M/I Homes, Inc. (NYSE:MHO) Q4 2023 Earnings Call Transcript January 31, 2024
M/I Homes, Inc. misses on earnings expectations. Reported EPS is $3.66 EPS, expectations were $4.94. 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' Fourth Quarter and Year-End Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded on Wednesday, January 31, 2024. I would now like to turn over the conference to Phil Creek. Please go ahead.
Phillip Creek: Thank you for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President; and Derek Klutch, the 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, 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.
Bob Schottenstein: Thanks, Phil. Good morning, and thank you for joining our call as we highlight our fourth quarter and full-year 2023 results. We had an outstanding year in 2023, one of the best in our 47-year history. We are particularly pleased with our results given the significant headwinds the housing industry faced as we entered 2023, as well as a rising interest rate environment throughout most of the year, together with inflationary pressures and general uncertainty within the economy. For the year, we had very strong income and returns. Pre-tax income equaled $607 million, with a pre-tax return of 15%. Gross margins for the year came in at 25.3%, the same as last year. We were pleased to see our gross margins hold steady notwithstanding the choppy market conditions and rising rates.
Return on equity was a very solid 20.2%. Strength of our communities and product offerings, along with our selective and very targeted use of below-market financing incentives contributed to our strong fourth quarter and full-year sales performance. In the fourth quarter, we sold 1,588 homes, a 61% increase over last year, with significantly better per-community absorptions. Clearly, as rates began to fall in the fourth quarter, we saw a pick-up in both traffic and demand. Notably, our December sales were the best month of the fourth quarter. For the full-year, we sold 7,977 homes, an increase of 20% over 2022. Our monthly sales pace during the year averaged 3.3 homes per community, compared to a sales pace of 3.1 homes per community during 2022.
And the quality of buyers that we're seeing continues to be strong with average credit scores of 747, and an average down payment above 18%. Our Smart Series, which is our most affordably priced product, continues to have a very positive impact, not just on our sales, but our overall performance. Smart Series sales comprised 53% of total company sales in the fourth quarter, compared to 52% in the fourth quarter a year ago. And I'm pleased to report that the improvement in traffic and demand that we saw in the fourth quarter has continued as we begin this year, with our January sales exceeding last year. We are very optimistic about a good selling season. We continue to see improvement in our construction cycle time. During the fourth quarter, our cycle time improved by an additional 10 days sequentially.
Year-over-year, our cycle time has improved by more than 60 days. Improvement in cycle time remains a major area of focus for us. In terms of deliveries, given that we began 2023 with roughly 15% fewer homes in the field, we were very pleased to close 8,112 homes for the year, 3% less than 2022. Now, I will provide some additional comments on our markets. Our division income contributions in 2023 were led by Dallas, Tampa, Columbus, Orlando, Raleigh, Sarasota, and Charlotte; all had very strong years. New contracts for the fourth quarter in our Southern region increased 44% and 89% in our Northern region. For the year, new contracts increased 18% in our Southern region and 22% in our Northern region. Our deliveries decreased 17% over last year's fourth quarter in the Southern region, comprising 1,171 deliveries or 58% of our total.
Northern region contributed 848 deliveries, a decrease of 13% over last year's fourth quarter. For the year, homes delivered, as I mentioned before -- or rather homes delivered increased 3% in the Southern region but decreased 12% in the Northern region. Our owned and controlled lot position in the Southern region increased by 12% compared to last year. Owned and controlled lots increased 3% in the Northern region. We have an excellent land position. Company-wide, we own approximately 24,400 lots, which is roughly a three-year supply. Of that total, 28% of the lots are in our Northern region, with the balance of 72% in the Southern region. On top of our owned lots, we control the option contracts, an additional 21,300 lots. So, in total, we own and control approximately 45,700 single-family lots, which is up 9% from a year ago, and equates to about a five-year supply.
Most importantly, about 47% of our lots are controlled pursuant to optioned contracts. This gives us significant flexibility to react to changes in demand or individual market conditions. With respect to our balance sheet, we ended the year with an all-time record $2.5 billion of equity, which equates to a book value of $91.00 per share. We also ended the year with $733 million of cash, and zero borrowings under our $650 million unsecured revolving credit facility. This resulted in a debt-to-capital ratio of 22%, down from 25% a year ago and a net debt to capital ratio of minus 2%. Before I conclude, let me just state we are in the best financial condition in our history. We feel very good about our business and fully expect to deliver another year of strong results in 2024.
With that, I'll turn it over to Phil.
Group of single-family homes against a scenic landscape, capturing the company's business area.
Phillip Creek: Thanks, Bob. Our new contracts were up 35% in October, up 92% in November, and up 64% in December, for a 61% improvement in the quarter overall. Our sales pace was 2.5 in the fourth quarter, compared to 1.8 in last year's fourth quarter, and our cancellation rate for the fourth quarter was 13%. As to our buyer profile, 53% of our fourth quarter sales were to first-time buyers, compared to 58% a year ago. In addition, 62% of our fourth quarter sales were inventory homes, compared to 64% in last year's fourth quarter. Our community count was 213 at the end of 2023, compared to 196 at the end of '22. During the quarter, we opened 20 new communities, while closing 11. And for the year, we opened 76 new communities.
We currently estimate that our average 2024 community count will be about 10% higher than 2023, delivered 2,019 homes in the fourth quarter, delivering 59% of our backlog compared to 53% a year ago. And as we stated in our third quarter conference call, we entered the fourth quarter with 1200 less homes in the field than a year ago. And at December 31, we had 4400 homes in the field versus 4500 homes in the field a year ago. Revenue decreased 20% in the fourth quarter to $973 million. Our average closing price for the fourth quarter was $471,000, a 4% decrease when compared to last year's fourth quarter average closing price of $492,000. Our gross margins were 25.1% for the quarter, up 250 basis points year-over-year. And for the full year, our gross margins were flat at 25.3%.
Our SG&A expenses increased by 4% in the fourth quarter due primarily to higher incentive compensation, increased real estate taxes on our inventory levels, and the cost of having more communities. Interest income increased to $8.3 million for the quarter due to our higher cash balances, and our pre-tax income was 15.1% versus 15.4% last year and our return on equity remained strong at 20%. During the fourth quarter, we generated $153 million of EBITDA and for the full year we generated $648 million of EBITDA. We generated $552 million of cash flow from operations this year compared to generating $184 million last year. Our effective tax rate was 24% in the fourth quarter compared to 21% last year's fourth quarter, and our effective rate for the year was 23%.
We expect 2024's effective tax rate to also be around 23%. Our earnings per diluted share for the quarter decreased to $366 per share from $465 per share in last year's fourth quarter, and decreased 6% for the year to $1621 from $1724 last year. During the fourth quarter, we spent $25 million repurchasing our shares, and for the year we spent $65 million. We currently have $128 million available under our repurchase authorization. And in the last three years, we have repurchased 9% of our outstanding shares. Now, Derek Klutch will address our mortgage company results.
Derek Klutch: Thank you, Phil. In the fourth quarter, our mortgage and title operations achieved pre-tax income of $4.7 million, down $5 million from 2022 on revenues of $19.7 million down 13% over last year, primarily as a result of lower pricing margins, lower average loan amounts, and fewer loans closed. For the year, pre-tax income was $38.4 million, and revenue was $93.8 million. Loan-to-value on our first mortgages for the quarter was 82% in 2023, the same as 2022's fourth quarter. 66% of loans closed in the fourth quarter were conventional, and 34% were FHA or VA. This compares to 79% and 21% respectively for 2022's same period. Our average mortgage amount decreased to $383,000 in 2023's fourth quarter compared to $392,000 in 2022.
Loans originated in the quarter decreased 7% from $1,497 to $1,387, and the volume of loans sold increased by 9%. As mentioned earlier, the borrower profile remained solid with an average down payment of over 18% for the quarter and an average credit score on mortgages originated by M/I Financial of 747. Our mortgage operation captured 88% of the business in the quarter, an increase from 77% in 2022's fourth quarter. We maintain a separate mortgage repurchase facility that provides us with funding for our mortgage originations prior to the sale to investors. At December 31, we had a total of $166 million outstanding under this facility, which expires in October of this year. The facility is typical 364-day mortgage repurchase line that we extend annually.
Now I'll turn the call back over to Phil.
Phillip Creek: Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with a cash balance of $733 million and no borrowings under our unsecured revolving credit facility. Our credit facility matures in late-2026 and our public debt with interest rates below 5% mature in 2028 and 2030. Our total home building inventory at year-end was $2.8 billion, which was flat with the prior-year level. During 2023, we spent $344 million on land purchases, and $512 million on land development, for a total land spend of $856 million. This was up from $837 million in 2022. At December 31, '23, we had $715 million of raw land and land under development, and $721 million of finished unsold lots. We own 8,724 unsold finished lots.
We have a very strong land position at year-end, controlling 46,000 lots. We own 24,400 lots, which is about a three-year supply. And of the lots controlled, 53% are owned, which is about a five-and-a-half years' supply. And at the end of the year, we had 592 completed inventory homes, about three per community, and 2,023 total inventory homes. Now, the total inventory, 912 were in the Northern region, and 1,111 is in the Southern region. And in December 31, '22, we had 485 completed inventory homes, and 1,827 total inventory homes. This completes our presentation. We'll now open the call for any questions or comments.
