M/I Homes, Inc. (NYSE:MHO) Q1 2024 Earnings Call Transcript April 24, 2024
M/I Homes, Inc. beats earnings expectations. Reported EPS is $4.78, expectations were $3.96. MHO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. And welcome to the M/I Homes, Inc. First Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, April 4, 2024. I would now like to turn the conference over to Phil Creek. Please go ahead.
Phil Creek: Thank you. Joining me on our call today 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 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 it over to Bob.
Bob Schottenstein: Thanks, Phil. Good morning and thank you all for joining us today. We had an exceptional first quarter, one of the best quarters in company history, setting first quarter records in homes delivered, revenue and income. Homes delivered increased 8% to a record 2,158 homes. Revenue increased 5% to a record $1.05 billion and pre-tax income increased by 33% to a first quarter record of $180.2 million, equating to 17.2% of revenue. Gross margins for the quarter were very strong, coming in at 27%, 360 basis points better than a year ago and up 200 basis points sequentially, and return on equity equaled 21%. Despite a volatile interest rate environment and continued macroeconomic uncertainties, we were very pleased with our new contracts.
For the quarter, new contracts increased by 17%, owing to the strength of our communities and product offerings, and very solid across-the-Board execution on the sales front. During the quarter, we were operating, on average, in 10% more communities than a year ago. We continue to benefit from strong housing fundamentals, including an undersupply of homes and low inventory levels in most markets. We have seen a slight uptick in used home listings in certain markets, particularly Florida. However, the use of below-market financing incentives, where necessary in select markets and targeted communities, has been and continues to be an important driver of our business. Our Smart Series homes, which is our most affordable line of homes, continues to be a meaningful contributor to our sales and operating performance.
Smart Series sales accounted for 52% of total company sales. This is roughly equal to what it was a year ago. As we enter the second quarter, we are on track to open a number of new communities, increasing our average community count by roughly 10% over 2023. And the quality of our buyers, in terms of creditworthiness, continues to be very solid, with average credit scores of 747 and an average down payment of 18%, which is about $85,000. We have made significant progress in improving our cycle time. Many of our markets are now operating at pre-COVID cycle time levels and we continue to be focused on this important operating imperative. From a balance sheet standpoint, we ended the quarter in excellent shape, the best in company history. Shareholders’ equity reached a record $2.6 billion, a 21% increase from a year ago and that equates to a book value of $95 a share.
Our cash balance at quarter’s end equaled $870 million. We had zero borrowings under our $650 million unsecured credit facility and a debt-to-capital ratio of 21%, down from 24% a year ago, as well as a net debt-to-capital ratio of negative 7%. Now I will provide some additional comments on our markets. Our division income contributions in the first quarter were led by Dallas, Orlando, Columbus, Raleigh, Tampa and Chicago. New contracts for the first quarter in the northern region increased by 40%. New contracts in our southern region increased by 3%. Our deliveries in the southern region increased by 9% from a year ago. Our deliveries in the northern region increased by 6%. 61% of our closings came out of the southern region, 39% out of the northern region.
Our owned and controlled lot position in the southern region increased by 20 point — 21% compared to a year ago and increased by 9% in the northern region. 34% of our owned and controlled lots are in the northern region, the other 66% in the southern region. We have an excellent land position. Company-wide, we own approximately 24,000 single-family lots, which is roughly a three-year supply. And on top of that, we control via option contracts an additional 23,000 lots, thus owning and controlling about a five-year supply. As I conclude, let me just state that we are in the best financial condition in our history. We feel very good about our business, we have a lot of operating momentum and we continue to be focused on gaining market share, growing our business by approximately 5% to 10% per year.
M/I Homes is well-positioned to have another year of very strong results in 2024. With that, I’ll turn it over to Phil.
Phil Creek: Thanks, Bob. Our new contracts were up 21% in January, up 14% in February and up 17% in March, and our cancellation rate for the quarter was 8%. 51% of our first quarter sales were to first-time buyers and 57% were inventory homes. Our community count was 219 at the end of the first quarter, compared to 200 a year ago and the breakdown by region is 101 in the northern region and 118 in the southern region. During the quarter, we opened 21 new communities while closing 15. We currently estimate that our average 2024 community count will be about 10% higher than 2023. We delivered 2,158 homes in the first quarter, delivering 72% of our backlog. And at March 31st, we had 4,500 homes in the field versus 4,300 homes in the field a year ago, up 6%.
Revenue increased 5% in the first quarter. Our average closing price for the first quarter was $471,000, a 3% decrease when compared to last year’s first quarter average closing price of $486,000. Backlog average sale price is $528,000, up from $522,000 a year ago. Our first quarter gross margin was 27.1%, up 360 basis points year-over-year and up 200 basis points from our fourth quarter. And our construction costs were flat in the first quarter compared to last year’s fourth quarter. Our first quarter SG&A expenses were 10.5% of revenue, compared to 10.0% a year ago. Our first quarter expenses increased 10% versus a year ago. Increased costs were due to our increased community count, higher selling expenses and increased headcount and incentive compensation.
Interest income net of interest expense for the quarter was $6.9 million and our interest incurred was $8.7 million. We are very pleased with our returns for the first quarter. Our pre-tax income was 17% and our return on equity was 21%. During the quarter, we generated $187 million of EBITDA, compared to $147 million in last year’s first quarter. And our effective tax rate was 23% in the first quarter, compared to 24% in last year’s first quarter. Earnings per diluted share for the quarter increased to a first quarter record, $4.78 per share from $3.64 per share last year, up 31%. And our book value per share is now $95, a $16 per share increase from a year ago. Now Derek Klutch will address our Mortgage Company results.
Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pre-tax income of $12.3 million, down slightly from $12.6 million in 2023’s first quarter. Revenue increased 7% from last year to $27 million due to higher margins on loans sold, an increase in loans originated and proceeds from the sale of mortgage servicing rights. This was partially offset by a lower average loan amount. Average loan-to-value on our first mortgages for the quarter was 82%, a decrease compared to 83% last year. We continue to see an increase in the use of government financing, as 68% of the loans closed in the quarter were conventional and 32% FHA or VA, compared to 81% and 19%, respectively, for 2023’s first quarter. Our average mortgage amount decreased to $386,000 in 2024’s first quarter, compared to $393,000 last year.
Loans originated increased to $1,556, which was up 24% from last year, while the volume of loans sold increased by 5%. As mentioned, our borrower profile remains solid, with an average down payment of over 18% and an average credit score of 747. Finally, our mortgage operation captured 88% of our business in the first quarter, a significant improvement from 78% last year. Now I’ll turn the call back over to Phil.
Phil Creek: Thanks, Derek. As far as the balance sheet, we ended the first quarter with a cash balance of $870 million and no borrowings under our unsecured revolving credit facility. We have one of the lowest debt levels of the public home builders and are well positioned with our maturities. Our bank line matures in late 2026 and our public debt matures in 2028 and 2030, and has interest rates below 5%. Our unsold land investment at the end of the quarter is $1.4 billion, compared to $1.3 billion a year ago. And in March 31st, we had $752 million of raw land and land under development and $668 million of finished unsold lots. During the first quarter, we spent $108 million on land purchases and $119 million on land development for a total land spend of $227 million.
In March 31, we owned 24,000 lots and controlled 47,000 lots. At the end of the quarter, we had 431 completed inventory homes and 1,896 total inventory homes. And of the total inventory, 850 are in the northern region and 1,046 are in the southern region. Last year, we had 432 completed inventory homes and 1,551 total inventory homes. We spent $25 million in the first quarter repurchasing our stock and have $103 million remaining under our current Board authorization. And since the start of 2022, we have repurchased 10% of our outstanding shares. This completes our presentation. We’ll now open the call for any questions or comments.
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