M/I Homes, Inc.

Good morning and welcome to the MI Homes, Inc. third quarter earnings conference call. My name is Lacey and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mr. Phil Creek. Please go ahead.

Thank you for joining us today. With me 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. With that, I'll turn the call over to Bob.

Thanks, Phil. Good morning and thank you for joining us today. Our third quarter results reflect the increasingly difficult market conditions impacting the overall economy, consumer behavior, and obviously the homebuilding industry. In the face of these conditions, we produced solid results, generating $87 million of pre-tax income, equating to an 8% plus return. Conditions changed notably during the quarter. Perhaps the best evidence of explaining the intra-quarter volatility is the movement in the benchmark 10-year U.S. Treasury bond. On July 1st, the 10-year Treasury was at 4.5%. By August 1st, it had risen to 4.75%. It then began to rise at a faster pace, particularly during September, and by September 30th, it had reached 5.3%. In similar fashion, The average par contract interest rate for a 30-year fixed-rate mortgage increased by nearly 100 basis points during the quarter, going from roughly 6.75% at July 1 to close to 7.75% at September 30. The combination of these rising rates, along with elevated fuel prices, concerns with inflation, and the continued conflict in Iran, have clearly impacted consumer confidence and demand and have contributed to growing economic uncertainty. As of today, mortgage rates have actually come down slightly, which is very good news. But the current choppy and challenging conditions may continue for some time. Regardless, this is not the first time we've managed through challenging conditions. We've been in business for 50 years. and during times like this, execution matters more than ever and a strong balance sheet is absolutely essential. I'm proud to share that on both of these counts, MI Homes is very well positioned to navigate the current market conditions. During the quarter, our teams executed at a very high level and as I will explain in more detail in a few moments, our balance sheet is rock solid. As strong as at any time in our 50-year history. For the quarter, we sold 1,861 homes, 2% less than a year ago, and for the first nine months of 2026, we have sold 6,598 homes, which is 5% more than a year ago. We continue to use mortgage rate buy-downs as our primary incentive to drive sales. With rates rising during the quarter, the cost of such buy-downs has increased, thereby impacting our margins. We have carefully managed the nature and extent of rate buy-downs as we deal with rising rates. And I might add, while rate buy-downs are clearly important at this time, well-located communities, quality product, and thoughtful design are just as, if not more important. When I talk about how much execution matters during times like this, the quality of our product, the strength of our communities, and the skills of our sales associates all make a meaningful difference in our results. In other words, nearly every builder is buying down rates, but the builder results from one builder to another clearly differ, and the difference is often all about execution. During the quarter, we closed 2,241 homes, a 2% decrease compared to a year ago. Year to date, we have closed 6,361 homes, which is 4% less than a year ago. Our third quarter total revenue decreased by 5% to $1.08 billion, and pre-tax income decreased 38% to what I mentioned earlier, $87 million. A gross margin excluding inventory charges was 21.3%, 320 basis points lower than a year ago, down primarily due to the higher cost of rate buy downs and higher lot cost versus a year ago. Our mortgage company's capture rate for the quarter was 96%, one of the highest capture rates we've ever seen and certainly one of the highest capture rates in the history of the home building industry. We continue to see quality buyers in terms of credit worthiness with average credit scores of 748 and average down payments over 16%. Our Smart Series line of homes, which as most of you know, our most affordable line of homes and generally appeals to the first-time home buyer, continues to be an important contributor to our sales performance. Of note, during the quarter, our Smart Series sales comprised about half of our sales. The other half went to second-time or move-up buyers. We ended the quarter with 246 communities and estimate that at the end of this year, our community count will be about 5% higher than last year. With respect to some comments about our markets, our division income contributions in the quarter were led by Chicago, Columbus, Minneapolis, Dallas, and Charlotte. New contracts during the third quarter in our northern region increased by 1%. New contracts in our southern region decreased by 4%. Our deliveries in the northern region increased by 1% compared to last year and represented 42% of our company-wide total. In our southern region, our closings decreased by 5% over last year and of course represented the other 58% of deliveries. We have an excellent land position. I repeat, we have an excellent land position. Our owned and controlled lot position in the southern region decreased by 12% compared to last year and increased by 13% versus last year in the northern region. 41% of our total owned and controlled lots are in the north, the other 59% in the southern region. Company-wide, we own on our books approximately 23,400 lots, which is roughly a two-and-a-half-year supply. In addition, we control approximately 25,600 lots via option contracts, resulting in a total of roughly 49,000 owned and controlled lots, equating to about a five-year supply. In my earlier remarks, I spoke about how critically important a strong balance sheet is in times like this. And as I said, our balance sheet is rock solid and continues to be in excellent condition. We ended the third quarter with an all-time record $3.3 billion of equity, equating to a book value per share of $130. We had zero borrowings under our $900 million unsecured revolving credit facility, and we ended the quarter with over $600 million in cash. This has resulted in a debt-to-capital ratio of 18% and a net debt-to-capital ratio of 2%, one of the lowest debt levels in the home building industry. Moreover, in looking at our balance sheet, it's important to recognize that we are one of the few builders that does virtually zero land banking. There's no confusion about what's on our books and what isn't. and our balance sheet has essentially zero goodwill on it. We're very proud of our financial condition. In closing, though these are more challenging times, we remain quite confident in the long term fundamentals of the home building industry. With our strong land position, well located geographic footprint, well located communities, diverse product offering, and Strong Balance Sheet, MI Homes is well positioned to manage through this current cycle. And with that, I'll turn it over to Phil. Thanks, Bob.