Prepared remarks
Thank you for standing by. My name is Freida, and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1. Thank you. I would now like to turn the conference over to Phillip G. Creek, Executive Vice President and Chief Financial Officer. You may begin.
Thank you. Joining me on the call today is Robert H. Schottenstein, our Chairman, CEO and President, and Derek J. Klutch, President of our mortgage company. First, to address regulation for disclosure, we encourage you to ask any questions regarding issues that could be material during this call. We are prohibited from discussing significant nonpublic items with you directly. 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. I will now turn the call over to Bob.
Thanks, Phillip. Good morning, and thank you for joining us today. We are pleased to report solid second quarter and first six-month results. Despite continued challenges in the broader economy, choppy demand, economic uncertainty, rising interest rates, and the impact of the conflict in the Middle East, we are very proud of our results. For the second quarter, we sold a second quarter record 2.39 thousand homes, 15% better than last year. And for the first six months, we have sold 4.74 thousand homes, 8% better than a year ago. Pretax income from the quarter was $105 million. Though down 35% from a year ago, we were very pleased to post a pretax income percentage equal to 10% of revenue. Pretax income for the first six months was $194 million, also equating to a very solid 10% pretax income percentage. And we were pleased to generate a 10% return on equity for the second quarter. Contributing to our solid returns was the second quarter gross margin of 22%, which includes $4 million of inventory charges. Notably, excluding those charges, our second quarter gross margin would have approached 22.5%, which is slightly better than our first quarter gross margins. We closed 2.21 thousand homes in the quarter, down 6% compared to a year ago. And for the first six months, we have closed 4.12 thousand homes, down 5% from last year. Revenue for the quarter was $1.1 billion, down 9% from last year. Our second quarter record new contracts resulted in a monthly sales pace average of 3.4 homes per community compared to a pace of 3 per community a year ago. We ended the quarter with 234 communities and remain on track to grow our 2026 average community count by about 5%. In terms of product mix, we have seen a slight increase in the sale of our move-up product. Specifically, during the quarter, our Smart Series, which is our most affordable line of homes that caters primarily to the first-time buyer, accounted for 43% of company-wide sales. This compares to 52% a year ago. We believe the primary driver of our solid sales results is well-located communities and excellent product. At the same time, we continue to use mortgage rate buydowns as our primary incentive, and given the current rate environment, we will continue to promote with such buydowns for the foreseeable future. Approximately 78% of our second quarter sales were spec homes, roughly the same as the first quarter. Our rate buydown program is targeted to both spec homes and to-be-built homes. The to-be-built buydown program appropriately features a longer-term rate lock. Our mortgage company had a terrific and very strong second quarter, capturing a record 96% of our business. We continue to see quality buyers for the most part in terms of creditworthiness with average credit scores of 748 and an average down payment of about 15%. We feel very good about all 17 of our homebuilding markets. We expect to have a very solid year in Columbus, Cincinnati, Indianapolis, Chicago, Minneapolis, Orlando, Dallas, Charlotte, and Raleigh. Tampa, which historically has been one of our top performing markets, is currently somewhat challenged in terms of the macro environment within the Greater Tampa market, as is Sarasota. Our newest markets, Nashville and Fort Myers/Naples, are beginning to gain very important traction and will no doubt be important contributors going forward as we gain scale in each of those two new markets. Now, to more specifically address our markets, our division results in the second quarter were led by Columbus, Chicago, Minneapolis, Raleigh, and Charlotte. New contracts for the second quarter in the Northern Region increased by 16% while new contracts in our Southern Region increased by 14%. The biggest increase we saw was in the Carolinas. The Midwest was up across the board followed closely by Texas, and our sales in Florida were also up. Our deliveries in the Northern Region decreased by 8% compared to last year's second quarter and represented 40% of our company-wide total. Our Southern Region deliveries also decreased by 5% over last year and represented 60% of total deliveries. We have an excellent land position. Our owned and controlled lot position in the Southern Region decreased by 15% compared to last year and increased by 24% in the Northern Region. Forty percent of our owned and controlled lots are in the Northern Region while 60% are in the South. Company-wide, we own approximately 23.5 thousand lots which is roughly a 2.5-year supply. In addition, we control approximately 25.7 thousand lots via option contracts resulting in a total of slightly more than 49 thousand owned and controlled lots which equates to about a five-year supply. Our balance sheet continues to be excellent, highlighted by S&P's recent upgrade of our credit rating to BB+. We ended the second quarter with an all-time record $3.2 billion of equity equating to a book value per share of $128. We had no borrowings under our $900 million unsecured revolving credit facility and we ended the quarter with $736 million of cash. This resulted in a debt-to-cap ratio of 18% and a net debt-to-cap ratio of negative 1%. In closing, as we celebrate our 50th year in business, we remain very confident in the long-term fundamentals of the homebuilding industry. Given the quality of our geographic footprint, our strong land position, very well-located communities and diverse product offering we believe M/I Homes is well positioned to have a solid 2026. With that, I will turn it over to Phillip.
Thanks, Bob. As far as the financial results, we had record second quarter new contracts, up 15% compared to last year. Our sales were up 13% in April, up 23% in May, and up 9% in June. Our cancellation rate for the second quarter was 8%. Fifty percent of our second quarter sales were to first-time buyers, and 78% were inventory homes. Our community count was 234 at the end of the second quarter, consistent with a year ago. The breakdown by region is 94 in the Northern Region and 140 in the Southern Region. During the quarter, we opened 27 new communities, while closing 23. We currently estimate that our average 2026 community count will be about 5% higher than last year. We delivered 2.21 thousand homes in the second quarter, and about 42% of these deliveries came from inventory homes that were both sold and delivered within the quarter. At June 30, we had 5.1 thousand homes in the field, flat versus a year ago. Revenue decreased 9% in the second quarter. We delivered fewer homes than a year ago, and our average sale price declined. Our second quarter results included $5 million of land sales profit, versus $3 million in last year's second quarter. We often sell land as part of our land strategy. Our gross margin was 22.1% for the quarter, including $4 million of inventory charges. Excluding these charges, our gross margin was 22.5%. Our construction costs were down slightly during the quarter compared to the first quarter and our cycle time improved by a couple of days. Our second quarter SG&A expenses were 12.6% of revenue compared to 11.3% a year ago. Our second quarter expenses increased 3% versus a year ago. Our increased costs were primarily due to new community openings and a slightly higher headcount. Interest income net of interest expense for the quarter was $3.3 million, and our interest incurred was $9.3 million. We had solid returns for the second quarter given the challenges facing our industry. Our pretax income was 10% and our return on equity was 10%. During the quarter, we generated $120 million of EBITDA, compared to $169 million in last year's second quarter. Our effective tax rate was 24% in the quarter, flat compared to last year. Our earnings per diluted share for the quarter decreased to $3.02 per share compared to $4.42 per share last year, and our book value per share is now $128, an $11 per share increase from a year ago. Now Derek Klutch will address our mortgage company results.
Thanks, Phillip. Our mortgage and title operations achieved pretax income of $14.4 million, in line with $14.5 million in 2024's second quarter. Revenue increased 3% from last year to $32.3 million due to a higher average loan amount and slightly higher margins on loans sold but offset by a decrease in loans originated. The average loan-to-value on our first mortgages for the second quarter was 85%. Sixty-five percent of the loans closed in the quarter were conventional and 35% were FHA or VA, compared to 65% and 35%, respectively, for 2024's second quarter. Our average mortgage amount increased to $405 thousand in the quarter compared to $403 thousand last year. Loans originated decreased to 1.82 thousand, which was down 3% from last year, while the volume of loans sold increased by 6%. Finally, our mortgage operation captured 96% of our business in the second quarter, up from 92% last year. Now I will turn the call back over to Phillip.
Thanks, Derek. As far as our balance sheet, our financial position continues to be very strong. We have one of the lowest debt levels of the public homebuilders and are well positioned with our maturities. Our Franklin loan matures in 2030 and our public debt matures in 2028 and 2030 and has interest rates below 5%. Our unsold land investment at June 30 was $1.9 billion compared to $1.7 billion a year ago. At June 30, we had $800 million of raw land and land under development, and $1.1 billion of finished unsold lots. During the quarter, we spent $131 million on land purchases and $155 million on land development, for a total of $286 million. At the end of the quarter, we had 510 completed inventory homes and 2.84 thousand total inventory homes. Of the total inventory, 1.13 thousand were in the Northern Region and 1.71 thousand are in the Southern Region. At 06/30/2024, we had 586 completed inventory homes and 2.73 thousand total inventory homes. We spent $50 million in the second quarter repurchasing our stock and have $120 million remaining under our current board authorization. Since 2022, we have repurchased 19% of our outstanding shares. This completes our presentation. We will now open the call for any questions or comments.
Questions and answers
Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, please press 1 again. Our first question comes from the line of Alan Ratner with Zelman. Your line is open.
Hey, guys. Good morning. Really strong results.
Good morning, Alan.
Tough market. Bob, I was intrigued by the comment you made about the somewhat modest mix shift toward more move-up this quarter. Could you expand a little bit on that in terms of what is going on under the hood? Is this a concerted effort to target that segment and a function of new community openings or changing product type? Or was this more a function of where demand was in the quarter? I have a follow-up.
I think it is a little bit of both. There is a bit more demand there. We have always been strong with our move-up market; this is not a new phenomenon for our company. We have the Smart Series, and then everything else, and the everything else has always been very strong. In select markets, we have strategically — beginning about 18 to 24 months ago — looked to find more locations where we could sell the move-up market because we expected better demand and we think we do a good job executing. When you shake it all out, it is a little bit of both. Over the last number of quarters, some move-up land opportunities pencil better in terms of underwriting. We underwrite based on current conditions, which is always a bit of a guess. In certain markets, the move-up product just seems to be penciling better. We find sites that are opportunistically attractive, perhaps more infill, and so forth. I hope that answers the question.
Yeah, that was great. Appreciate the added thoughts there. I think this might be related, but I wanted to pivot to the gross margin, which is good to see some sequential improvement. I was hoping you could drill into the drivers of that. You mentioned costs being down a little quarter over quarter. Is there any mix impact from move-up as well in that?
Maybe slightly. We saw modest cost improvements — perhaps 1–3% depending upon the market — which helped a little bit. A number of builders mentioned larger cost improvements, but we did not see that much. If it were not for mortgage rate buydowns, industry-wide, the sales environment would be bleak. But the primary driver for our sales is our well-located communities. If it were all about rate buydowns, all communities would perform highly. We have communities selling at a very strong pace and at premium margins because they are well located. The 22% is an average across 234 communities; many are well north of 22, 23, 24%. Our more mature divisions are posting very credible margins in this environment, better than we would have expected. You never know whether a community will perform as well as you hope, but we have a healthy percentage of what I would call good-performing communities, and that generally traces back to location and product quality.
Alan, just to add a couple of things. We opened 49 new stores in the first half. If you look at the average sale price in those 49, it is about $575 thousand. Our backlog right now is about $540 thousand, so we have focused a little more on the higher price point. As far as margins and cost pressure, our finished lot cost compared to a year ago is up about 8%. We try to open stores the right way and not get too far ahead. We also try to get pricing power where we can. That is very important. Having said that, with a 30-year fixed at par currently in the 7% range, there are pressures on the cost of those buydowns. But it is a subdivision-by-subdivision business, and that is where we will continue to focus.
Thank you so much for that added detail, Phillip. Good to hear your voice as well. Thank you.
Your next question comes from Kenneth Zener with Seaport Research Partners. Your line is open.
Good morning, everybody.
Morning.
You said 78% of your closings were spec. Could you break out the mix between which were spec overall, 78%, and the percent that were intra-quarter to-be-built closings versus spec? Also, could you talk to the margin difference between those two categories?
What we provided was that from a sales standpoint in the second quarter, 78% were specs. As far as deliveries in the second quarter, 42% of the deliveries were sold and closed in the quarter.
We do not give a specific company-wide margin differential between to-be-built and spec because that number varies market to market. In nearly every one of our 17 markets, the margins on to-be-builts are better.
In some markets the difference is just slight; in others it could be 100 or 200 basis points, perhaps more in a couple of select instances. In general, margins are higher on to-be-built homes. We continue to manage our spec levels closely. Our improved cycle time, which has been improving a couple of days every quarter, gives us the benefit of not having to have so many specs. When you look at midyear completed houses and inventory, it is 510 this year versus 586 last year, so we actually have fewer completed specs. Specs are about being on the right lots with the right product. Our more affordable Smart Series tends to have a few more specs, but we manage spec levels carefully.
Thank you. My second question is big-picture. Despite industry headwinds, margins are higher than pre-COVID for many in the industry and generally stable quarter to quarter. You guys are starting more homes than you have orders for. What are you worried about in the second half and into 2027? Given the rate buydown benefits you highlighted, it seems you are somewhat insulated from near-term moves in the 10-year. What is the main risk you see out there?
We have all seen conditions significantly worse than now. If I had to grade current housing conditions, I think they are above average — not great, but certainly not bad. For M/I Homes to be generating a 10% pretax return is a strong result. There are significant differences in performance across the industry. When you look at balance sheets, for the most part builders are in the best shape they have ever been in — we certainly are. But you also see radically different returns within large-cap and mid- and small-cap builders. Some of that can impact certain markets where you may see discounting by some builders. Demand is not as robust as we'd like; it is suppressed by the current rate environment, economic uncertainty, affordability, and a lack of confidence. There is a large pool of potential buyers held back by rates and sentiment. We are bullish long term, but the buyer pool is relatively constrained right now and we are all competing for those buyers. We focus on a strong balance sheet, low debt levels, buying the best possible communities, and keeping our land ownership in balance — ideally not owning more than a two- or three-year supply, which we do not. I feel really good about our land position and our new communities. We will remain vigilant and concerned about things we cannot anticipate, and the only way to be ready is to keep the balance sheet strong.
Understood. Much appreciated. Thank you.
Your next question comes from Buck Horne with Raymond James. Your line is open.
Hey, good morning, guys, and congrats on a great quarter. Appreciate all the color so far. Could you dive into how the selling environment progressed through the quarter and how you think gross margins in the current backlog are shaping up for the back half of the year? Also, what level of incentives did you deploy in the quarter to get these strong order results?
Buck, backlog margin has been pretty consistent over the last few quarters. Almost half of our houses are specs getting sold and closed in the quarter, and specs generally have a lower average sale price than to-be-builts and tend to have slightly lower margins. We have some pressures: finished lot cost is up about 8% versus a year ago and mortgage rates are higher, which increases buydown costs. Most builders remain competitive on the mortgage rates we offer, and we try to offset that with the quality of our new communities and product. We expect to open more new stores in the second half than the first half, and some openings in the third quarter will generate results this year. We do not give gross margin estimates, but we are doing all we can on the cost and product side to offset pressures. On expenses, community count is flat at 234 versus a year ago; we expect it to increase in the second half. We have about 3% more people than a year ago and will manage costs and expenses as best we can to protect margins.
Got it. Helpful color. On land and lots under contract: you increased owned and controlled lots in the North by about 24% and decreased in the South by 15%. Is that a function of demand, lot availability, or land market changes? How should we think about the repositioning of lots?
Nothing significant has changed, Buck. We focus first and foremost on what we own. We want to own a two- to three-year supply of land based on current closing rates. Right now we own a little over 23 thousand lots. A year ago it was about 25 thousand, but that isn't a big shift. We like to own roughly a one-year supply of finished lots to avoid going dark due to development delays, weather, and those types of things. We control about 49 thousand lots total right now, versus a little over 50 thousand a year ago — so really nothing significant. You will see numbers move around a little as we selectively sell lots, write off small deposits when deals don't go forward, and manage the investment level, but our overall approach of owning two to three years and controlling four to five years has not changed.
Keep in mind our total owned and controlled lots are just a little over 49 thousand and 60% of them are in the Southern Region, even with all the puts and takes.
So are you trying to rebalance toward more of a 50-50 split regionally going forward? The trend seems to show a shift.
We don't manage it by region. It starts within the individual markets. We evaluate the opportunity in each market — for example, Dallas, Fort Myers/Naples, Nashville — and set growth goals market by market. Our decisions are driven by market-level opportunity rather than a regional rebalance.
To add, we develop about 85% of our own land. We do not take title to land unless it is zoned for our use and utilities to the site, but we develop a large portion. We are now seeing more opportunities for finished lots in most of our markets — from sellers, other builders, and land bankers — and we will take advantage of those because they shorten time to get lots on the books and open communities. Overall, we are happy with our land position.
Sounds good. Congrats again and thanks.
Your next question comes from Jay McCanless with Citizens Bank. Your line is open.
Hey. Good morning, everyone. Thanks for taking my questions.
Absolutely. I want to deepen the point about move-up lots looking better from an underwriting standpoint. Is that a function of expected pace or lot cost? What drives that attractiveness? Not every move-up deal looks more attractive, but some presented to us have been penciling better. When we underwrite, critical factors include expected sales pace based on submarket conditions, achievable price, and margins. There is a lot of art and judgment in that underwriting because of long lead times — typically six months or more from opening to selling — and many variables like rates and the macro environment. Some move-up pieces are smaller or more infill, which can contribute to returns. Ideally, we aim for at least a 20% internal rate of return on each land deal, but returns vary by finished lot deals versus large raw land deals because risk profiles differ. Sometimes we will accept a slightly lower return for a higher-quality location. I have often said I would rather overpay for an A location than try to steal a B, because A locations produce the best long-term results.
Second quick question: on the mortgage rate buydowns, where are you buying the rate down to on average right now, and what rate seems to get buyers moving?
Our mortgage company is exceptional; capturing 96% of our buyers is industry-leading and an important part of our platform. For specs, our program is slightly below 5.875% on a 30-year fixed equivalent. For conventional to-be-built with a longer-term rate lock, the effective rate is slightly above 5%. Our mortgage team is very focused on market conditions day-to-day and how to structure buydowns.
One thing to note is that incentives differ by subdivision based on buyer needs. In more affordable communities, buyers may need closing cost assistance; some customers prefer ARMs. We offer a variety of targeted programs and avoid a shotgun approach. Our mortgage team and loan officers tailor programs to individual customers, which has been helpful.
Have you seen any positive or negative impact from all the M&A activity — more availability of finished lot deals or less competition? Any color there?
There is a lot going on with builder M&A and supplier consolidation. So far, we have not seen much impact, but we are in the early innings on some of those deals, so it will remain to be seen. We have excellent long-term relationships with national suppliers and have not seen material disruption yet.
There are other dynamics too — for example, data center buyers paying significantly for land in some places, which can impact local land markets and supplier availability, creating pressures on concrete and energy in certain areas. We monitor those developments and manage as best we can.
One last question: it was impressive to see both segments driving mid-teens order growth. Has that carried into July, and as you open the rest of the year, are you targeting similar balanced growth for the back half of 2026?
We hope so, but we'll see. The first six months were up 8% and the second quarter was up more than the first, with some month-to-month volatility. We think our communities are driving the results. Everyone is using rate buydowns, but not everyone is seeing the same business performance. We are in summer, which is seasonally less robust, and we look forward to the fall when business historically picks up. We feel good about sales but will see how the year shakes out.
Okay, great. Thanks for taking my questions.
Your last question comes from Alex Barron with Housing Research Center. Your line is open.
Yes. Thank you, gentlemen. Good morning. I wanted to ask about the jump in G&A sequentially and year over year — what drove that?
Are you referring to SG&A expenses? The increases were driven by opening more communities and related expenses. We have about 3% more people than a year ago, and we are spending more in sales-related areas such as promotion, advertising, and lead generation. With revenue down, that drives the SG&A percentage up, but we are managing those costs closely.
And on the gross margin improvement this quarter, was that mainly a reduction of incentives, lower costs, product mix, or a combination?
It is a combination. We were pleased with the performance of communities opened in the first half; we opened 49 new stores and some of those communities contributed closings in the second quarter. Construction costs and cycle-time improvements helped slightly. We did spend more on buydowns in the second quarter than the first, and with mortgage rates near 7% that increases buydown costs. There are multiple moving parts that go into gross profit, but we are pleased with the second quarter outcome.
Got it. Thank you, guys.
That concludes our question and answer session. I will now turn the conference back to Mr. Phillip Creek for closing remarks.
Thank you for joining us. See you next quarter.
Thank you. This concludes today's conference call. You may now disconnect.