M/I Homes Inc (MHO) 2011 Q1 法說會逐字稿

Good afternoon. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter conference call for M/I Homes. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions.)

I would now like to turn the call over to Phil Creek. You may begin, sir.

Thank you. And thank you for joining us today. Joining me on the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Paul Rosen, the President of our Mortgage Company; Ann Marie Hunker, our VP Corporate Controller; and Kevin Hake, our SVP.

To address regulation and 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 now turn the call over to Bob.

Thanks, Phil. Good afternoon and thank you all for joining us to review our first quarter results.

In today's release we reported a pre-tax loss from operations for the quarter of $5.9 million. This was greater than our pre-tax loss from operations in the first quarter of 2010 as a result of an 8% decline in homes delivered, combined with a decline in our gross margin from last year's first quarter.

These results were also negatively impacted by the difficult selling conditions in the final months of 2010, which led to a lower backlog level for our Company at the start of the quarter and beginning of the year.

Notwithstanding the fall in volume, we were pleased that we were able to accomplish a reduction in our selling, general and administrative expenses in the first quarter of 2011, compared to the year-earlier quarter, both on an absolute dollar basis and as a percentage of revenue. This helped reduce the magnitude of the operating loss for the quarter compared with the prior year, and we continue to maintain very tight controls on all of our expenses.

Our sales for the first quarter were down 15% from the first quarter of 2010, which is slightly better than the year-over-year decline in US new home sales for the first quarter, which were down 18% as reported earlier this week by the Census Bureau.

Overall, our sales were generally in line with our expectations. As we had clearly anticipated a decline from last year when sales were positively impacted by the Federal Homebuyer Tax Credit during last year's first quarter and the first two months of last year's second quarter.

In terms of our business, housing conditions improved marginally each month during the first quarter, but remained challenging overall. Demand for new homes continues to be impacted by weak employment growth, restrictive mortgage qualification requirements, and chopping existing home values, which are combining to restrain potential homebuyers from purchasing a new home, all despite improved affordability and continued low mortgage rates.

Traffic is healthy as an indication and, frankly, of potential demand and buyer desire. However, this potential demand by consumers is being offset by the financial realities of our time - obtaining a mortgage and selling an existing home in the current environment, as well as general uncertainty regarding jobs and the US economy.

Nationally, sales of new single-family homes in March improved 11% from February to a seasonally adjusted annual rate of 300,000 homes. This exceeded most analyst estimates and generated, for all the right reasons, some enthusiasm. But, this is still a rate that is 22% below the annual rate from last March, which at that time was a rate of 348,000 single-family sales.

Many have asked about the spring selling season. Through March, we would rate the spring selling season for our Company as a B-minus; clearly not great, but far from poor. Overall, we have experienced noticeably -- a noticeable improvement in sales conditions from the pace that we achieved during the last six months of 2010 following the expiration of the homebuyer tax credit.

Specifically, our sales have increased sequentially, up 42% compared with last year's fourth quarter and up 33% compared with last year's third quarter. We are encouraged by this improvement, which we view as being in line with forecasted national home sales this year, which are expected to be in the range of 320,000 to 350,000 homes.

Margins mostly held steady in our communities during the first quarter, but we did experience some locations, mainly new communities, where we have been able to increase margins. These, however, have been offset by other locations where margins have slipped and, in some cases, we deliberately and intentionally lowered prices and margins in certain older communities where we felt it was in our best interest to do so.

To some extent, we've also had to rely on selling spec homes to a greater degree than we have historically, and have experienced lower margins on spec homes than we have experience on our to-be-built homes, which are built pursuant to sales contracts. But overall, our gross margin improved sequentially from the fourth quarter of 2010, which is an indication that we are continuing to make real progress toward profitability. And, I want to underscore that are generally very pleased with the margin performance of our newer communities.

While the housing markets continue to muddle along in search of some real momentum, we continue to manage somewhat cautiously. We have reinvested carefully in the replenishment of our land during the quarter and, as I said at the outset, have maintained very tight controls on our expenses while continuing to operate with low leverage and strong liquidity on our balance sheet. We ended the quarter with $127 million of cash and very low debt leverage.

As I stated, we continue to be encouraged by the contribution levels of our new communities. We opened 12 new communities during the quarter and closed 11 older communities. We also continue to diversify our geographic footprint with the previously announced acquisition of the assets of TriStone Homes in San Antonio, Texas. The TriStone acquisition closed on April 1st and will begin to contribute to our operations in the second quarter. TriStone represents a very strong strategic fit for us and further expands our presence in the Texas markets.

We also continue to be very pleased with the improvement of various operating practices. Our customer service scores are among the highest in the industry and, over the past number of quarters, we've made demonstrable progress in a number of operating initiatives; specifically, reducing cycle time, improving our cost structure, enhancing our product, and improving our sales efforts across all spectrums, including the Internet.

Now, let me take a moment to review our regional performance. First, the Midwest region. The Midwest markets continue to be difficult, with Chicago being the lone exception for our Company. Our operations in Chicago are very solid as a result of a well-timed and -- of well-timed and well-located acquisitions that we've made there.

New contracts throughout the Midwest region were down 34% for the first quarter compared with 2010. This is the net result of declines in Columbus, Cincinnati and Indianapolis, partially offset, however, by a very significant increase in our Chicago sales. We have grown our investment and our communities in Chicago with seven active communities as of the end of the first quarter, while we have continued to reduce our investment levels and the number of open communities we have in our Columbus market. We ended the quarter with 62 active communities in the Midwest. This represents a 6% decrease from the quarter last year.

The Southern region. Our Southern region is now comprised of our two Florida markets, Tampa and Orlando, and our two Texas markets, Houston and San Antonio. We entered Houston in the middle of 2010 and we just recently began selling homes in Houston and have four active communities there today. As noted earlier, we closed on our San Antonio acquisition of TriStone Homes on April 1st and are very excited about our opportunities in the San Antonio market.

In Florida, market conditions and demand for new homes continue to be challenging; however, our new contracts in the Southern region were, in the aggregate, up 14% in the first quarter. We ended the quarter with 19 active communities in the Southern region and that is a 14% decrease for the quarter.

The Mid-Atlantic region. Washington, DC continues to be one of the strongest housing markets in the nation and, likewise, is clearly one of our very best markets. Total new contracts throughout the Mid-Atlantic were up 9% for M/I Homes in the first quarter compared with 2010. Specifically, our contracts in Raleigh were up significantly in the quarter, largely as a result of several very successful new communities.

Our sales in Charlotte were flat, while we experienced a decline in DC due solely to the timing of older communities selling out and new communities not yet open for sale. We did end the quarter with 30 active communities in the Mid-Atlantic region. This represents a 43% increase as we've continued to shift, by intent and design, more of our geographic focus and investment to the Mid-Atlantic region.

And now, before I turn it back over to Phil, let me just simply reiterate what was stated in our release today, and that is that, while we believe 2011 will remain challenging and that we will continue to manage in a somewhat cautious fashion, we are very confident in our strategy and in our market position.

And with that, I'll turn it over to Phil.

Thanks, Bob.

New contracts for the first quarter decreased 15% to 654, with a net absorption rate of 2 sales per community, per month. By region, contracts were down 34% in the Midwest, up 14% in the South, and up 9% in the Mid-Atlantic. Our cancellation rate for the first quarter was 16% compared to 18% a year ago.

Our traffic for the quarter decreased 8%. Our sales were down 2% in January and traffic was down 3%; sales were down 12% in February and traffic was down 6%; and our sales were down 24% in March and traffic was down 16%. Our sales in January and February were at about the same level, while our March sales were up 20% from January and February levels. And again, our March sales comp was particularly difficult as our March 2010 sales was our highest monthly sales level since 2007.

Our active communities increased 2% from 109 last year to 111. The breakdown by region is 62 in the Midwest, 19 in the South, and 30 in the Mid-Atlantic. Our current estimate is to end the year with about 15% higher community count than we began 2011 with, which includes communities from our San Antonio acquisition. And for your information, our San Antonio operation had 5 communities at April 1st of this year.

At March 31st, about 55% of our active communities are new communities. And we define new communities as those opened since January of 2009.

We delivered 439 homes in 2011's first quarter, down 8% compared to last year's 479. And about 45% of our first quarter deliveries were from new communities versus 40% in 2010's fourth quarter.

We delivered 83% of our backlog this quarter compared to 74% a year ago, and our backlog of 747 homes is 20% lower than a year ago and our average sales price in backlog is $252,000, which is 4% lower. Third-party land sales were $850,000 to 2011's first quarter, and this compares to $86,000 last year.

In the first quarter we recorded pretax charges for impairments of $10.9 million, with about 45% of those impairments in the Midwest and 55% in the Southern region. The majority of these impairments were in older communities in Ohio and Florida, which are our most challenging markets. And this compares to $3.1 million in last year's first quarter.

Our gross margin, exclusive of the impact of impairments, was 16.3% for the quarter, down 100 basis points year-over-year, but 20 basis points higher than 2010's fourth quarter.

G&A expenses for the quarter were $11 million, decreasing 12% from last year's level. And selling expenses for the quarter were $9 million, down 18% from a year ago. As a percent of revenue, SG&A declined by 160 basis points for the quarter to 18.1%. And in total, SG&A expenses declined by $3.4 million in the quarter comparison.

Interest expense increased $1.9 million for the quarter, compared to the same period last year. The increase in the first quarter was due to incremental net interest incurred of $1.8 million, as well as an increase in our weighted average borrowing rate from 8.6% a year go to 9.7% this year. These increases reflect the impact of our new senior notes.

We had $5.9 million of pre-tax loss from operations in the first quarter, compared to a $4.9 million loss during the first quarter last year, primarily the result of the decline in deliveries and higher interest expenses. We generated our 7th consecutive quarter of positive EBITDA, producing $3 million of EBITDA and covering interest 1.5 times for the trailing four quarters.

We have $20 million in capitalized interest on our balance sheet, compared to $24 million a year ago, which is about 3% of our total assets. And we reported a non-cash, after-tax charge of $6.5 million in the first quarter for a valuation allowance related to our deferred tax assets. And at March 31, '11, our gross deferred tax asset is $134 million and it is fully reserved.

Now, Paul Rosen will address our mortgage company results.

Thank you, Phil.

Our mortgage and title operations pre-tax income decreased from $1.7 million in 2010's first quarter to $1.4 million in the same period of 2011. The decrease was primarily the result of a decrease in loans originated from 385 in 2010 to 334 in 2011.

The loan to value on our first mortgages for the first quarter was 88% in 2011, compared to 87% in 2010's first quarter. 62% of the loans closed were FHA BA and 38% were conventional. This compares to 56% and 44%, respectively, for 2010's same period. Over 90% of our communities are eligible for FHA financing.

Overall, our average mortgage amount was $213,000 in 2011's first quarter, compared to $210,000 in 2010's first quarter. The average borrower credit score on mortgages originated by M/I Financial was 724 in the first of 2011, compared to 737 in 2010's fourth quarter. These scores compared to 734 for the first quarter of 2010 and 732 for the fourth quarter of 2009. Our mortgage operation captured 83% of our business in the first quarter, compared to 2010's 85%.

At March 31st, 2011, M/I Financial had $16.1 million outstanding under the $45 million M/I Financial Credit Agreement, and $9.9 million outstanding under the $10 million facility. Effective April 18th, 2011, M/I Financial entered into a $50 million secured mortgage warehousing agreement which replaces M/I Financial's current $45 million agreement. The M/I Financial warehousing agreement expires on March 31st, 2012.

In the normal course of business, we receive inquiries concerning underwriting matters. And in 2011, we have received 7 such inquiries. We thoroughly review and respond to each inquiry and, even though we are not required to do so, we routinely engage an independent third-party to review the files and information related to origination of each mortgage.

Our reserve on March 31st, 2011, with respect to these matters was $1.6 million. Our comparable reserve as of December 31st, 2010 was $1.4 million. M/I Financial has not repurchased any loans this year.

Now, I'll turn the call back to Phil.

Thanks, Paul.

As far as our balance sheet, we continually focus on our capital structure, cash and liquidity and we ended the quarter with $127 million of cash, which includes $47 million of restricted cash. Our operating cash flow for the quarter well services $3 million and included land and land development spending of $27 million.

We entered the quarter with $289 million of equity and net debt to cap of 33%. Lots owned and controlled as of March 31 totaled 10,100 lots, 76% of which were owned and 24% under contract. We own 7,600 lots, of which 55% are in the Midwest, 19% are in the South, and 26% are in the Mid-Atlantic. A year ago, 61% of the owned lots were in the Midwest, 22% in the South, and 17% in the Mid-Atlantic. This is an indication of our new company acquisitions being weighted toward DC and the Carolinas. Total homebuilding inventory at March 31 was $443 million, about the same as a year ago.

Our unsold land investment at March 31st is $258 million, 7,600 lots, compared to $232 million or 7,300 lots a year ago. Compared to a year ago, raw land and land under development decreased 4% and finished unsold lots increased 30%. At March 31st we had $123 million of raw land and land under development, and $135 million of finished, unsold lots.

Our unsold finished lots total 3,000 with an average cost of $45,000 per lot. And this $45,000 average lot is 18% of our $252,000 backlog average sale price. And the market breakdown of our 285 -- excuse me, $258 million of unsold land is $117 million in the Midwest, $36 million in the South, and $105 million in the Mid-Atlantic.

During 2011 first quarter we spent $19 million on land and $8 million on land development. About 44% of our land purchases were in the Midwest, 37% were in the South, and 19% in the Mid-Atlantic. And as to the type of our 2011 land purchases, about 70% have been bulk finished lot purchases, about 15% have been raw land deals, and about 15% have been finished lot pickups under option contracts.

We currently estimate that our 2011 land purchase and land development spending will be slightly higher than last year's $153 million total, with about 70% being spent on land and 30% on land development. And obviously, market conditions will impact our spending.

At the end of the quarter we had a $55 million investment in specs, 227 that were completed, and 214 specs in various stages of construction. This translates into about four specs per community. And of the 441 total specs, 202 are in the Midwest, 121 are in the Southern region, and 118 are in the Mid-Atlantic.

At March 31st, 2010 we had 448 specs with an investment of $48 million. And at December 31st, 2010, we had 561 specs with an investment of $74 million.

At March 31st the Company had no borrowings under its $140 million credit facility. Our borrowing availability under this facility is currently $23 million based on the value of current pledged properties, and this availability can be increased.

During the quarter we extended and increased our secure letter of credit facilities. Our total availability is now $58 million. Total cash pledged to secure LCs under those facilities was $37 million.

This completes our presentation. We'll now open the call for any questions or comments.

(Operator instructions.) Ivy Zelman, Zelman & Associates.

Hey, guys. Good afternoon. Your disclosure was very helpful with all the detail. And with respect to your recent entry into San Antonio and capitalizing on an opportunity there, when you talk about your land spend and the 70% would be on finished lots and 30% on development -- or maybe you didn't say finished lot, you just said it would be on land and 30% would be on development. Does that incorporate potential incremental opportunities to acquire other builders, or is that sort of separate from your thought process on land spend?

Ivy, how you doing?

Good, thanks.

I'll try to answer that. First of all, the 70% number that Phil articulated reflected the fact that, of that which we have purchased recently, 70% were finished lot deals, primarily bulk as opposed to takedown. And the -- I think 15% were raw deals or --

The 15% were pickups.

Were pickups in the first quarter.

Now, going forward, we'd like to think that that formula will be pretty close to the same. I mean, our first preference is to buy finished lots pursuant to a takedown, if possible. Our second preference is to buy them in bulk, if that's not possible. And if it's a really superb location and the returns merit the investment, we'll look at a raw deal. But, all guided by the fact that we're trying to secure the best possible locations we can.

And as far as the land spend estimate for the year, Ivy, being slightly above last year, we have incorporated in there what we think we need to do for our San Antonio acquisition, and also to grow Huston, etc. But, we have not incorporated anything else in there as far as any other new markets.

And would you consider other new markets? I mean, obviously, if something were to sort of be in an area that you're already in or potentially a new market altogether, just differentiate between the two, please.

I mean, the short answer is, yes. It's about when and how. We're just getting started in Huston. We've got an established builder that allows us to start a little quicker in San Antonio. We want to have a meaningful presence in Texas on a go-forward basis. The likelihood is, is that at some point in the future we'll open up in at least another market in Texas. And there's other places we're looking. And beyond that, I probably shouldn't say much more.

Okay. No, that's helpful. And then, just more specifically, I was appreciative of your B-minus grade, Bob. I don't think anyone's articulated it that way in terms of your assessment of the spring selling season.

Can you differentiate for us a little bit within your markets, what you're seeing from price points? We hear a lot about first-time buyer really struggling. I know you guys are a little bit more of a first-time move up, a move-up builder, but can you differentiate a little bit? And then, you mentioned Ohio and Florida are your still weakest markets. Is that reflective of absolute sales, percentage change, just momentum, what you're seeing with respect to sales and traffic, etc.?

Well, first of all, I gave it a B-minus because I got a lot of those when I was in school and I think it made me feel good about myself. But, I think the spring selling season has been -- I don't think it's been weak. I don't even think it's been average. I think it's been slightly above average. So, whatever grade someone -- and market-to-market we've had very strong sales in Raleigh. Our sales in Chicago have picked up considerably. I think we're taking market share in both communities and I -- both cities -- and I think it's a consequence of well located or of well-purchased communities.

I would echo the sentiments that we've heard from a lot of the other builders concerning the first-time homebuyer. It's generally represented anywhere from 20% to 40% of our business, depending upon the point and time when you measure it. We're not heavily tilted towards it, but we're also -- it's also not a small part of our business. And that has been the toughest. A lot of those houses you've had to sell more than once, even before you could start them because of buyer inability to qualify.

The other part of the question, I'm not sure if I --

Ohio and Florida you mentioned were the weakest areas still. If you think about it from an absolute perspective, is it -- from a percentage basis, is it a little bit different in terms of any pickup and momentum off a very low base, or is there no traction in terms of traffic and sales activity?

I mean, we're optimists, or at least I think I am. And I think things are very slowly, almost imperceptibly at times, starting to get a little bit better, and -- at least for us. Sometimes, two steps forward and a step and half back, or a step forward and two steps back. So, there's a lot of fits and starts, but -- even in Ohio.

And in Florida, I think we're starting to see a very, very slow, choppy kind of uptick. I think that if -- you're either getting better or you're getting worse. I think things at least are getting slightly better. It may only be 51/49, but I think they are getting -- starting to get slightly better.

Hard to get much worse.

Yes. Well, I don't know. I mean, I think they were worse some time ago. But, so --

Do you have any -- last question and I'll let someone else ask. Just in terms of feedback from those that are making the purchases, were they renters, were they selling a house and now they finally capitulated on price? Any way to bucket the people that are closing on homes and buying today?

One thing, Ivy, we've been a little bit surprised by in terms of our newer communities, where oftentimes the average sale price might be 225 or 250, we're getting more first-time buyers there that can qualify pretty strongly and buy from us. That surprised us a little bit.

I mean, I sure echo Bob's comments. The lower part of the entry level up to the mid-part of the entry level, those people continue to be pretty credit challenged. And it's almost impossible to find a home for lower, difficult credit scores. But, we do think things are getting a little better out there, but it still kind of comes down to giving people a reason to buy, having a really good location with a really good product, but demand is still very choppy.

But, you can't say, for instance, is it a renter versus an existing homeowner that sells a house, but you -- in terms of bucketing it?

Paul Rosen will try to answer that one.

I don't know that we've seen any substantial difference. I mean, the market is basically made up almost by -- and it depends by subdivisions, but you have people who have problems, who haven't been able to sell them, but qualify with both (inaudible) people who just sold their homes and want to move quickly into a new home, and you have the first-time buyer. And by subdivision, those numbers change by 5% or 10%, but that is -- they're roughly a third when you put everything together.

Great. Thanks, guys. Appreciate it.

Thank you, Ivy.

Alex Barron, Housing Research Center.

Thank you. Hi, guys. How you doing?

We're doing good, Alex.

Thanks for taking my question. I wanted to ask you if you could provide a little bit more color regarding the impairments, like what drove them and how many -- if I missed it, how many communities were involved?

Hey, Alex, glad to. The impairments were about half in Ohio and about a half in Florida, and they tended to be in older communities, many of which had been impaired before. As Bob mentioned, you're constantly reviewing your communities. You're looking at what the price points are in the market, what the price points need to be to move through products. We obviously look hard at products and sales reps and everything else. But, we make certain decisions based on all of that, including the market, that sometimes you do need to adjust prices to try to work through some of these older assets to get your cash out of them, etc. But again, they were primarily in the Ohio and Florida areas and older communities.

Got it. My second question has to do with your gross margins. I take it that part of the sequential decline was due to perhaps more competition during the winter and the early part of the spring. And I'm just kind of wondering, as you look forward, what's your best guess is going to happen to margins? Are they going to remain at these levels or are they going to go up because of your new communities that are coming online? Or do you still see more pressure on margins because of what the competition is doing?

Yes, that's of course a good question. If you look again at the margins, overall the margins were 16.3% in the first quarter. They were 16.1% in the fourth quarter of last year. So, sequentially they were up. We also disclosed that about 45% of our deliveries in the first quarter were from new communities versus 40% of our deliveries in new communities in the fourth quarter. I mean, we're not going to make any projections about gross profit. That's just so hard to do in today's environment. We are continuing to work very hard on our sticks and bricks; however, with oil and gas and some other cost pressures, its' difficult to get significant cost reductions.

And our new communities -- our new communities are pretty much performing like we thought they would. But again, some of our older communities are a little more difficult. But, we felt our margins were okay. We continue to work very hard on them. But really, can't give any projections as far as what they're going to be.

Okay. I'm sorry, I missed the number. Did you say 40% in the fourth quarter? And what was the percent in the first quarter this year?

No, it's 45% of the deliveries from communities in the first quarter of this year and 40% in the fourth quarter of last year.

Okay, got it. Okay. Thank you very much.

(Operator instructions.) Jay McCanless with

Hey, good afternoon. Just wanted to get --

Hi, Jay.

A little more breakdown on -- hey, how are you all today?

Good, thanks.

Good. I just want to get a little more breakdown on the Midwest. I know you said Chicago was up sharply year over year, but Indianapolis versus Columbus and Cincinnati. Could you give me a little more color on those?

Well, as Bob said, when you look at our sales in that region, Chicago has continued to produce improvement. We have gotten a few more communities open there. We had kind of expected, for different reasons, our business to be down somewhat in Columbus, Cinci and Indi. I mean, the general economic data is not real great. We've continued to try to reduce investment in Columbus.

And if I could just interrupt, Phil, for a second, we made a management change in the Cincinnati market within the last couple of months, and we did so because obviously it was needed. And I think that the conditions that precipitated us making that change perhaps are reflected in maybe a slightly higher decline in sales than we might otherwise have seen, because we just had some issues operationally that we needed to get straightened out.

But again, as we've talked about, Jay, we're continuing to invest more money in the Carolinas, in DC. We obviously like Texas. Florida's being a little slow to turn. And the Midwest just did not have real great economic data, so we're just being real careful where we invest our money.

Okay, great. Thank you. That's all I have.

Thanks.

There are no further questions.

Thank you very much for joining us. We look forward to talking to you at the middle of the year.

This concludes today's conference call. You may now disconnect.