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spk00: Ladies and gentlemen, thank you for your patience. This call is due to start in a couple minutes' time. © transcript Emily Beynon Hello and welcome to the MI Homes fourth quarter conference call. My name is Elliot and I will be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to our host, Phil Creek at MI Homes. Phil, please go ahead when you're ready.
spk07: Thank you. Thank you for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President, Susan Croney, our SVP and Chief Legal Officer, Derek Clutch, president of our mortgage company, Anne Marie Hunker, our VP, chief accounting officer, and Mark Kirkendall, our 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 is 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 it over to Bob. Thanks, Phil.
spk09: Good afternoon, and thank you for joining us today. 2021 was an outstanding year for MI Homes, highlighted by record revenue, record homes delivered, record income, and record year-end backlog. We are very proud of our results. They are a clear reflection of strong macro housing conditions as well as the extraordinary effort put forth by our entire MI Homes team across all of our markets. The strength of the U.S. housing markets is well documented. Although mortgage rates have recently been on the rise, they remain at or near historical lows. In addition, inventory levels are at or near historical lows. More and more millennials are moving into home ownership. In fact, recent Freddie Mac data suggests that during the past year, the percentage of first-time buyers securing a mortgage reached a near 25-year high, approaching 45%, fueled by ever-increasing millennial participation in home ownership. And we continue to see a shift in buyer preference towards single family homes and away from more densely populated areas, further driving demand. The quality of our buyers is as good as it's ever been in terms of credit worthiness and down payment. Taken together, all of these factors have created the strongest and highest quality demand for new homes that we've ever seen. It was that way throughout all of 2021 and continues today. At the same time, our industry is dealing with unprecedented challenges in the construction and supply chain part of our business, and we continue to deal with inflationary pressures with nearly all of the materials and components that go into our homes. So far, we have been able to navigate these challenges, although they have had a noticeable impact on our cycle and delivery times. So as we begin 2022, we are dealing with very robust and very healthy housing demand, exceptionally well qualified buyers, and persistent construction and supply challenges. Against this backdrop, just as we did in 2021, we believe MI Homes is well positioned to deliver another year of strong performance in 2022. Looking back for a moment at 2021, we achieved record revenues of $3.7 billion, 23% better than 2020. Record pre-tax income of $509 million, 64% better than 2020, and record closings of 8,638 homes, 12% better than 2020. These results contributed to a strong return on equity approaching 28%. Our gross margins of 24.3% were a 210 basis point improvement over last year, and our overhead expense ratio improved by 130 basis points to 10.4% for the year. We also achieved record performance from our mortgage and title operations. All of this resulted in our full-year pre-tax income margin improving by 340 basis points to 13.6%. We sold 9,084 homes during the year, a decline of 4 percent from the record 9,427 homes that we sold in 2020. Our monthly sales pace during 2021 averaged 4.1 sales per community, the highest pace for any year over the past decade, and this compares to a sale pace of 3.7 homes sold per community on a monthly basis during 2020. We accomplished our sales with an average of 15 percent less communities during the year, and throughout the year, we were limiting monthly sales in roughly half of our communities or more at times in order to best manage construction costs and deliveries. In the fourth quarter, we sold 1,744 homes, a decline of 18 percent from the fourth quarter record sales that we achieved in 2020. In terms of sales, our Smart Series, which is our most affordably priced product, continues to have a very positive impact, not just on sales, but our overall performance. At the end of 2021, our Smart Series homes were offered more than 40% of our communities company-wide. And our Smart Series sales also comprised slightly more than 42% of total company-wide sales in the fourth quarter. This number compares to 36% the fourth quarter of a year ago. As we continue to grow our Smart Series within our company, it's important to note that our Smart Series communities generally produce, on average, greater sales pace, better gross margins, better cycle time, and better overall bottom line returns. Company-wide, our backlog sales value at the end of 2021 increased by 29%, to $2.4 billion, which is an all-time year-end record. Units and backlog were up 10 percent and were at the level of 4,835 homes, with an average sales price and backlog increasing 17 percent to a record $490,000. As I mentioned earlier, our mortgage and title operations also recorded strong performance in 2021. with a record number of loans originated, record revenue, and record pre-tax income for the year of $58.4 million. We ended the year with 175 active communities. This was down 13 percent from the end of 2020. During the year, and we shared this in earlier quarterly calls, we sold out of communities faster than anticipated. Clearly, increasing our community count is a major area of focus. And in that regard, we expect to open a record number of new communities in 2022, growing our community count by 15% by the end of 22 to more than 200 communities company-wide. Our financial condition is the strongest it's ever been, with $1.6 billion in equity at December 31st, which equates to a book value of nearly $57 per share. We ended the year with a cash balance of $236 million and zero borrowings under our $550 million unsecured revolving credit facility. This all resulted in an improved ratio of debt to capital of 30% compared to 34% a year ago. Now I'd just like to provide a few comments on our markets. We experienced strong performance from our divisions in 2021 with substantial income contributions across the board, led by Orlando, Tampa, Minneapolis, Dallas, and Columbus. For the year, new contracts decreased 5 percent in our southern region and 2 percent in our northern region. For the year, our deliveries, homes delivered, increased 9 percent in the southern region and 17 percent in the northern region. Our owned and controlled lot position in the southern region increased by 17% compared to last year and increased 2% in the northern region compared to 2020. We have a very strong land position, highlighted by a number of premier communities and outstanding locations. Company-wide, we own approximately 24,600 lots. Of this total, 31% of the owned lots are in the northern region, with the balance being 69% in the southern region. This equates to roughly a three-year supply of owned lots. On top of the owned lots, we control via option contract an additional 19,400 lots. So in total, we own and control approximately 44,000 single-family lots, up 11% from a year ago. and this equates to about a five-year supply. Most importantly, about 44 percent of our lots are controlled under option contracts, which gives us significant and important flexibility to react to changes in demand or individual market conditions. At the end of the fourth quarter, we had 85 communities in the southern region, down from 112 a year earlier, and 90 communities in the northern region, which was the same as it was at the end of 2020. Before I turn it over to Phil for more financial results, let me just make a few closing comments. Our company is in the best shape we've ever been in, both financially and otherwise. We have noticeable operating momentum in all of our markets and are excited about opening up in Nashville later this year. Though the supply chain and construction challenges are likely to persist throughout the year, We begin 2022 with an excellent balance sheet, a strong backlog, very robust housing demand, and plans to open a record number of new communities. We believe MI Homes is very well positioned to continue growing our business and look forward to 2022 being a year of continued solid performance.
spk07: Phil? Thanks, Bob. As far as financial results, our new contracts in the fourth quarter were 1,744. 18% below last year's record fourth quarter. New contracts were down 14% in October, down 21% in November, and down 20% in December. Our sales pace was 3.3 in the fourth quarter compared to 3.5 in last year's fourth quarter. And our cancellation rate for the fourth quarter was 10%. As to our buyer profile, about 53% of our fourth quarter sales were to first-time buyers, the same as a year ago. And in addition, 45% of our fourth quarter sales were inventory homes compared to 43% last year. During the quarter, we opened nine new communities while closing 10. And for the year, we opened 72 new communities and closed 99. We delivered a record 2,316 homes in the fourth quarter. And for the year, we delivered 8,638 homes, which is 12% better than the last year and an all-time record for our company. Revenue increased 16% in the fourth quarter of 2021, reaching an all-time quarter record of $1.1 billion. And for the year, our revenue reached $3.7 billion, up 23% from last year, a record annual amount. Our average closing price for the fourth quarter was $443,000, a 14% increase compared to last year. And our backlog average sale price is $490,000, up 17% from a year ago. Our backlog average sales price of our Smart Series homes is $388,000. Our gross margins for the fourth quarter were 23.2%, up 20 basis points year over year. And for the full year 2021, our gross margin was 24.3% versus the prior year, 22.2%. Our fourth quarter and full year SG&A expenses were 9.8% and 10.4%. 190 basis point improvement for the quarter, and 130 basis point improvement for the year when compared to last year. Interest expense decreased slightly for the quarter and decreased $7.5 million for the year. Interest incurred for the quarter was $9.4 million compared to $10 million a year ago, and for the year interest incurred was $39 million versus $42 million the prior year. We are very pleased with our improved returns for the year. Our pre-tax income was $13.6 versus $10.2, and our return on equity was 27% versus 22% the prior year. During the fourth quarter, we generated $155 million of EBITDA compared to $127 million in last year's fourth quarter. And for the full year 2021, we generated $568 million of EBITDA, up 48% over last year. We used $17 million of cash flow from operations in 2021 compared to generating $168 million in 2020. Cash flow was impacted by higher land spend in 2021. We have $24 million in capitalized interest on our balance sheet, about 1% of our assets, and our effective tax rate was 20% in the fourth quarter compared to 21% in last year's fourth quarter. And our annual effective rate for 21 was 22% compared to 23% for 2020. Our fourth quarter and annual tax rate benefited from energy tax credits from prior years. And our earnings per diluted share for the quarter increased 41% to 383 per share from 271 in last year's fourth quarter and increased 61% for the year to 1328 per share from 823 per share last year. During the quarter, we repurchased 600,000 of our outstanding common shares for $36 million, bringing our total share repurchases up to $52 million for the year. That leaves $48 million available to our current repurchase authorization. And our current plans, based on existing market conditions, are to continue repurchasing shares. Now, Derek Clutch will address our mortgage company results.
spk04: Thanks, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $10.8 million, down $4 million from 2020, and revenue of $22.9 million, down 10% over last year, primarily as a result of lower pricing margins. For the year, pre-tax income was $58.4 million, and revenue was $102 million, both all-time records. The loan-to-value on our first mortgages for the fourth quarter was 82%, down from 2020's fourth quarter of 83%. Eighty-one percent of the loans closed in the fourth quarter were conventional, and 19% were FHA or VA, compared to 74% and 26%, respectively, for 2020's same period. Our average mortgage amount increased to $360,000 in 2021's fourth quarter, compared to $319,000 in 2020. Loans originated in the quarter decreased 3% from 1746 to 1692, and the volume of loans sold increased by 19%. Our borrower profile remains solid, with an average down payment of almost 18%. And for the quarter, the average borrower credit score on mortgages originated by MI Financial was 749, compared to 751 last quarter. Our mortgage operation captured 83% of our business in the quarter, down from 85% in 2020's fourth quarter.
spk07: Now I'll turn the call back over to Phil. Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with no borrowings under our unsecured revolving credit facility. Total home building inventory at year end was $2.5 billion, an increase of $536 million above prior levels. During 2021, we spent $630 million on land purchases and $422 million on land development for a total land spend of $1.1 billion. This was up from $733 million in 2020. At December 31-21, we had $682 million of raw land and land under development and $423 million of finished unsold lot. We own 5,700 unsold finished lots with an average cost of $74,000 per lot, and this average lot cost is 15% of our $490,000 backlog average sale price. In 2021, we purchased 16,900 lots compared to 2020's 11,500 lots. Our goal is to own a two to three year supply of land, and we feel very good about our strong land position. At the end of the year, we had 99 completed inventory homes, about one per community, and 1,266 total inventory homes. And at December 31, 2020, we had 225 completed inventory homes and 1,131 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments.
spk00: Thank you for our Q&A. If you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from Jesse Lederman from Zellman and Associates. Jesse, your line is now open.
spk02: Hey. Thanks for taking my questions. My first question pertains to the sequential decline in gross margin. I'm assuming part of that impact was from peak lumber flowing through. I just want to understand the moving pieces here and whether there were other mixed impacts and if the margin of homes in your backlog is stronger than those that you delivered during the fourth quarter.
spk07: To answer the first part of the question, yes, we did get more impact from lumber in the fourth quarter. Overall, we're still pleased about the strength of our margins. We don't really give any margin guidance, but we are focused every day on continuing to have strong margins. If you look at it from the cost side, in the fourth quarter, it looks like our sticks and bricks went up 3% or 4%. Markets are a little different. Prices or costs have been moving up a little bit this year also. But again, you know, we feel very good about where we are from a pricing standpoint, et cetera.
spk09: I just would like to add something. Is your first name Jesse?
spk07: Yes.
spk09: Jesse, it's nice to meet you. I'm not sure we've spoken before. So this is Bob Schottenstein. The only thing I'll add to what Phil said is that we were very pleased with our margins for the year, with our growth in our margins. And I just want to underscore this. We look at our backlog and where we sit today. we feel really good about the return profile for the year.
spk02: Awesome, thanks for that and nice to meet you too. Second question is more so a little bit higher level. Has the increase in rates or anything you're seeing on the ground today changed the way you're thinking about price increases or your ability or willingness to push price? I remember last quarter You mentioned you were raising prices in about 15 to 35% of your communities, and I'm just wondering how you're thinking about pricing at this point in time.
spk09: Well, yeah, a couple things on that. First of all, it's something that you react to every single day. If you decide not to pay attention to it for a week or two, you may be dealing on bad data. a year ago if you would have said to me what do you think is going to happen if rates go from whatever they were then roughly three percent to to banging on the door for i would have said it's going to have an impact on demand and i would have been wrong and um so uh you know with that comment made uh as i said in my opening remarks uh when you look at all the factors together on the demand side of our business. These are the best and healthiest conditions I've ever seen and we've ever seen. And it was that way as we ended last year, and it remains unabated today. You look at the down payment and the credit scores. Derek Clutch, the head of our mortgage operations, spoke about our average down payment being in the 18, 19%. Then you take into account how many of our buyers are utilizing FHA. Those that are going conventionally are probably putting over $100,000 down on average. It's a big number. And we're very encouraged by that. The levels of inventory, as you know, you guys follow this as close as anyone. The levels of inventory across the markets we do business in, and I'm fairly certain it's this way everywhere, I've never seen it this low. I'm talking about used home listings. most of the markets we're in, the listing levels today are lower than they were even a year ago, and they were at historic lows then. You basically can't find a house. And the millennials continue to move from renting to owning. That latest data I referred to from Freddie Mac I found very compelling. It was the 45 or so percent of all the mortgages secured were first-time buyers, and so much of that was fueled by the large population of millennial households that are going from the rent to the own side. Having said all that, you know, we're going to keep raising prices where we can. If we weren't limiting sales, we would be selling a whole lot more homes every month. We're limiting sales today in just under half of our communities, and that's all about deliveries and managing cost and managing, you know, trying to manage pricing. But having said that, if rates continue to go up, up, and up, I guess you and others believe that that's going to have a pretty chilling impact on demand, and you might be right. We haven't seen it yet. You've got to come down somewhere. We're much more optimistic about the business than our good friend Ivy and her cohorts are, and, you know, we'll see. I mean, we... We've never had a crazy long land position. We've always managed pretty conservatively. We pressure test our backlog pretty regularly with various rising rate assumptions. We think it's in great shape. Super, super excited about all the new communities we've got coming on later this year. As I talked about, our community growth should be right around 15% or more for the year. Hopefully it'll be more. But the delays associated with home construction have have found their way into the opening of communities too. So everything's been stretched out. But, you know, if you want to – there's never been a better time to sell a home, and there's never been a more difficult time to build one. But we'd rather have it that way than the other way, obviously, or the tone of this call would be radically different. So, you know, that's sort of how we see things, Jess.
spk02: I appreciate the time. Thanks so much, and congrats on the quarter.
spk09: Hey, thanks a lot.
spk00: Our next question comes from Alex Barron from Housing Research Center. Alex, your line is now open.
spk05: Yeah, thanks, guys, and great job on the quarter and for the year. I wanted to congratulate you on buying back your stock here because I think that's a bit different than in the past and just wanted to get your current thoughts around further share buyback given the stock is sitting here below one-time book and around three times earnings. Can you share how you guys are looking at that going forward?
spk07: Yeah, Alex, appreciate the comment. As I said in my previous comments, you know, we do plan on continuing to buy shares back. We've been very pleased with our earnings, you know, book values up to 57 bucks a share. The stock was at 75 in the middle of last year. So we did buy back about $50 million of shares last year and we do plan on continuing to buy back shares.
spk05: But I'm saying, are you guys looking at it, you know, depending on the valuation itself or is this more of a systematic thing you'll be doing every quarter going forward?
spk07: You know, Alex, that depends on a lot of factors. As I'm sure you know, we are focused on growing the business. As Bob said, we're opening a lot of new stores. We're focused on continuing to grow our bottom line, our units, and so forth. But we think we can do all those things, including buy shares back. But again, that just depends on market conditions, demand out there, how fast we can get houses built through the system, those type of things. Got it.
spk05: Another question, Phil. Your SG&A, you know, was better not just in percentage terms, but even in dollar terms than a year ago, despite the increase in the revenue. So I'm curious, you know, what contributed to that saving, especially on the corporate side?
spk07: You know, Alex, that's something we've been working on for a long time. Our scale has improved when you look at our now 16 housing divisions counting Nashville. We're just getting better scale in our operations. Our headcount is up today about 9%. Obviously, our revenue for the year was up over 20%, so we've been able to get the benefit of scale, which we've been working on so long. We were really, really excited to see those SG&A percentages come down. Again, been spending a lot of time on that. There's always a few things quarter to quarter. Incentive is kind of recorded based on when we make the money. And so every year is a little different as far as which quarters you tend to make the money or whatever. But nothing real big in there. But again, we're very pleased with the scale we're getting
spk09: Just to underscore what Phil said, Alex, so much of SG&A is really controlled by scale. And obviously it's not 100% controlled by scale. We have, you know, there's things we can do to hopefully to be prudent, you know, when it comes to expense management. But sort of how I think about it, you know, our revenues are around $4 billion. I go back and look at some of our bigger competitors and see what, what their SG&A levels were like when they were doing $4 billion in revenue, and then I see what ours are today. And quite honestly, in most cases, ours are lower. Maybe I like when I look at that. Stated differently, if our revenues were $8 billion, I would expect our SG&A to be noticeably lower as a percentage than it is today.
spk05: Okay. If I could ask one more.
spk09: There are things we can control. And, you know, we're constantly looking for ways, whether it's on selling commissions or, you know, all kinds of overhead to control that even further. It's been a very intense area of focus for us for the last, frankly, almost eight years.
spk05: Well, that's great to see the progress. If I could ask one more on the tax side, it looks like your tax rate was a bit lower this quarter. Was there some one-time tax credit or anything that contributed to that?
spk07: Sure, go ahead.
spk03: Yeah, it's the energy tax credit. We had a change in estimate when we trued it up for our 18 and 19 returns, so that's reflected in the 21 tax rate in the fourth quarter.
spk05: Thank you very much. All right, guys. Well, best of luck for this year.
spk07: Thanks.
spk05: Thanks, Alex.
spk00: Our next question comes from Jay McCandless from Wedbush. Jay, your line is now open.
spk06: Hey, good afternoon, guys. Great year. Thanks, Jay.
spk01: Good to talk to you.
spk06: Yeah, absolutely. Absolutely. Sticking on tax, what rate should we use for 2022?
spk03: 24%. Jay, did you hear Ann Marie?
spk06: Yeah, 24%. Yeah.
spk09: We're in different locations, and I just wanted to make sure you heard Ann Marie.
spk07: Yeah, a little higher than the current rate, Jay. We're thinking maybe, you know, 23%, 24%, something like that.
spk06: Okay. Sounds good. Excited, and thank you for giving us the details around community growth. How do you expect that to flow through the year? Is it going to be backloaded or pretty consistent through each quarter?
spk09: Backloaded. We thought it would be a little bit more consistent, but it's going to be backloaded. But we'll start to see the effects of it, I think, begin to take shape here, you know, little by little in the first half and then pick up steam in the second half.
spk07: One of the things also, Jay, is that We did close 99 stores in 2021. We don't expect to close out that many stores next year. Also, you know, as Bob said, we intend to open a record number. So hopefully that gets us to around a 15% higher number by the end of the year. So we're really excited about that.
spk06: And 15% higher just off the ones... Was it 176 y'all had at the end of 4Q, I believe?
spk09: Yeah, I think what I said is we hope to have, yeah, we should, yeah, Jay, we should have, you know, hopefully 200 or more communities open and operating by, you know, the fourth quarter. Yes.
spk06: Okay. And then if we look at cycle times, what did those do during the quarter and how did that compare to 3Q and maybe 4Q of 20?
spk07: You know, if you look at cycle times in the fourth quarter of 21, it was up about 60 days from the fourth quarter of 20. It kind of just got a little worse as the year went on. You know, the fourth quarter was a few days worse than the third. Our current view, Jay, is that, I mean, we're working hard to make it better, but we're thinking realistically it may not get any better. But we're still hoping, planning on having a record year in many ways. We do have some tough sales comps in the first quarter of last year. We sold over 3,000 houses, had a tremendous first quarter sales. But again, we're hoping to have a record year in many ways.
spk06: Absolutely. On the supply chain, is it Is it strictly just the suppliers not being able to get you enough goods, or is it a little bit more tightness on the labor side?
spk09: It's everything at one time or another. I don't think there's one component or one part that has been immune from some irritating slowdown during the last 12 months. The only good news is they all haven't happened on the same day at the same time. But it's, I don't know, I was listening to one of the other builders. It's like that, I think they use the whack-a-mole term. You know, it's cabinets one month, it's appliances the next. Then appliances gets fixed, and then it's duct work. Then something else, then it's pipe. Then you can't find paint. Then you can't find brick. But you can find brick here, but you can't find it there. It's just one thing after another. And, you know, the... The only good part about all of it is it's against the backdrop of, I think, some of the best demand our industry has ever seen.
spk06: Absolutely. I won't ask you for numbers in January, but did you maybe talk about what you're hearing from the field in terms of either pushback around the higher rates or people maybe trading down to a little bit lower square footage?
spk09: Yeah. What I said in my opening comments, which I'll repeat, is that throughout all of 2021, demand was as good as we've ever seen it, and that continues today. So far, we've seen pushback on rates. And I think that in terms of product selection, square footage, no, nothing meaningful there. I think it's pretty apples to apples from a year ago. The only difference is we have a few more Smart Series communities now than we did, so that would skew, but that's not a change. That just means there's more affordably priced product being offered, and the fact that it's more affordably priced is oftentimes related to the size.
spk06: Do you think, Bob, you're going to get Smart Series?
spk09: It's not buyer's decision. It's not a buyer deciding to buy a 2,400 square foot house instead of a 28 because of interest rates. We've not seen that yet.
spk06: Where do you think is a percentage of total community smart series could be by year end?
spk09: I think it's going to be around that mid-40s. It's been going up about 4% to 5% a year since 2016 when it was like one community. And now it's, last year at this time it was in the mid-30s. I think last year at this time we said we thought it could get to the 40s. It's now a little bit over 40. I think it'll go up another 3%, 4%, 5% here. Everything is selling that we're building. And we don't want to become, we don't want to, you know, we don't need to put all our eggs in one basket. We don't tend to.
spk07: You know, Jay, we've also been pleased that, you know, we have been able to start more houses. You know, we started about 9,500 houses in 2021. And in 2020, we started about 8,600. So we started almost 1,000 more houses. Again, they're at different stages of construction, et cetera. But even with all the issues going on, you know, we have been able to get more houses in the field. We do have a few more spec homes out there, not only backlog homes that are in the field. So we do feel good about where we are. Again, there's always some issues quarter to quarter in this crazy world, but we feel like we're in really good shape going into this year.
spk06: Yeah, it's great to see those numbers going up. And I know you said earlier that you've got sales caps on at about 50% of the communities, but could you talk about what percentage of communities you're able to raise price and fork you?
spk09: I don't have that specific.
spk07: That's a really hard number because it's a subdivision-by-subdivision basis. I mean, overall, our average sale price continues to go up on a monthly basis. We talked about it being $490 in backlog, and the average sale price in backlog of Smart Series is $390. So we're pushing price everywhere we can, not really having any significant appraisal issues. not really having any customer pushback. You know, the backlog is very strong, over 5,000. So, you know, we just continue managing it, you know, as best we can. We just don't want to get too far ahead of ourselves. I mean, lumber's kind of gotten back up again, and like Bob said, there's always things happening. So it's just something you've got to manage every day.
spk06: Yeah. I mean, one of your competitors earlier said, So the rising lumber prices probably start to hit a little bit on the gross margin in the back half of the year. I mean, with you guys doing most of the homes bill to order, would you say that's probably a safe assumption with the homes that you're selling now?
spk07: Pretty much. I mean, the way our business is now, Jay, you know, every market is a little different, but we pretty much got to get the houses in the field by April or May to get them closed. And in most situations from the time it starts, you know, it's like, you know, 50 to 100 days before you get the lumber out there and so forth. So, yeah, I would guess there's going to be some in the third, fourth quarter or whatever. You know, we have been trying to build in, you know, a higher contingency amount for things in general, things like lumber when they go up. But it's definitely been a challenge.
spk06: Gotcha. And then one other question from me on the mortgage side. I know the capture rate was down a little bit. Just wondering, you know, with what we've seen with refi starting to drop off, are y'all seeing more competition for purchase mortgages? Is it harder to get people to want to go with MI for their mortgage? Just would love a couple comments on that from Derek.
spk04: Yeah, sure, absolutely, Jay. Yes, we did see the capture rate drop, and it's exactly what you mentioned. Refinance business went away. The other lenders that were doing the refi business didn't go out of business, didn't shut their doors. They're coming after ours. So it is more challenging. Every contract we write, we're competing with more and more outside lenders for that business. So it's going to be a more difficult year for capture rate coming up.
spk09: And what about margins?
spk04: And pricing margins, we also saw that. we're having to price more aggressively to compete with those lenders for the business.
spk09: Our goal is to have an 85% capture rate. That's our clear internal goal. And, you know, it's a goal that we hope to achieve. But we did see a little movement late this year, last year.
spk07: And you saw it in our results last year, Jay. The mortgage company results last year in the first half, bottom line, were a lot better than the second half. And again, that was just all due to, you know, margin pressure.
spk09: And it's interesting because without getting into too much of the weeds, some of our – we have an MI financial branch, if you will, in all of our divisions. And in some of those branches, our capture rate is in excess of 90%, probably about a third of them. So you say, well, if you can do it there, why can't you do it in all of them? Don't they all have the same competitive issues? The answer is yes, but sometimes it also relates to the type of product that we offer in that particular city. Where there's more smart series, you might have an opportunity to have a higher capture rate, for example, than if you have more move up first or second time where that buyer may have previous banking contacts or who knows what. But our goal is to be at 85% or more everywhere.
spk06: Got it. One other one that popped in, and then I really will give it up. Any evidence of competitors using incentives, whether it's an extra $1,000 on closing costs, people trying to buy down mortgage rates, are you seeing any evidence of that in the field from your competitors?
spk09: Not yet. No, not yet. I mean, we've looked at buying down rates, but it doesn't seem to make economic sense yet. But, no, we've seen nothing, which is a good thing. I would be shocked and disappointed if we saw it.
spk06: Gotcha. Well, congrats again. Thanks for all the time.
spk09: Okay. Yeah, thanks. Thanks, Jay.
spk00: As a reminder, to ask any questions, please press star followed by one on your telephone keypad now. Our next question comes from Adam Starr from Gulfside Asset Management. Adam, please go ahead.
spk08: Hello. Congratulations on a very good year, and thank you for taking my question. I'm just wondering what kind of – can you hear me okay? I hear you great. Thank you. Okay. Okay. I'm wondering what kind of future pricing assumptions are you making when you price and build land? How are you underwriting it? Do you see continued price increases? Are you holding at kind of today's level? Just like some color on that. Thank you.
spk09: Yeah, the underwriting really, that's a great question. It's one that we think about a lot, frankly, right now. First of all, the land market is unbelievably competitive. If you stumble onto a piece that there's not a lot of demand for, you probably don't need to do any underwriting. You should just walk away from it. But the good piece is there's intense demand. And for the most part, we really haven't changed our underwriting in quite some time. We have minimum rates of return thresholds, and we – We take the conditions as they are today. We don't assume any inflation on the pricing side or on the costing side, with one exception. And on deals that we're internally developing, we have been incorporating greater and greater contingencies due to the likely inflation that we'll see on land development, you know, site work and pipe and street improvements. So other than trying to build in a little bit more inflation on land development deals, just because we think those are longer and more risky, we're pretty much saying the conditions as they are today is the way we want to analyze it. And, you know, even with that said, there's a lot of intuition, and it's not just like arithmetic and you type it into a computer and you say yes or no. There's an awful lot of conversation, particularly on larger deals. You know, the larger the deal, the more concerned about price point. The larger the deal, the more concerned about the time you might be in it. The larger the deal, the questions that might come up about should we look to sell off a part of this or bring in a partner and split the lots. All kinds of factors, you know, weigh into any land deal that go well beyond what is a pretty, I think, appropriate and rigorous underwriting process.
spk08: Thank you very much. I appreciate the answer. Thanks.
spk00: Our next question comes from Art Winston from Pilot Advisors. Art, your line is now open.
spk01: Thank you. Thank you very much for a great year for our stockholders. Great result. I have two questions. Thank you. You commented that approximately 70 places were opened already in 2021, 20 new ones. And I wonder if you could comment at all how it's progressing in relation to prior openings and what you might have anticipated very generally.
spk07: Hey, Art, it's Phil. As far as 21, we opened 72 stores already. At the first of last year, we kind of thought we would be north of 80. So we did open a few less last year than we thought. This year, as we said, for 22, we expect to open a record number. That is something we track constantly. And so far, we're on target to get all of those communities open. It's something we revisit all time. It's so important to us.
spk09: And I think you also asked our – this is Bob Schottenstein. I think you also asked – Hi, Bob. Hi. You wanted to know how those communities have done. Is that correct?
spk01: In relation to what you had anticipated and openings, you know, in prior years, very general.
spk09: Yeah. Yeah. We're getting pretty good grades. Almost all of them are performing at or above land.
spk07: Yeah, we track every MOSCOW. every store that opens, and how is it doing versus what we approved it at. So as Bob said, we're very pleased with that.
spk01: Excellent. My last question, I think it's terrific that you're sustaining your underwriting standards with some caveats, as you mentioned for the last question. Is it possible or probable that the amount of land that you purchased this year and lots that you purchased could be slattered down as opposed to being up compared to 2021?
spk07: Art, the way it looks, we expect to spend more this year on land development than we did last year. As far as actual purchases of lots, yes, it could be less than what we did last year.
spk09: There's about three or four or five factors you've got to look at because Even if you did exactly the same number of lots, not all lots are the same. A 50-foot lot might be worth X. A 60-foot lot might be worth X plus 10%. And if you do the same number of lots, but there's more 50s or 60s, you're going to spend more. There's clearly been inflation on land development. So even if you develop the same exact number of lots this year as last year, it's going to cost more. So if you shake all that out... to underscore Phil's point, whereas land spend likely could go up, amount of lots purchased could trail off. That's a quick... Certainly not enough to steer the future. But when it's taking longer to get things through the system, we're trying to take that into account with what we've got coming up.
spk07: I mean, we still like to stay in the area of owning two to three years of current closing rates And Bob talked about at the end of 21, we owned about 25,000 lots. Of course, our closing rate this past year was a little under 9,000. So we were a little bit south of three, which is good. So that's kind of an overall thing we try to watch. Smart series in general tends to be a little bigger communities, a few more lots. Also, almost all of the smart series communities, we tend to develop the land also. So again... I do expect the land development spend to go up this year, but the number of lots we buy, like Bob said, may very well come down.
spk01: It sounds like the land that you have under option, the lots you have under option but do not own, aren't as big a factor as the ones you own, it sounds like. Is that true?
spk09: A factor in what? I want to make sure I understand what you're asking.
spk01: In other words, you have five years' worth of, lots that you own and have under option, but only related to the ones that you own in your last comment?
spk07: Well, the risk is definitely more on the ones you own. So, we don't want to get too far out. The issue with getting too far out is where are the jobs? What are the income levels? What's the competitive landscape? If you start buying land today that you can't consume for four or five years, you're taking market risk and a lot of other risk. So, again, we like to kind of be a little bit short in that two- to three-year supply of what we actually own.
spk09: I mean, the demand for housing continues to be very strong, as we've said a couple of times, notwithstanding rates going from roughly three to almost four. If the demand had dropped off by 10% or 15%, then it hasn't. But if it had, we might start looking at some of those deals we have under option. I can't say which one's. But hypothetically, we would probably have been looking at things, and that's the kind of thing that we're constantly focused on. You know, as soon as you start to get the first sign of sales slowing, usually that's not a false positive. That usually tells you something, and we've not seen any of that yet.
spk01: Good. Okay. Thank you very much. Yeah. Thanks, Art.
spk00: We've come to the end of our Q&A. I want to hand back to the management team for closing remarks.
spk07: Thank you for joining us. Look forward to talking to you next quarter.
spk00: This concludes today's call. We thank you for joining. You may now disconnect your lines.
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