M/I Homes, Inc.

Hello and welcome to today's MI Homes Incorporated third quarter earnings conference call. My name is Bailey and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, Phil Creek, so 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 Klutsch, President of our Mortgage Company, Ann Marie Hunker, VP and Controller, and Mark Kuykendall, 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. 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.

Thank you, Phil. Good afternoon, and thank you for joining us today. We are pleased to report record financial results for the third quarter of 2022, highlighted by record revenue, record income, and record earnings per share. Revenue increased by 12% to $1 billion. Pre-tax income increased by 43% to $167 million. Net income increased 45% to $132 million, and earnings per share increased by 54% to $4.67. We were also pleased to report very strong margins and returns for the quarter. Gross margins improved by 230 basis points to 26.8%. Free tax operating margins improved by 270 basis points to 16.5%, and our SG&A overhead expense ratio improved by 40 basis points to 10.3%. All of this resulted in a very strong return on equity of 27% during the quarter. Our record-setting financial results reflect the strong market conditions and demand for new homes that we experienced throughout all of 2021. where the quality and quantity of new home demand within our markets was as good as we've ever experienced. On the other hand, things have changed dramatically since the beginning of this year, due primarily to the unprecedented rapid rise in mortgage rates. In response to the Federal Reserve's actions increasing the benchmark federal funds rate, mortgage rates have more than doubled since the beginning of the year and now exceed 7%. This has significantly impacted demand across all markets and all price points. Clearly, there are many factors that influence demand for homes, including job growth, consumer confidence, and general economic conditions. However, this recent very rapid and significant rise in rates is the primary reason why we and the entire industry has seen a noticeable pullback in demand. During the quarter, we sold 1,349 homes, 31% decline from the 1,964 homes that we sold in the third quarter of 2021. During the quarter, we were operating in 2% fewer communities than a year ago. Given current conditions, and the general uncertainty concerning the overall economy, we have, over the past nine months, shifted from what was a predominantly offensive operating strategy focused mostly on growth to what is now a predominantly defensive operating strategy focused on carefully monitoring and controlling all expenses, consuming and conserving cash, and maintaining our strong balance sheet with low debt levels, reexamining every pending land deal, and taking the necessary steps to either buy time, renegotiate terms, or perhaps even cancel the deal if it no longer meets our current underwriting standards. And we're also taking steps aggressively to adjust pricing and or provide incentives on a subdivision by subdivision basis across all of our markets in order to try and meet the current state of demand. Every subdivision within every market is different, and our approach is certainly not a one-size-fits-all and never has been. As we've done in the past, we try to be very strategic and very careful about our pricing within a particular community. Simply put, some communities require more incentives than others. Some require no incentives at all. The past number of quarters, our company-wide gross margins have averaged between 23% and 27%, with many of our communities achieving gross margins in excess of 30%. As these current conditions persist, margins will be dropping. In that regard, we have not and will not be providing any margin guidance other than to say, as we have repeatedly said over the past five years, That is that home building has historically been roughly a 20% to 22% gross margin business. Turning to deliveries, our closings declined by 1% from a year ago, primarily due to the impact of Hurricane Ian in our Florida markets during the last 10 days of the quarter, where we saw approximately 75 deliveries shift from the end of the third quarter to the fourth quarter. Now I will provide some additional comments on our markets. Our division income contributions in the third quarter were led by Dallas, Raleigh, Columbus, Tampa, Orlando, and Minneapolis. However, given the decline in market conditions that I discussed earlier, new contracts for the third quarter in the southern region decreased by 26% and decreased by 40% in the northern region. Deliveries in the southern region increased 1% year-over-year, while deliveries in the northern region decreased 3% year-over-year. 50% of our deliveries came out of the southern region, 42% out of the northern region. Our owned and controlled lock position in the southern region increased by 6% compared to a year ago and increased by 10% in the northern region. 34% of our owned and controlled lots are in the northern region, the other 66% in the southern region. We do fully expect to open a record number of new communities in 2022 and to further grow our community count in 2023. We are excited and feel very good about our communities. We have a strong land position. Company-wide, we own approximately 25,000 lots which is roughly a three-year supply. Of this total, 31% are in the northern region, 69% in the southern region. On top of these owned lots, we control via option contracts an additional 21,000 lots. In total, our owned and controlled lots increase 7% year-over-year to approximately 46,000 lots, or roughly a five-and-a-half year supply. Importantly, almost half of the lots that we own and control, or about 46%, are controlled pursuant to option agreements, which give us significant flexibility to react to changing market conditions, as I noted earlier in my comments. In terms of our balance sheet, our financial condition is very strong. In fact, we are in the best shape ever. Specifically, we ended the quarter with record shareholders' equity of $1.9 billion, an increase of 26% over last year, a book value of $71 a share, cash of $68 million, and zero borrowings under our $550 million unsecured revolving credit facility. This resulted in a debt-to-capital ratio of 26% down from 31% last year and a net debt-to-capital ratio of 24%. In sum, there is much uncertainty concerning the general economy, and it is unclear when demand for new homes will improve. However, we strongly believe that over the long term, housing markets will benefit from strong fundamentals, including favorable demographic trends and a general undersupply of housing throughout our markets. We are well positioned to manage through these changing and uncertain times, given the strength of our balance sheet, low debt levels, diverse product offerings, and well-located communities. With that, I'll turn it over to Phil.