M/I Homes, Inc. (MHO) Earnings Call Transcript & Summary

Thank you for standing by. My name is Frilla, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Second Quarter Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Phil Creek. You may begin.

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President; and Derek Klutch, 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. I'll now turn the call over to Bob.

Thanks, Phil. Good morning, and thank you for joining us today. We are pleased to report solid second quarter and first 6-month results. Despite continued challenges in the broader economy, choppy demand, economic uncertainty, rising interest rates and the impact of the conflict in the Middle East, we are very proud of our results. For the second quarter, we sold a second quarter record 2,387 homes, 15% better than last year. And for the first 6 months, we have sold 4,737 homes, 8% better than a year ago. Pretax income from the quarter was $105 million. Though down 35% from a year ago, we were very pleased to post a pretax income percentage equal to 10% of revenue. Pretax income for the first 6 months was $194 million, also equating to a very solid 10% pretax income percentage. And we were pleased to generate a 10% return on equity for the second quarter. Contributing to our solid returns was a second quarter gross margin of 22%, which includes $4 million of inventory charges. Notably, excluding those charges, our second quarter gross margins would have approached 22.5%, which is slightly better than our first quarter gross margins. We closed 2,206 homes in the quarter, down 6% compared to a year ago. And for the first 6 months, we have closed 4,120 homes, down 5% from last year. Revenue for the quarter was $1.1 billion, down 9% from last year. Our second quarter record new contracts resulted in a monthly sales pace average of 3.4 homes per community compared to a pace of 3 per community a year ago. We ended the quarter with 234 communities and remain on track to grow our 2026 average community count by about 5%. In terms of product mix, we have seen a slight increase in the sale of our move-up product. Specifically, during the quarter, our Smart Series, which is our most affordable line of homes that caters primarily to the first-time buyer, accounted for 43% of company-wide sales. This compares to 52% a year ago. We believe the primary driver of our solid sales results is well-located communities and excellent product. At the same time, we continue to use mortgage rate buydowns as our primary incentive. And given the current rate environment, we'll continue to promote with such buydowns for the foreseeable future. Approximately 78% of our second quarter sales were spec homes, roughly the same as the first quarter. Our rate buydown program is targeted to both spec homes and to-be-built homes. The to-be-built buy-down program appropriately features a longer-term rate lock. Our mortgage company had a terrific and very strong second quarter, capturing a record 96% of our business. We continue to see quality buyers for the most part, in terms of creditworthiness with average credit scores of 748 and an average down payment of about 15%. We feel very good about all 17 of our homebuilding markets. We expect to have a very solid year in Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis, Orlando, Dallas, Charlotte and Raleigh. Tampa, which historically has been one of our top-performing markets, is currently somewhat challenged in terms of the macro environment within the Greater Tampa market as is Sarasota. Our newest markets, Nashville and Fort Myers, Naples are beginning to gain very important traction and will no doubt be important contributors going forward as we gain scale in each of those 2 new markets. Now to more specifically address our markets, our division results in the second quarter were led by Columbus, Chicago, Minneapolis, Raleigh and Charlotte. New contracts for the second quarter in the Northern region increased by 16%, while new contracts in our Southern region increased by 14%. Biggest increase we saw was in the Carolinas. The Midwest was up across the board, followed closely by Texas, and our sales in Florida were also up. Our deliveries in the Northern region decreased by 8% compared to last year's second quarter and represented 40% of our company-wide total. Our Southern region deliveries also decreased by 5% over last year and represented 60% of total deliveries. We have an excellent land position. Our owned and controlled lot position in the Southern region decreased by 15% compared to last year and increased by 24% in the Northern region. 40% of our owned and controlled lots are in the Northern region, while 60% are in the South. Company-wide, we own approximately 23,500 lots, which is roughly a 2.5-year supply. In addition, we control approximately 25,700 lots via option contracts, resulting in a total of slightly more than 49,000 owned and controlled lots, which equates to about a 5-year supply. Our balance sheet continues to be excellent, highlighted by S&P's recent upgrade of our credit rating to BB+. We ended the second quarter with an all-time record $3.2 billion of equity, equating to a book value per share of $128. We had no borrowings under our $900 million unsecured revolving credit facility, and we ended the quarter with $736 million of cash. This resulted in a debt-to-cap ratio of 18% and a net debt-to-cap ratio of negative 1%. In closing, as we celebrate our 50th year in business, we remain very confident in the long-term fundamentals of the homebuilding industry. Given the quality of our geographic footprint, our strong land position, very well-located communities and diverse product offering, we believe M/I Homes is well positioned to have a solid 2026. With that, I'll turn it over to Phil.

Thanks, Bob. As far as the financial results, we had record second quarter new contracts, up 15% compared to last year. Our sales were up 13% in April, up 23% in May and up 9% in June, and our cancellation rate for the second quarter was 8%. 50% of our second quarter sales were to first-time buyers and 78% were inventory homes. Our community count was 234 at the end of the second quarter, consistent with a year ago. The breakdown by region is 94 in the Northern region and 140 in the Southern region. During the quarter, we opened 27 new communities while closing 23. We currently estimate that our average 2026 community count will be about 5% higher than last year. We delivered 2,206 homes in the second quarter and about 42% of these deliveries came from inventory homes that were both sold and delivered within the quarter. And at June 30, we had 5,100 homes in the field, flat versus a year ago. Revenue decreased 9% in the second quarter. We delivered fewer homes than a year ago and our average sale price declined. Our second quarter results included $5 million of land sales profit versus $3 million in last year's second quarter. We often sell land as part of our land strategy. Our gross margin was 22.1% for the quarter, including $4 million of inventory charges. Excluding these charges, our gross margin was 22.5%. Our construction costs were down slightly during the quarter compared to the first quarter, and our cycle time improved also by a couple of days. Our second quarter SG&A expenses were 12.6% of revenue compared to 11.3% a year ago. Our second quarter expenses increased 3% versus a year ago. Our increased costs were primarily due to new community openings and a slightly higher headcount. Interest income, net of interest expense, for the quarter was $3.3 million, and our interest incurred was $9.3 million. We had solid returns for the second quarter given the challenges facing our industry. Our pretax income was 10% and our return on equity was 10%. During the quarter, we generated $120 million of EBITDA compared to $169 million in last year's second quarter. And our effective tax rate was 24% in the quarter, flat compared to last year. Our earnings per diluted share for the quarter decreased to $3.02 per share from $4.42 per share last year, and our book value per share is now $128, an $11 per share increase from a year ago. Now Derek Klutch will address our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved pretax income of $14.4 million, in line with $14.5 million in 2025's second quarter. Revenue increased 3% from last year to $32.3 million due to a higher average loan amount and slightly higher margins on loans sold, but offset by a decrease in loans originated. The average loan-to-value on our first mortgages for the second quarter was 85% compared to 83% in 2025's second quarter. 65% of the loans closed in the quarter were conventional and 35% FHA or VA compared to 51% and 49%, respectively, for 2025's second quarter. Our average mortgage amount increased to $405,000 in 2026 second quarter compared to $403,000 last year. Loans originated decreased to 1,817, which was down 3% from last year, while the volume of loans sold increased by 6%. Finally, our mortgage operation captured 96% of our business in the second quarter, up from 92% last year. Now I'll turn the call back over to Phil.

Thanks, Derek. As far as our balance sheet, our financial position continues to be very strong. We have one of the lowest debt levels of the public homebuilders and are well positioned with our maturities. Our bank line matures in 2030 and our public debt matures in 2028 and 2030 and has interest rates below 5%. Our unsold land investment at June 30 is $1.9 billion compared to $1.7 billion a year ago. And at June 30, we had $800 million of raw land and land under development and $1.1 billion of finished unsold lots. During the quarter, we spent $131 million on land purchases and $155 million on land development for a total of $286 million. At the end of the quarter, we had 510 completed inventory homes and 2,839 total inventory homes. And of the total inventory, 1,125 were in the Northern region and 1,714 are in the Southern region. At June 30, 2025, we had 586 completed inventory homes and 2,726 total inventory homes. We spent $50 million in the second quarter repurchasing our stock and have $120 million remaining under our current Board authorization. Since 2022, we have repurchased 19% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

[Operator Instructions] Our first question comes from the line of Alan Ratner with Zelman.

Really strong results in a tough market. So I was intrigued by the comment you made about the -- maybe the somewhat modest mix shift toward more move-up this quarter. And I was curious if you could maybe expand a little bit on that in terms of what's kind of going on under the hood there. I mean is this a concerted effort you guys are making to target that segment of the market and a function of maybe new community openings or changing in product type? Or was this more just a function of where the demand was in the quarter? And I have a follow-up after that.

Yes, I think it's a great question. I think it's a little bit of both. I think there is a little bit more demand there. We've always been really strong with our move-up market. I'm not going to act like this is a new phenomenon for our company. We've pretty much got our Smart Series and then everything else. And the everything else has always been very strong. I will say that in select markets, we have strategically and we began this some time ago, probably 18 to 24 months ago, look to find more locations where we could sell the more -- the move-up market because we just thought there would be better demand for it, and we think we do a good job of executing. So I think that when you sort of shake it all out, it's a little bit of both. And the other thing is, I'll say this, that over the last number of quarters, I think that some of the more high-priced or move-up land opportunities pencil better in terms of underwriting. We underwrite based on current conditions. It's always a bit of a guess. If it was an exact science, they wouldn't need any of us. But in that context, in select markets, and there's a number of examples, the move-up stuff just seems to be penciling better. And we find sites that we think are opportunistically exciting in terms of perhaps more infill and so forth. So it's -- I hope that answers the question.

Yes. No, that was great. I appreciate the added thoughts there. So, yes, I'm guessing this might be related, but what I wanted to pivot to next was the gross margin, which -- good to see some sequential improvement there. I was hoping you can kind of drill into the drivers of that. You mentioned costs being down a little bit quarter-over-quarter. Is there any mix impact from move-up as well in that?

Maybe slightly. But I think our cost -- I know a couple of builders mentioned they had a 5% improvement in cost. We didn't see that much. And when we say improvement in costs, it's not apples and bananas. It's apples-to-apples. I mean we haven't [ despeced ] or changed any of the fit or finish. We probably got 1%, 2%, 3% improvement depending upon the market. So that's helped a little bit. There's a lot of uncertainty still. And we were pleased to see margins slightly improve or at least not get any worse. I really think -- look, I know -- let me say it this way, if it weren't for mortgage rate buydowns industry-wide, from the best performing builders to the worst, if it weren't for mortgage rate buydowns, the sales environment would be bleak. I think everyone knows that. But having said that, I want to emphasize something that I said. The primary driver for our sales is our well-located communities. If it was all about rate buydowns, then all of our communities would be performing at a high level. We've got communities that are selling at a very strong pace and at premium margins because they're well located, and the 22% is an average. We've got 234 communities. A very meaningful number of those communities are well north of 22%, 23%, 24%. And our divisions, particularly the more mature ones, and I tried to single some of those out that are performing at a high level are posting very credible margins in this environment, better than we would have expected. And look, you never know whether a community is going to perform as good as you hope it will. We've just got a lot of -- we've got a very healthy percentage of what I would call good performing communities. And most of that hunts back to location, but obviously, it's also the quality of the product.

Alan, just to add a couple of things. This is Phil. We opened 49 new stores in the first half. If you look at the average sale price in those 49, looks like it's about maybe $575. Our backlog right now is about $540. So it is kind of focused a little more on the high price point. As far as margins and cost pressure and those type things, our finished lot cost compared to a year ago is up about 8%. But you're always market pricing, but we try to make sure we open these stores the right way and don't get too far ahead of ourselves and really try to get pricing power where we can. That's really, really important to us. Having said that, as you know, 30-year fixed rate at par right now is in the 7% range. So there are pressures on the cost of those buydowns and so forth. But again, it's kind of a subdivision-by-subdivision business, and that's what we'll continue focusing on.

And your next question comes from Kenneth Zener with Seaport Research.

You said 78% of your closings were spec. Could you break out the mix between, which were spec overall 78% and the percent that were intra-quarter order closings, orders and spec, if you would, and talk to the margin difference between those 2 categories?

Phil, do you have that?

Well, what we gave you was that from a sales standpoint in the second quarter, 78% were specs. And then as far as deliveries in the second quarter, 42% of the deliveries were sold and closed in the quarter.

We don't give specific -- Ken, we don't give specific information on the margin differential company-wide between to-be-built and spec. That number varies from market to market. In nearly every one of our 17 markets, the margins on to-be-builts are better. In some, just slightly; and in others, it could be 100 or 200 basis points, perhaps more in a couple of select instances. But in general, the margins are higher on to-be-built. And it's just -- the differences can vary pretty meaningfully between market to market.

And we've really been -- we continue to manage our spec levels closely, as always. Our improved cycle time, it's been improving a couple of days every quarter. As that cycle time improves, that gives us the benefit of not having to have so many specs out there. When you look at the mid-year, completed houses in inventory is 510. Last year, it was 586. So, we actually have less completed specs. But again, having said that, with our cycle time, we help that. But the specs are all about trying to be in the -- on the right lots with the right product. Of course, as you do attached homes, attached townhouses, that tends to create more specs in general, our more affordable priced Smart Series. We have a few more specs, but we manage our spec levels very closely.

And my second question is, Bob, it's kind of big picture. But despite all the industry headwinds, margins are higher than pre-COVID. Generally for the industry, what we're seeing so far, stable quarter-to-quarter. And you guys are actually starting more homes than you've had orders. So what are you worried about in the second half, you could say the industry in general into '27. Given that with the rate buydown benefits you highlighted, it seems that you are somewhat insulated from any near-term moves in the 10-year given that you can just buy down. So what is kind of the worry that you see out there?

Well, first of all, we've all seen conditions that are significantly worse than now. I've said during the last several calls that if I had to -- and I think that our senior management team agrees with this, that if I had to grade or if we had to grade current housing conditions, I think they're above average. They're not bad. They're not really good either, but they're -- we've seen far, far worse. And for M/I Homes to be generating a 10% pretax return, take that for a long time, sign us up. Same time, you've got pretty significant differences in performance across the industry within the builder group. And we're all -- I think when you look at the balance sheets, for the most part, the builders are in the best shape they've ever been in. We certainly are. And I think that's true of a number of our competitors. But you also see some really radically different returns within the large cap and even the mid and small cap builders. Some of that can have a big impact on certain markets where for whatever reason, you may see big discounting going on by certain builders and others have us scratch our head and go why. You don't need to do that. Those things have an impact on business. We're all -- the demand is not as robust as we would like to see it. I think it's suppressed by conditions. I think there's a massive amount of buyers that are -- potential buyers that are waiting to join homeownership that are held back by the current rate environment, the uncertainty in the economy, lack of confidence, affordability, all the stuff that everyone constantly talks about. So we're really bullish long term. But I think right now, the buyer pool is relatively constrained, and we're all fighting for those that are out there. So what each of us do can impact the others. We try to focus on what we think is best for our business. Look, I think there's just a lot of uncertainty. I think we're well positioned to deal with it. I'm not afraid of anything, and I don't want to sound arrogant because that's not good. But at the beginning of this year, I think most people thought rates might come down through the year, wrong so far. At the beginning of this year, no one anticipated the conflict in Iran. And it looks like it's going to be with us for a while. And the impact that's had on oil prices and consumer sentiment, none of that was foreseeable at the beginning of the year. Between now and the end of the year, things will happen that none of us can imagine right now. We need to make sure of is that we have a very strong balance sheet. We don't -- that our debt levels remain low, that we focus on the best possible communities that we can buy, keep our land ownership in balance, hopefully not owning more than a 2 or 3-year supply, which we don't. I feel really good about our -- as I said, our land position. We love the new communities we're opening this year, that we already have and that are coming on; that we focus on quality and we focus on the fundamentals of the business because that's what's gotten us here. We've been in business since 1976. And so I love our position. As I said, we're going to have a really good year in the vast majority of our markets. We've got a few places that are struggling right now. And I think it's due more to the macro conditions than unforced errors by us, namely Tampa, to some extent Sarasota. Certainly, Austin is still crawling its way back. It was red hot for a while. It's getting a little better. But we had positive sales comps in the state of Texas. We had positive sales comps in Florida. Our Orlando operation is terrific, really strong in the Midwest. Carolinas could not be more bullish. So I like where we are. I guess the thing is we will remain vigilant and concerned about those things that we can't anticipate. And the only thing you can do to ready yourself for that is to keep your balance sheet strong.

And your next question comes from Buck Horne with Raymond James.

Congrats On the great quarter. Appreciate all the color so far. I was just wondering if you could just dive into your thoughts on maybe how the selling environment of the quarter kind of progressed. And I'm curious just how the gross margins in the current backlog you think are shaping up for the back half of the year? To what degree you can characterize those? And really just kind of what level of incentives did you have to deploy in the quarter to get such strong order results?

Buck, the backlog margin really is pretty consistent the last few quarters. But almost half of our houses, specs are getting sold and closed in the quarter. And I'm sure you can guess that the specs in general tend to have a lower average sale price than the to-be-builds, backlog houses and so forth. And also the margins tend to be a little bit lower. There are pressures. I talked about our land cost, finished lots being up 8% versus a year ago. And with mortgage rates up a little bit, that puts pressure on that buydown amount. Most builders are still very, very competitive on the mortgage rate we're offering. Trying to offset that by the quality of our new communities and product that Bob mentioned, we expect to open more new stores in the second half than we did the first half. And a number of those that we opened in the third quarter will also generate closings for us this year. But we don't give gross margin estimates. That's just a very -- but as Bob says, we're doing all we can on the cost side and the product side to offset that. As far as expense levels, our community count is flat at 630 versus a year ago. We do expect that to increase in the second half. Right now, we do have about 3% more people. So again, we'll try to manage those costs and expenses as best we can and try to make sure we get all we can get at the margin line.

Got it. Got it. Helpful color. I appreciate that, Phil. And just on the land and the lots under contract, just going back to -- highlighting that you've increased the number of lots under contract in the north by a pretty considerable percentage, I think, 24%. And then it looks like you're letting some of those options burn off in the South a little bit here. So is that a function of the demand environment from the buyer? Or is it just a function of, is there something changing in the lot availability and the land market? How would you characterize the strategy and the repositioning of the lots?

Nothing has really changed, Buck. I mean, we focus, first and foremost, on what we own. We want to own a 2 to 3-year supply of land based on current closing rate. Right now, we own a little over 23,000 lots. If you look at June a year ago, it was 24,000 or 25,000. But again, nothing real significant. And inside that 23,000 or so lots, we like to own a 1-year supply of finished lots. We don't want to go dark as far as having finished lots on the ground due to development delays and weather and all those things. So we feel really good about what we own. As far as off the books and total control, we control right now about 49,000. If you look a year ago, it was a little over 50,000. Really nothing significant, things go in and out there. We talked about our inventory charges of about $4 million, less than $1 million of that was deposits and prepaid expenses we wrote off on deals that we decided not to go forward with. We also talked about the lots that we sold, which we do periodically to help manage that investment level. But those numbers move around a little bit. But overall, owning 2 to 3 years and controlling 4 to 5 years, that really hasn't changed. It's just those numbers move around a little bit.