M/I Homes, Inc.

Hello and welcome to today's MI Homes first quarter earnings conference call. My name is Elliot and I'll 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 Mr. Phil Creek. Please go ahead when you're ready.

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President, Susan Croney, our SVP and Chief Legal Officer, Derek Clutch, president of our mortgage company, Ann Marie Hunker, VP chief accounting officer and controller, and Mark Kirkendall, VP 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. As to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements 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. We had a very strong first quarter, one of the best first quarters in our company history, highlighted by record first quarter revenues and net income and and an all-time record-ending backlog units and backlog value. We continue to operate against a backdrop of unprecedented housing conditions. On the one hand, we are experiencing some of the toughest construction and development challenges our industry has seen with persistent labor and supply chain issues combined with unanticipated delays associated with land entitlement, and land development. At the same time, demand for housing continues to be very robust. Although mortgage rates have increased considerably since the beginning of the year, demand for new homes across our markets remains strong. Many of the reasons behind the strong demand are well documented, including historically low inventory levels and an ever-increasing number of millennials moving to home ownership. Moreover, The quality of our buyers continues to be very strong, with average credit scores of 747 and average down payments above 16%. Basically, the quality of buyers that we're seeing in terms of credit worthiness is the best we've ever seen. In terms of our performance, we achieved record first quarter net income of $92 million, or $3.16 per diluted share. This is an 8% improvement in net income over last year's first quarter. We had record first quarter total revenue of $861 million, an increase of 4% from last year. We closed 1,823 homes in the quarter, a 10% decrease from a year ago, with an average sale price of $457,000, which is an increase of 16% in average selling price. Decline in closings was largely due to the extended cycle times we are dealing with because of the aforementioned construction, labor, and supply chain challenges that have impacted our entire industry. Pre-tax income increased 11% to $122.3 million, a first quarter record. Financial growth and income was a result of a 40 basis point improvement in our gross margin over last year, to 24.8%, and our SG&A overhead expense ratio improving by 50 basis points to 10.5%. Our financial services segment also contributed to our positive results for the quarter with pre-tax income of $13.1 million. As a result, our pre-tax income margin improved significantly to 14.2% and we achieved a strong return on equity of 26% during the quarter. As mentioned, demand for new homes remains solid. We sold 2,514 homes during the quarter, a decline of 19% from the all-time record 3,109 homes that we sold during last year's first quarter. In this year's first quarter, we sold 4.8 homes monthly per community, well ahead of our sales pace in any prior first quarter over the last decade, with the exception of last year. In terms of our sales, it's important to note that we are operating in 6% fewer communities than a year ago, and on top of that, we are limiting or capping our sales in nearly two-thirds of our communities in order to manage construction costs, deliveries, and the timing of land development and lot availability. Our Smart Series, which is our most affordable line of homes, continues to have a very positive impact on our sales performance. During the quarter, our Smart Series sales comprised nearly 46% of total company-wide sales compared to 35% a year ago and 36% in 2020. We're now selling our Smart Series homes in 44% of our communities. As mentioned in previous calls, these communities often have more lots in total, and in general, produce, on average, a greater sales pace, better gross margins, better cycle time, and better bottom line returns. Company-wide, our backlog sales value at the end of the quarter was $2.8 billion, an all-time record. and 17% ahead of a year ago. Our units and backlog increased by 1% to an all-time record 5,526 homes with an average selling price and backlog of $505,000, which is 16% higher than the average price and backlog a year ago. Our financial condition is very strong with $1.7 billion of equity at the end of the quarter, which is an all-time record, and that equates to a book value per share of $60. We ended the first quarter with a cash balance of nearly $220 million and zero borrowings under our $550 million unsecured revolving credit facility. This resulted in a debt-to-capital ratio of 29%, down from 32% a year ago, and a net debt-to-capital ratio of 22%. Now I will provide some additional comments on our markets. We experienced strong performance from our divisions in the first quarter with substantial income contributions led by Dallas, Houston, Tampa, Raleigh, Chicago, and Columbus. However, given that we are operating in fewer communities than a year ago, and as I noted that we are limiting sales in nearly two-thirds of our communities, New contracts for the first quarter in the southern region declined by 27% and by 9% in the northern region. Our deliveries in the southern region decreased by 13% from last year, and our deliveries in the northern region decreased by 5% from last year. 58% of our deliveries came out of the southern region, the balance 42% out of the northern region. Our owned and controlled lot position in the southern region increased by 12% compared to last year and increased by 4% in the northern region. One-third of our owned and controlled lots are in the northern region, the other two-thirds in the southern region. While we are selling through communities somewhat faster than expected, we fully expect to open a record number of new communities in 2022. and in addition, to further grow our community count in 2023. We have a very strong land position. Company-wide, we own approximately 24,200 lots, which is roughly a three-year supply. Of this total, 30% of the owned lots are in the northern region, while the balance is in the southern region. On top of the owned lots, we control via option contracts an additional nearly 22,000 lots. So in total, our owned and controlled lots are approximately... Welcome to your conference call.