. So we really tried to focus on every subdivision not get too far ahead of ourselves, make sure we're focused on who the buyer is. So every subdivision is really a little different. We we don't do blanket things like a list, do interest rate buydowns everywhere in some customers need and interest rate buydown for the payment help some customers need closing cost help. So again, we tried to deal with it more.
We know on a rifle approach as opposed to just a shotgun across the board on any notion of what you're hearing and on land acquisition and development this year?
Phil Creek
Well, we definitely expect to spend more. We did spend a little more in 23 and 22. And the majority is continuing to be land development. Land development costs, as Bob says, was not going up the way it was the good news is kind of stabilizing, but we do want to continue to grow, have more stores.
Bob Schottenstein
So we do expect to be spending more on land this year, but you know, 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 our growth goals in oh 5% to 10% per year, hopefully closer to 10. And that that remains our goal.
Our strategic outlook.
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 and 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? Is it going to be maybe reduction in the other input costs that are coming in that key, the keep your gross margin flat around this 25 level, Bob, especially with land prices seemed to move up, I guess kind of what are the levers you're going to have to push and pull to hold to hold at these levels, 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% level, continue to produce really high-quality affordable product, whether it's attached or detached and well located communities, you probably would like a more analytical answer, but I think that's what it goes back to well-located communities we'll sell and they will sell at really good margins.
Bob Schottenstein
And 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 that to happen in 2024.
Phil Creek
And that's I mean, definitely, we're all focused on that.
Couple of 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.
Bob Schottenstein
That's very important to us as we increase the mix of attached product in our company, probably approaching somewhere around 20% Company-wide, we get higher density and that bring even though the land they cost more all those things 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 slightly more attached product as well.
As you know, we've just had homerun success with our Smart Series, and it's since over half of our business and it will continue to be.
Phil Creek
And then a couple of 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's 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 as trained sales team, et cetera.
Bob Schottenstein
But when you look at sales pace, cycle time, big impact on overall returns it, 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 and some other markets, but 60 60 day improvement on average year over year in 2023, I think was your Rollic. 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. Our cycle time remains a very, very intense area of focus for us, and that contributes to margins as well and returns.
Phil Creek
And you also know, Jay, I mean, we're just getting started in Nashville. We closed our first house in Nashville in the fourth quarter. We just opened for sale our second community in Nashville. So we're excited about that of our new Fort Myers Naples division, also getting additional stores opened for 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 is 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 accounts?
Bob Schottenstein
No, with the underwriting we have, we haven't changed our approach in underwriting. Every community has underwritten to hit certain thresholds, and we're not we're not we're not doing attach product at lower margins. That's not the goal, if anything, hopefully with pace and so forth, that will be at least equal to if not better than what we get with single-family we've had I don't want to let this go and say either we have a lot of move up product. It's very successful for us. And so it's, you know, it's we're not we're not just we 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.
Bob Schottenstein
Yes, thanks, Jay.
Phil Creek
Thanks, Jay.
Operator
Ladies and gentlemen, as a reminder, should you have any questions, please press Starpower by the number one. There are no further questions at this time. Mr. Correa, please proceed with your closing remarks.
Phil Creek
Thank you for joining us. Look forward to talking to you next quarter.
Operator
Okay, ladies and gentlemen, this concludes today's conference call.
Bob Schottenstein
Thank you.
Operator
For participating. You may now disconnect.
