M/I Homes, Inc.

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.

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.

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.