M/I HOMES, INC. (MHO) Q1 2025 Earnings Call Transcript

Good morning ladies and gentlemen and welcome to the M/I Homes' First Quarter Earnings Conference. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. This call is being recorded on Wednesday, April 23rd, 2025. I would now like to turn the conference over to Mr. Phil Creek. Please go ahead.

Thank you for joining us. With me on the call is Bob Schottenstein, our CEO and President; and Derek Klutch, President of our mortgage company. First, to address regulation for our 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.

Thanks Phil. Good morning everyone and thank you for joining us. In the first quarter, dominated by rapidly changing and mostly challenging macroeconomic conditions, M/I Homes posted very solid results. We appreciate the opportunity to share our results with you. Before we do, however, I want to address more specifically the macro environment and how it has impacted the housing industry and our business. When we last spoke, sharing our 2024 year-end record-setting results, we commented then on the changing economic conditions and demand challenges we faced, particularly during the third and fourth quarters of last year when mortgage rates began to rise. It was during that time last year that we first implemented mortgage rate buydowns to drive traffic and incentives sales. As demand for housing became more uneven during last year's fourth quarter, the need for such rate buydowns became an even more important part of our sales strategy, carefully utilized by us on a subdivision-by-subdivision basis to try and maximize both volume and margins.

As we begin 2025, it was clear to us that rate buydowns remain necessary for us to drive traffic and promote sales and that such rate buydowns would continue throughout the spring selling season unless and until it became clear that consistent and solid demand had returned. Clearly, that has not happened. Instead, what we have seen is the continuation of choppy and challenging conditions. While there has been some uptick in demand during the first quarter, the spring selling season has been just okay. Frankly, we graded somewhere between a B minus to C plus. Clearly, this has been a period marked by uncertainty, a volatile stock market, the back and forth with threatened tariffs, concerns with inflation, interest rate fluctuations, mostly going up, talk of a recession, and not surprisingly, a decline in consumer confidence. Despite all of this, we were able to post very solid first quarter results.

While new contracts were down 10% compared to last year, we believe we were effective in balancing pace and price as our gross margins were strong at 25.9%, a sequential improvement over 2024's fourth quarter, reflecting some pricing power in the first quarter as well as the positive impact of select new communities. But margins were down 120 basis points from last year's first quarter. Given the need to continue using rate buydowns for the foreseeable future, our gross margins will likely be under some pressure as we move through the year and continue to be below 2024's full year margins of 26.6%. 54% of our buyers are now using our rate buydowns compared to just under 50% during last year's fourth quarter. That said, the credit quality of our buyers continues to be strong with average credit scores of 746 and average down payments of 17% or nearly $90,000. Homes delivered during the quarter decreased by 8% to 1,976 homes and revenues decreased by 7% to $976 million.

Pre-tax income decreased by 19% to $146 million, though our pre-tax income margin was a very strong 15%, and we generated a very solid 19% return on equity. We ended the quarter with a record 226 communities and remain on track to grow our community count in 2025 by an average of 5%. With regard to our markets, our division income contributions in the first quarter were led by Dallas, Chicago, Columbus, Charlotte, and Minneapolis. New contracts for the first quarter in our Northern region decreased by 8%. New contracts in our Southern region decreased by 11% compared to last year's first quarter. Our deliveries in the Southern region decreased 13% and our deliveries in the Northern region decreased by 2% from a year ago. 58% of our deliveries come out of the Southern region, the other 42% out of the northern region. We have an excellent land position. Our owned and controlled lot position in the Southern region increased by 11% compared to a year ago and was flat versus last year in the Northern region.

32% of our owned and controlled lots are in our Northern region, the other 60% in our Southern region. Company-wide, we own approximately 25,000 lots, which is slightly less than a three-year supply. In addition, we control approximately 26,000 additional lots via option contracts, resulting in a total of 51,100 owned and controlled lots, equating to about a five-year supply. With respect to our balance sheet, we ended the first quarter of 2025 with the strongest balance sheet in company history, with an all-time record of $3 billion in equity, equating to a book value per share of $112. We also ended the quarter with zero borrowings under our $650 million unsecured revolving credit facility and this resulted in a debt-to-capital ratio of 19%, down from 21% a year ago and a net debt-to-capital ratio of negative 3%. As I conclude, we plan to continue to offer rate buy-down incentives to meet demand and as mentioned earlier, we'll likely continue to experience some compression in our gross margins throughout the year compared to what our margins were in 2024.

Despite the short-term volatility and many market uncertainties, we remain very optimistic about our business and believe over the long term, the homebuilding industry will continue to benefit from an undersupply of homes as well as growing household formations throughout our 17 markets. We are well-positioned as we begin the second quarter of 2025 and expect to have a solid year in 2025. And with that, I'll turn it over to Phil.

Thanks Bob. Our new contracts were down 10% when compared to last year. They were down 20% in January, down 10% in February, and down 2% in March and our cancellation rate for the first quarter was 10%. 50% of our first quarter sales were to first-time buyers and 65% were inventory homes. Our community count was 226 at the end of the first quarter compared to 219 a year ago. The breakdown by region is 98 in the Northern region and 128 in the Southern region. During the quarter, we opened 27 new communities while closing 21. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered 1,976 homes in the first quarter, delivering 78% of our backlog and about 35% of our first quarter deliveries came from inventory homes that were sold and delivered in the quarter. And at March 31, we had 4,800 homes in the field versus 4,500 homes in the field a year ago.

Our revenue decreased 7% in the first quarter, and our average closing price in the first quarter was $476,000, a 1% increase when compared to last year. Our first quarter gross margin was 25.9%, down 120 basis points year-over-year and up 130 basis points over last year's fourth quarter. Our first quarter SG&A expenses were 11.5% of revenue compared to $10.5 million a year ago. Our first quarter expenses increased 2% versus a year ago. Our increased costs were primarily due to increased community count and additional headcount. Interest income, net of interest expense for the quarter was $5.2 million, and our interest incurred was $8.8 million. Our pre-tax income was 15%, and our return on equity was 19%. During the quarter, we generated $154 million of EBITDA compared to $187 million in last year's first quarter, and our effective tax rate was 24% in the first quarter compared to 23% in last year's first quarter.

Our earnings per diluted share for the quarter decreased to $3.98 per share from $4.78 per share last year, and our book value per share is now $112, a $17 per share increase from a year ago. Now, Derek Klutch will address our mortgage company results.

Thanks Phil. Our mortgage and title operations achieved pre-tax income of $16.1 million, an increase of 31% from $12.3 million in 2024's first quarter. Revenue increased 17% from last year to a first quarter record of $31.5 million due to higher margins on loans sold and a higher average loan amount, partially offset by a slight decrease in loans originated. The average loan to value on our first mortgages for the quarter was 83% compared to 82% in 2024's first quarter. We continue to see an increase in the use of government financing as 57% of the loans closed in the quarter were conventional and 43% FHA or VA compared to 68% and 32%, respectively, for 2024's first quarter. Our average mortgage amount increased to $406,000 in 2025's first quarter compared to $386,000 last year. Loans originated decreased to 1,530, which was down 2% from last year, while the volume of loans sold increased by 26%. Our borrower profile remains solid with an average down payment of 17% and average credit score of 746 compared to 747 in 2024's first quarter. Finally, our mortgage operation captured 92% of our business in the first quarter, up from 88% last year. Now, I'll turn the call back over to Phil.

Thanks Derek. So, the balance sheet, we ended the first quarter with a cash balance of $776 million and no borrowings under our unsecured revolving credit facility. We continue to have one of the lowest debt levels of the public homebuilders and are well-positioned with our maturities. Our bank line matures in late 2026 and our public debt matures in 2028 and 2030. Our unsold land investment at March 31 is $1.7 billion compared to $1.4 billion a year ago. And in March 31st, we had $866 million of raw land and land under development and $803 million of finished unsold lots. During the first quarter, we spent $146 million on land purchases and $102 million on land development for a total of $248 million. At March 31, we own 25,000 lots and controlled 51,000 lots. At the end of the quarter, we had 700 completed inventory homes and 2,400 total inventory homes. And of the total inventory, 900 are in the Northern region and 1,500 are in the Southern region. At March 31, 2024, we had 400 completed inventory homes and 1,900 total inventory homes. We spent $50 million in the first quarter repurchasing our stock and have $200 million remaining under our current board authorization. Since 2022, we have repurchased 13% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Alan Ratner of Zelman & Associates. Please go ahead.

Hey guys, good morning.

Good morning Alan.

Good morning Bob. Nice job in a tricky environment out there. It seems like it's changing by the day. So, I'm sure it's not easy. First question, Bob, I'd love to drill in a little bit in terms of what you're seeing, both from a geography standpoint and a price point perspective. Just curious like with all of the moving pieces going on, have you seen any notable shifts in buyer demand either within price points, Smart Series versus, say, move up or geography, any kind of relative winners and losers, given all of the noise today?

That's a great question. Regarding price point, there hasn't been much change in demand. We have several high-performing Smart Series communities, which focus on first-time buyers, accounting for about 54% of our sales, and this has remained consistent. However, we also have strong communities for second and third-time buyers. There's no clear conclusion to draw from that, and we monitor it closely. Geographically, there were some noticeable differences, particularly in Florida markets towards the end of last year. Tampa was struggling more than Orlando or Sarasota, and we've just begun our efforts in Fort Myers and Naples, so it's early to make conclusions there. Recently, Tampa has shown some improvement, partly due to aggressive pricing promotions and a slight return of buyers. Indianapolis and Cincinnati have performed well, and Chicago has been a bright spot, along with Houston and Dallas.

Although Dallas isn't as strong as it was a few months ago, we're still optimistic about those Texas markets. Austin has been in transition for builders over the last year and a half, but I believe it has long-term potential. Columbus has been solid for us, while Charlotte and Raleigh have held up relatively well. Detroit appears to be softer. Overall, the economy is changing rapidly and poses challenges. Most of our new communities have started strongly, and I believe the margin improvement in the first quarter helped offset what could have been a more significant decline compared to last year. This margin uplift was driven by the positive impact of new community openings, which we are excited about. While the market isn't collapsing and there's no need for panic, it's a bit of a holding period. The spring selling season has been just okay, with March performing better than January and February. April isn't as strong as March, but as I mentioned, there's no need to panic; we will continue our current strategies and are aiming for a solid year.

Appreciate the very detailed rundown there. And definitely encouraging to hear Tampa showing some signs of life and the new community performance as well. Those are all good.

And I don't think Tampa is going anywhere anytime soon. By that, I mean it's a city that is still seen on average over the last four years, very respectable population growth it's likely to continue. In fact, if you look at population growth throughout most of our markets, many of them over the last four years have seen 4%, 5%, 6%, 8%, 10% population growth, which bodes well for household formations, which bodes really well for our industry. We'll get through this period of time, but I wouldn't want to be in any other business.

Got you. Appreciate that. Second question on kind of the spec strategy. I mean you and others obviously have pivoted pretty hard towards spec over the last several years. I think you said it was about 65% of your sales this quarter. We've heard from some other builders that seem to be dialing back spec starts a bit here over the last few months given the choppiness in activity and others have kind of signaled trying to maybe bring down that spec share a little bit closer to longer term averages. I'm curious, A, what are you seeing in terms of the spec margin differential? I know you've actually seen some pretty healthy margins on your spec product. But have you also dialed back those starts more recently?

Let's put this in perspective. This is an area where there's a clear difference in strategies among the various public builders. Some have shifted entirely to a 100% spec approach in recent years, while we have significantly increased our spec ratio. Five years ago, we were at around 20% to 40% spec; now we're between 50% and 65%. We prefer this balance. Generally, specs have sold at lower margins. At times, the difference has been 100 to 200 basis points. Currently, our average is likely around 150 to 200 basis points, with some markets being slightly higher. We've managed to maintain a close margin gap between the two, not out of stubbornness, but because that's what buyers are looking for. However, in most of our markets, specs have a somewhat lower margin.

Also, Alan, it's just kind of a subdivision-by-subdivision. Product matters quite a bit. Today, we're doing 15%, 20% attached townhouses and attached townhouses tends to happen when you sell a unit or two in the building, you start another building, et cetera. Also, our Smart Series, our more affordable product line. In general, we have a few more specs. If you look right now with us having about three finished specs per community, we feel very good with that. Also, with the rate buydown, it's pretty costly when you start getting outside of 45 to 60-day window to be buying down those rates. So, again, we manage that on a subdivision-by-subdivision basis for sure.

Perfect. Thanks a lot for all the detail. Good luck.

Thanks Alan.

Thanks Alan.

Thank you. The next question comes from Kenneth Zener at Seaport. Please go ahead.

Good morning everybody. Thank you.

Morning.

I am curious about your order pace, as the fall seasonality may suggest a slight decrease when considering the three- and longer-term averages. More importantly, how are you approaching your units under construction and how will the starts be related to the pace as you outline expectations for those units by the end of the year? If you're focusing on speculative builds, you might consider increasing those even if orders are low because it could enhance your closings. Could you elaborate on your thoughts regarding this?

Well, if you look at us today, we do have a few more communities than a year ago. And as we talked about, we planned this year on having on average about 5% more. We talked about in my remarks that houses in the field today are like 4,800 versus 4,500. So, we are continuing to be careful with what we put in the field. However, as Bob said, we're trying to manage very carefully on a subdivision basis. It takes a long time to get locations under control, bought, developed and opened. So, we're trying to balance that good margin, good return versus pace. So, it's just something that we manage on a subdivision basis constantly. We would like to do a little more volume than we're doing. Last year, we did over 9,000 houses. Our volume in the first quarter was down a little bit. But again, we're being mindful not to get too far ahead of things in the market. But again, where we are now with having a few more communities and a few more houses in the field, we feel like we're in pretty good shape.

Right. And I wonder, buydowns, which had been done in the 1960s and 1970s by builders, went away. And I've always been kind of curious as to why that happened. It's you hear some builders talking more about price reduction versus mortgage buydowns. Can you comment on how those buydowns might directionally break apart or be different within your conventional loan structures, where there's more down payment versus the FHA, VHA, which is a lower down payment? Are you seeing more of that efficacy in the lower down payment loans?

I guess, the first thing I would say is that, again, we manage that, not only on a community basis, but a customer basis. Customers more in the entry-level price point, a number of those customers may need more help in closing costs, being stressed a little bit for out-of-pocket, those types of things. Again, buyers are different. I don't know, Derek, Bob, do you want to...

There are a few key points to mention. Firstly, mortgage rate buydowns are currently one of the most effective tools available given the current rate environment and various challenges we've been discussing. They are an excellent way to attract buyers and potentially increase sales. Price reductions can significantly impact the backlog of sales, as lowering prices now could mean renegotiating many existing deals. The advantage of mortgage rate buydowns is that they maintain the integrity of our sales backlog. Secondly, regarding our offerings, the buydown rates for government loans are lower than those for conventional loans. For our FHA and government packages, the rates are generally around 4.875% for a 30-year fixed loan, while conventional loans are about 5.875%. If and when mortgage rates decrease, either through the spread over the 10-year yield or a direct drop in rates, demand could increase.

However, we don't necessarily need to see rates return to 3% or 4% to eliminate the need for buydowns. As rates go down, the cost of buydowns will also decrease. Currently, it's crucial to recognize that these buydowns are supporting the homebuilding industry. If they were removed from major builders, the market would be significantly different. Additionally, larger builders, like us, that have their own mortgage companies, benefit from being able to react quickly to market changes. We strive to adapt as effectively as possible.

I mean, primarily, we're in the payment business. And what's most important to the majority of the people is what's that monthly payment. And again, there's a different result based on a price reduction, which also can impact appraisal values of homes and those types of things, which Bob talked about. But again, the rate buydown, it depends what the customer really needs. We try to be as efficient as possible. Our mortgage company helps us a lot deal with individual customers. Customers need different things, and we try to make that available to them at the most efficient cost we can.

Thank you for your thoughtful answer.

Appreciate it. Thank you.

Thank you. The next question comes from Buck Horne at Raymond James. Please go ahead.

Hey thanks. Appreciate the time and the opportunity. Congrats on the results in a difficult environment.

Thanks Buck.

Yes, you're very welcome. Thinking through the kind of impact potentially as the quarters progress for the remainder of the year and how you're thinking through things like lot cost inflation as it's going to roll through the income statement and also your stick and brick costs factoring in the potential tariff impacts. I'm wondering if you guys have thought through that in terms of the supply chain and kind of what kind of cost trends?

Yes, I'll start with a brief response, and then Phil can provide more details. Currently, there has been no effect on sticks and bricks. Our costs are mostly the same as a year ago, and in some cases, they are a bit lower, which may have contributed to the improvement in margins. Despite the ongoing discussions about tariffs, we have not yet experienced any impact. There may be future effects, but at this moment, our industry has not really felt those consequences, aside from some potential indirect impacts on consumer confidence. If we do see any changes, they will likely become apparent later in the year when any cost increases due to tariffs would be reflected in our fourth quarter results. Phil, do you have anything to add?

No, we think our national account people and our purchasing teams have done a really good job. We've been working on a number of programs in the last couple of quarters. And as Bob said, our sticks and bricks in the first quarter were actually a little less. So, we were pleased with that. We're obviously trying to make sure that we're not single-sourced anywhere. We have seen a little more availability of substance suppliers, but really, that's about it. We're just trying to stay on top of everything as we can, try to focus on affordability best we can with targeted product to make sure we have the specifications right in our product line because lot costs are continuing to go up. But overall, we feel pretty good about where we are.

Let's discuss lot costs for a moment, as this greatly affects affordability and the final price of a home. Land and land development are the most significant factors influencing the final price. I don't expect much change in land prices across our markets. Like many competitors, we are focused on securing prime locations. Even with our cautious approach to purchasing, land prices have remained fairly stable. We might see better terms, like longer closing periods due to the slow zoning and approval processes, which sellers are aware of. We do not close on unzoned land, and neither do most competitors. Beyond these terms, I don't anticipate any significant changes in prices. Land availability remains constant, and premium locations will continue to demand top prices. To participate in this market, you need to be prepared to pay, and we are ready to do so. Our balance sheet is strong, and our land holdings are under a three-year supply; we maintain discipline in this regard. Our approach to owned and controlled land hasn't changed much. We prefer not to utilize land bankers, as we believe we can manage without incurring additional costs. Overall, we're confident in our land strategy, but I don't foresee any significant changes to this element of pricing in the near future.

I find your insights very helpful and appreciate your detailed thoughts. I want to shift the discussion to the balance sheet, which you've mentioned is stronger than ever. However, your shares are currently trading below book value. It seems like you might be considering slowing down the pace of activity for the rest of the year. While you've been consistent with your share repurchase efforts, I’m curious if you would consider taking advantage of the current market conditions to accelerate those repurchases.

It's something we always look at it. We talk about it every quarter with our Board. We've tried to maintain consistency. We're not trying to game the time in which we purchase. We think a consistent approach is the most sound one. In all likelihood, what we have been doing will continue to do. Phil, I don't know if you have anything to add.

Yes. Yes, Buck. I mean, like Bob said, we've had a consistent strategy the last few quarters buying $50 million. And we think now is a good time to have lower leverage and bank line availability and those type of things. Our interest incurred is one of the lowest in the business. and we like that position. Something we'll continue to look at. But again, we're just trying to be very mindful to make sure we're positioned very good. We've always run a conservative company and that's kind of kept us where we are and so forth, but something we'll continue to look at, but we feel really good about where we are.

All right. Very good. Thanks for the thoughts, guys. Appreciate it.

Thanks.

Thanks.

Thank you. The next question comes from Jay McCanless at Wedbush. Please go ahead.

Hey, good morning guys. First question I had where do you think the gross margin backlog is right now relative to what you saw in the first quarter and maybe directionally how that's been trending so far in the second quarter?

Jay, that's a pretty flat number. But again, about 35% of our closings during the quarter came from spec sales that sold and closed in the quarter. Bob talked about the continued pressure on margins. We're doing all we can to keep those margins as high as we can. We were pleased with the 25.9% in the first quarter, but we think there will be continued margin pressures as we go through the year.

The exit velocity from January to March shows that order comparisons continue to improve. For the entire second quarter, you will have an easier comparison to last year. What are you currently observing in the field, considering factors such as resale competition or other challenges that might lead to a trend lower than what you experienced in March for the remainder of the quarter?

If I knew what sales would be like next week, I would share that with you. There's been a lot of uncertainty and volatility in the economy, which has affected demand week-to-week. Some weeks we experience a significant increase in traffic, and the next week it decreases. There has been very little consistency, making things highly unpredictable. I initially thought our margins would be lower, but they have held up better than I anticipated. This is not because we're overly focused on margins; rather, we believe we are balancing our margins with the need to drive our sales adequately. We understand that nothing positive can happen without making sales, and we are striving to maximize sales. At this point, if I had to make a prediction about the second quarter, I would say it's likely to be uneven and predominantly challenging, but I hope we might be pleasantly surprised. The situation is not dire, and I believe the stocks trading at very low values suggest a potential recession, which I do not agree with.

We achieved a 15% return to the bottom line and nearly a 20% return on equity, making the first quarter one of our strongest in the company's history, although not as strong as last year. We are positioned for a solid year compared to last year, albeit likely down unless significant changes occur, which is not surprising. I believe we and many of our peers are well-prepared, and I don't foresee any drastic changes in builder behavior, including our own. Forecasting and providing guidance in this environment is difficult. Historically, we haven't excelled at providing guidance, and we aren't going to change that now. So, it's a challenging question, and I appreciate it, but I simply do not have an answer at this moment.

Jay, I mean you're right. I mean if you look at the second quarter of last year, our sales were actually up 3%. But I mean we were surprised; January and February sales were weaker than we thought. March was better. And we're not sure exactly why, again, it's just something we watch every week community-by-community. We did open 27 stores the first quarter, and we're going to be opening a lot of stores as the year goes on, but it's still just very choppy out there.

Okay. And then, Phil, could you give me the total spec numbers at the end of the quarter and where they were last year? I didn't catch those numbers.

At the end of the quarter, we had 700 completed specs, compared to 400 a year ago. In total, we now have 2,400 specs, up from 1,900 last year. We are pleased with our progress, averaging about 3 completed specs per community.

Our community count is up, too.

Our community count is up. And then we talked about it being up on average about 5%, and it should move up as the year goes on. So, we feel good about where we are managing that very carefully. There is, most of the time, a little bit of margin leak between specs and to be built. But again, we try to be very careful how we price and sell those specs also.

Got it. And then the last question for me, just pricing power, what percentage of communities were you able to raise price this quarter?

That's a really challenging question. We've been happy with the average selling price, the margin, and the speed of new community openings over the last few quarters. Overall, they're performing slightly better than expected. We've increased prices where possible, and we feel positive about our new communities. It's still a tough question, but with our margins at 25.9%, we are quite satisfied with that. One of the challenges some builders face is when they open new phases in an existing community while intending to set the new phase at a slightly higher price due to increased lot costs. Is that considered pricing power? Are you trying to maintain the same margins? In my view, true pricing power exists in probably less than 10% of our communities. Currently, in this environment, there is very little pricing power.

Understood. Okay, thanks guys. Appreciate it.

Thank you.

Thanks Jay.

Thank you. We have no further questions. I will turn the call back over to Mr. Phil Creek for closing comments.

Thank you for joining us. Look forward to talking to you next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.