M/I Homes Inc (MHO) 2012 Q4 法說會逐字稿

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the M-I Homes year-end 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. (Operator Instructions) Thank you. I would now like to turn the conference over to Phil Creek. Please go ahead, sir.

Thank you very much. Joining me on the call today is Bob Schottenstein, our CEO and President; Tom Mason, our Executive Vice President; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, our VP, Corporate Controller; and Kevin Hake Senior VP. 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 now turn the call over to Bob.

Thanks, Phil. Good afternoon, everyone, and thank you for joining our call to review our fourth quarter and full-year results. We're very pleased with our fourth quarter and full-year results, highlighted by a $47 million bottom-line improvement over last year and a return to full-year profitability. In achieving these results, we made significant progress on a number of fronts. Pre-tax income from operations for the fourth quarter was $7 million compared with $1.4 million in last year's fourth quarter. In addition, it's worth noting that we made $18 million from operations during the first nine months -- or during the last, rather, nine months of 2012.

Our fourth quarter new contracts increased 33%, with about a 9% increase in community count and we ended the year with 965 homes in backlog, nearly 300 units more than a year ago. Value of our backlog was up 56%, representing our highest year-end backlog, both in units and dollar value since 2006. The year-over-year improvement in our profitability resulted from a 21% increase in closings, a 9% increase in our average selling price and a 200 basis point increase in adjusted gross margins, with 2012 margins reaching 19.5%.

We delivered 887 homes in the fourth quarter, 33% more than a year ago and 2,765 homes for the full year, resulting in $762 million of total revenue for the year which is an increase in revenue of 35% over 2011. The material improvement in our gross margins was the result of the continued solid performance of our new communities along with the strategic shift in our geographic footprint which resulted in more closings in our better-performing markets. Additionally, our mortgage and title operations also contributed significantly to our profitability in 2012 and Paul Rosen will speak more about that in a few minutes.

With macro housing conditions continuing to show noticeable signs of improvement, we were very excited about the future. We have a solid position in each of our markets and we expect to continue to expand our community count and grow our aggregate market share in our existing markets, all the while remaining focused on continued improvement in profitability. More specifically, we estimate that in 2013, our Company-wide community count will increase by 25%.

We have materially strengthened our land position, particularly in Raleigh, Charlotte, Tampa, and Orlando, and expect strong results in these markets in 2013 and beyond. We will also continue the successful expansion of our footprint in Texas. As many of you will recall, we first opened in Houston, Texas 2.5 years ago. We first opened in San Antonio, Texas approximately 1.5 years ago and we announced our entry into the Austin market during the third quarter of 2012, expecting to open our first communities in Austin later this year.

Whenever you open in a new division, your investment levels typically proceed sometimes by a significant amount your revenues. And in the years that lie before us, we expect meaningful growth in Texas that will further strengthen our operating leverage and improve our profitability.

Let me just say a few more words about our specific regions before I turn this call back over to Phil. First, the Midwest region. We delivered 318 homes in the Midwest during the fourth quarter, 1,113 homes for the year, which represents 40% of our business. It's important to note that the ratio of closings in the Midwest has declined from 53% of total deliveries in 2009 to now 40%. This is all pursuant to an intentional strategic shift in our geographic footprint.

Our deliveries in the Midwest for the fourth quarter increased 27% compared with last year. New contracts in the Midwest for the quarter were up 18%. Sales backlog was up 13% in the Midwest from the start of the year in dollar value and we increased our controlled lot position in the Midwest by more than 300 lots or about 7% from a year ago. We ended the quarter with 61 of our active communities in the Midwest, which is a slight increase, 3% to be exact, from the end of last year.

Despite overall improvements, the Midwest markets do vary a bit in their condition. Though Chicago has difficult macro conditions, it continues to be one of our absolute best-performing markets and I'm happy to report that conditions have improved and so has our performance in both Indianapolis and Columbus.

The Southern region, we delivered 280 homes in the Southern region for the fourth quarter, which is a 59% increase from last year and represents -- and we delivered 823 homes in the Southern region for the full year. New contracts increased 66% for the quarter. Sales backlog at year-end was 140% higher than it was at the start of the year although as I've noted, we're really just getting started in some of our Texas markets and we're coming off of a low base. Our Southern region is comprised of Florida and Texas, and our Texas expansion will continue to help fuel our growth.

We have seen significant improvement in our Florida markets as I noted a few moments ago, achieving solid results in both Orlando and Tampa. We increased our controlled lot position in the Southern region by nearly 1,500 lots or about 61% more from a year ago. And we have 37 communities in the Southern region at year-end, which is a 32% increase from the prior year.

In the mid-Atlantic region, our new contracts were up 20% for the quarter compared with 2011. Backlog value was up 80% at year-end from the start of the year. We delivered 289 homes in the fourth quarter, a 20% increase from last year and 829 homes in the mid-Atlantic region for the year. Our North Carolina markets, both Charlotte and Raleigh, continue to perform very well for us. Charlotte experienced improved margins and a very strong increase in sales in 2012, and joined with Raleigh as one of the top markets within our Company. Washington D.C. continues to be a healthy market. We've experienced improved sales there over the past few months after a slight tightening of demand there during the middle part of last year.

And with that, I'll turn things over to Phil to more thoroughly review our financial results.

Thanks, Bob. New contracts for the fourth quarter increased 33% to 673, with the net absorption rate of 2.0 sales per community per month. Our traffic for the quarter increased 20%. Our sales were up 5% in October and traffic was up 21%; sales were up 55% in November and traffic was up 12%; and our sales were up 59% in December and traffic was up 31%. Our active communities increased 7% from 122 last year to 131 this year. The breakdown by region is 61 in the Midwest, 37 in the South and 33 in the mid-Atlantic.

During the quarter, we opened 12 new communities, while closing nine; and for the year, we opened a total of 46 new communities and closed 37. And at December 31, 77% of the communities that we are selling out of are new and we define new as those opened since January of 2009.

Our current plans for 2013 are to increase our community count by about 25% by year-end, opening more than 65 new communities. We project that our Southern region, led by our Texas growth in all three markets, will add the most new communities in 2013. We delivered 887 homes in the fourth quarter, up 33% when compared to last year's 667 deliveries and we delivered 75% of our backlog this quarter compared to 80% a year ago.

Revenue increased 42% in the fourth quarter and increased 35% for the year compared to the same periods in 2011. Our average closing price for the fourth quarter was $273,000, up from $257,000 for last year's fourth quarter. And for the year, average closing price was $264,000 versus $242,000 in 2011.

In the fourth quarter, we recorded pre-tax charges of $1.6 million for impairments. Our 2012 charges were primarily for legacy land assets in the Midwest. Our gross margin, exclusive of impairments, was 19.6% for the quarter, up 120 basis points year-over-year; and for the full year, we were very pleased that our gross margins improved 200 basis points to 19.5%. We are dealing with construction cost increases led by lumber and drywall, and we continue to focus on improving our gross margin percentage and dollars, and we are pleased that our average sale price and backlog continues to increase and is now $26,000 higher than a year ago. Land gross profit was $240,000 in 2012's fourth quarter compared to zero in last year's fourth quarter and for the year, land gross profit was $1.7 million compared to $100,000 last year.

Our fourth quarter SG&A expenses were 15.2% versus 15.9% a year ago. Our fourth quarter G&A expenses increased $5.7 million compared to a year ago, with about half of that increase due to our growth in Texas and in variable incentive compensation, and the increase in variable incentive compensation was due to our significantly improved results. And for the year, our SG&A expense ratio improved almost 200 basis points and we expect additional expense leverage in 2013.

Interest expense decreased to $116,000 for the quarter and increased $1.1 million for the 12 months of 2012 when compared to last year. Interest incurred was $6.1 million in the fourth quarter of this year compared to last year's fourth quarter of $5.7 million. The increase to interest expense for the year is primarily the result of higher average borrowings outstanding, which is offset by a lower average borrowing rate and higher capitalization. We had $7 million of pre-tax income from operations for the fourth quarter and had $18 million of operating income during the last nine months of 2012.

We generated $18 million of EBITDA for the quarter and covered interest 2.4 times for the year and had $56 million of EBITDA for the year. We had $15 million in capitalized interest on our balance sheet compared to $19 million a year ago, which is about 2% of our total assets. We reported a non-cash after-tax benefit of $1.4 million in the fourth quarter for a valuation allowance related to our deferred tax assets. And in December 31, 2012, our gross deferred tax asset is $136 million and is fully reserved. Based on discussions with our auditors, we currently estimate that we will be able to reverse our deferred tax asset valuation by the end of 2014.

Now, I'll turn it over to Paul Rosen to address Mortgage Company results.

Thanks, Phil. Our mortgage and title operations pre-tax income increased from $2.1 million in 2011's fourth quarter to $3.5 million in the same period of 2012. Our fourth quarter results included increased income attributable to an increase in loans originated from 547 to 691. Additionally, higher average loans amounts, retained servicing rights, higher margins on the loans sold and an increase in our refinance business. We continued to see a shift towards conventional financing. The loan-to-value ratio on our first mortgages for the fourth quarter was 86% in 2012, the same as 2011's fourth quarter. 61% of the loans closed were conventional and 39% were FHA VA. This compares to 55% and 45%, respectively, for 2011 same period.

Overall, our average mortgage amount was $240,000 in 2012's fourth quarter compared to $218,000 in 2011's fourth quarter. The average borrower credit score on mortgages originated by M/I Financial was 739 in the fourth quarter of 2012, compared to 731 in 2012's third quarter. These scores compared to 737 for the fourth quarter of 2011 and 734 for the third quarter of 2011.

Our mortgage operation captured 83% of our business in the fourth quarter, the same as 2011. During the fourth quarter, we've closed on an additional mortgage warehouse facility. The new facility allows for an additional $15 million in borrowing availability and expires November 12, 2013. At December 31, 2012, we had $7 million outstanding under the $15 million credit facility and $61 million outstanding under the existing $70 million MIF credit agreement.

In the normal course of business, we received inquiries concerning underwriting matters on specific loans that have been purchased from us. We thoroughly review and respond to each inquiry, you can know -- and even though we are not required to do so, we routinely engage in independent third-party to review the files and information related to the origination of each mortgage. Our reserve at December 31, 2012, with respect to these matters was $2.3 million and was $2.2 million at September 30, 2012. M/I Financial has not repurchased any loans this year.

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

Thanks, Paul. As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing carefully in new communities and also managing our capital structure. Total homebuilding inventory at 12/31/12 was $557 million, an increase of $90 million above prior-year levels, primarily due to higher investment in our backlog.

Our unsold land investment at year-end was $256 million, a 5% increase compared to a year ago; and compared to a year ago, raw land and land under development increased 36% and finished unsold lots decreased 12%. At December 31, we had $119 million of raw land and land under development, and $137 million of finished unsold lots. Our unsold finished lots totaled 2,725 lots with an average cost of $50,000 per lot. And this $50,000 average lot cost is 17% of our $293,000 backlog average sale price. The market breakdown of our $256 million of unsold land is $94 million in the Midwest, $65 million in the South, and $97 million in the mid-Atlantic.

Lots owned and controlled at year-end totaled 14,200 lots, 52% of which were owned and 48% under contract. We owned 7,400 lots, of which 46% are in the Midwest, 29% in the South and 25% in the mid-Atlantic, and our owned and controlled lots of 14,000 is an increase of 37% versus a year ago. We believe we have a very good, solid land position. 35% of our own controlled lots are in the Midwest, 35% of our land is in our Southern region and 30% is in the mid-Atlantic. A year ago, 45% of our land was in the Midwest.

In 2012, we spent $134 million on land and $56 million on land development for a total of $190 million. About 16% of our land purchases were in the Midwest, 45% in the South and 39% in the mid-Atlantic. And as to the type of our 2012 land purchases, about 60% were raw land deals, 20% were finished lot pickups, and 20% have been bulk finished lot purchases. Our estimate today for 2013 land purchase and development spending is $250 million to $300 million; and at the end of the year, we had [$90 million] invested in specs, 266 that were completed and 383 specs under construction. This translates into about 5 specs per community. And of the 649 total specs, 264 are in the Midwest, 201 are in the Southern region and 184 is in the mid-Atlantic. At December 31, 2011, we had 573 specs with an investment of $85 million.

We have continued to focus on managing our leverage and liquidity. During the third quarter, we enhanced our capital structure by issuing $58 million of convertible senior subordinated notes due 2017 and 2.4 million common shares which yielded net proceeds of $97 million. As a result of our equity issuance in the third quarter and our profits over the past three quarters, our restricted payments basket under the indenture governing our 2018 senior notes is now a positive $39 million. Thus, the payment of dividends is again being discussed at our quarterly Board meetings, including our upcoming Board meeting in this February. The determination as to whether to pay dividends will be based on a number of factors, including our financial results, financial condition, and market and economic conditions.

Our financial condition continues to be strong, with $154 million of cash at year-end and at year-end, the Company had no borrowings under our $140 million credit facility. This completes our presentation. We'll now open the call for any questions or comments.

(Operator Instructions) Alan Ratner, Zelman & Associates.

Good afternoon, guys. Thanks as always for the great disclosures. Bob, my first question just relates to the gross margin. Your margins have flatlined a little bit over the past few quarters, albeit at a kind of normalized level, but when you think about what other builders are saying in terms of their ability to more than offset the cost inflation through price increases, my question is based on your geographic footprint, which is generally seeing less price -- pricing power that out West and the builders that are experiencing some pretty significant increases there. Yet, at the same time, you're competing against them for materials and appliances and on all various inputs that are seeing some significant inflation. So, I wonder if -- should we be a little bit more tepid as far as our margin outlook for you given the fact that your costs are going up; yet, maybe you're not -- you don't have the same ability to push those prices on to the consumer.

Good question. Our view is as follows. We feel very good about our margins for 2012. We feel good about the 200 basis point increase. The increase has been, as we've noted repeatedly, primarily fueled by closings -- increasing closings from new communities. Clearly, we've seen -- and it's not this way in every market but in an increasing number of markets and sub-markets that we're in, we have seen pricing power as well. I'm not going to be profess to be an expert on the conditions out in the Far West other than what you read suggests that there's been some more significant pricing power in some of those areas as you've noted.

As it relates to us going forward, we are going to be continuing to open new communities, close to a 25% increase in the upcoming year; all of those new communities are underwritten with an expectation of the same minimum returns that we've always sought and we're going to expect them to perform at that level. We believe we can manage the cost increases. We do not believe we are in any disadvantage when it comes to that. We've been able to manage it thus far and I don't know what more I can say about it than that, because we're not providing any guidance in terms of forward margins for the year other than to say that we believe we can manage the situation and I'm not going to say we're not concerned about it, but I do think it's one -- a condition that we can and will manage.

Good. I appreciate that and if I could add a follow in just on the Texas operations, I think Phil gave a number, I might have missed it, but in terms of the overhead this quarter, or if I want to about it for the year, can you give us just a rough number in terms of costs that were associated with the Texas or expanding into your Texas markets and ultimately, kind of what would you expect the leverage of that going forward or how long it might take to see a return on investment?

Just before Phil jumps in on that, I'm not sure how clear I was in my remarks, but we've got 12 divisions and for all intents and purposes, three of them are less than 2.5 years old, and whenever you start up, there's as much as you like expenses to follow revenues, opening up a new division is -- tends to be the opposite where investment proceeds revenues and proceeds returns, and we're expecting a very significant growth in those markets over the coming years, which will give us we believe a noticeable operating leverage. I don't know, Phil, do you want to add anything?

I guess just to be explicit, then, and I appreciate that. So if I think about the $20 million of corporate G&A, can you give us a dollar amount that's associated with those three divisions?

No, I can't really break that kind of detail down, but we've talked about how it was if you look at it, our SG&A expenses for the year were in the 15.5% range in 2011. They were almost 200 basis points higher than they are. What we stated in our remarks was, we do think and plan on getting additional expense leverage in 2013. Bob talked about that we've -- haven't been in Texas early two years or so, or in Houston rather, and San Antonio has been less than that, we're just getting started in Austin. So we're not bringing a whole lot in compared to what we're going to from the revenue line. So again, we expect to get leverage on those expenses.

Incentive compensation was lumpy in the fourth quarter and also a little bit in the third quarter, we were very, very incented not only a little bit on customer service like always, but predominantly on getting back to profitability and significantly improving our results, and Bob talked about the magnitude of that result. That incentive compensation was accrued primarily as we made money and having made the majority of the money in the last few months of the year. That's why that was lumpy in there, but again, it's our view that we will get expense leverage in 2013 working very hard on that.

Thanks a lot.

(Operator Instructions) Alex Barron, Housing Research Center.

Yes, thanks, guys. I wanted to see if you could elaborate a little bit more still on the SG&A. I understand that one component I guess is -- tends to be more variable with volume or with sales, and the other I guess is more corporate related. So on the corporate side, can you give us some sort of run rate? I mean this year was as you stated was kind of lumpy in the fourth quarter and so I'm just trying to see there is some sort of a dollar run rate or something you can give us to get a sense of where 2013 might come in.

No, Alex, that's as far as expense-type projections, other than what we've already given you, that we expect additional leverage. Again, when you look at corporate, there's various things in corporate, as far as systems and HR and department expenses and those type of things. Again, incentive compensation varies based primarily on income. And again, it was a situation where we lost about $4 million the first quarter of this year. So obviously, there was very, very little variable incentive compensation in there, that we made like [$3 million] or so the third quarter. So again, it was just really lumpy toward the end of the year.

I think if you look at our results over the year, we had pretty good returns, [et cetera] in the past, and again, we expect to get some leverage there. It takes awhile, especially for some of these startups in Texas and so forth to roll in as far as revenue and profits. But again, no other projections than we've already given that we do expect additional leverage.

Okay. What about on the margin side? Obviously, you guys did pretty well in the last couple of quarters. Is that -- do you think that 19.6% sort of a sustainable rate?

Bob made that comment about how we are working very, very hard on margins. I also made the comment that we're working not only on margin percentage but margin dollars. I mean, if you look at the average sale price and backlog, it's gone up like the last seven quarters from $252,000 to $290,000. So hopefully, that's going to help margin dollars. Also, we are seeing today more options being selected that margins are in general higher on those.

I think it's safe to say our margins kind of moved up a little faster this year than we thought. We're very happy with that. But also opening 65 or so new communities this year. Hopefully, that would help our margins. So everybody is fighting cost pressures. We're dealing with that as best we can, trying to make sure we're taking advantage of the pricing power we have. So again, working very hard on improving margins. We were able to move them up 200 basis points this past year and we'll continue to work on that, but not any firm projections or anything.

Okay. And on the DTA, you mentioned that you're going to get it definitely by 2014, but I would have thought by my math that your pre-tax income on a cumulative three-year basis, you'd be past the profitability point sometime in the middle of 2013. So why until 2014? What else are they looking for?

That's a conservative estimate.

I assure you, Alex, we are focused on this.

(multiple speakers) as soon as we can get it, but --

And we have conversations every quarter in detail with our auditors.

It's very difficult to pin them down.

We'll be reversing that as soon as we can, but we did want to get something in the marketplace and that's why we said, we currently estimate that we'll be able to reverse it by the end of 2014. If there is any way to get things in sooner, we'll do that, but again, we continue to look at that. That's a very big number to us.

Right. So are they giving you any like specific metrics to aim at or is it just kind of intangible?

Well, we've only had two real big quarters of profitability and in our cycle of 16 quarters. So we have to look at 16 quarters and we have to have projections. So that's where we are.

[Close], okay. I mean obviously, the projection looks good, but I didn't know it was 16, I thought it was just 12.

But we have to have -- we can do huge projections, but they carry less weight because we haven't had it -- we've only had two quarters of real profitability. So they're not putting -- actually on a net income basis just two.

Got it. Okay, I'll get back on the queue. Thanks.

(multiple speakers) year-to-date, three quarters.

Yes.

I'm sorry, three quarters.

Yes, again, if you look at it, as far as the net income, we reported $3 million of net income the second, $8 million the third, $5 million the fourth, again. So it has been three in a row and hopeful we'll continue that and again, we'll keep our eye very much on this asset, recognizing that it's very sizable to us, we understand that.

Right.

We watch very carefully what other builders have done, when they are able to reverse it. A lot of us use the same auditors. So we're on top of that.

Excellent, thanks.

(Operator Instructions) Alex Barron, Housing Research Center.

[Seems] I'm the only one here. All right. On the land side, I saw the numbers that you guys posted for owned lots and option lots and I guess there is a very significant jump, especially in the -- I guess it's a southern market. Can you kind of give us a sense for are those finished lots, are those communities that are ready to start pretty soon, like how many communities are involved and the size of those communities?

Alex, the biggest impact of course is Texas where again, we're really enrolling and the lots are mixed. I mean, there are some raw, there are some developed, et cetera. That's the biggest jump in the under-contract number that you are talking about.

And what about the one that -- the owned, that also jumped from like 1,450 to 2,160? Was that -- are those comparable community sizes between one quarter to the next or --?

I'm not sure exactly what number you're talking about specifically. Again, when you look at where we were at 12/31/12, we owned 7,400.

Yes.

A year ago, we owned 7,200 each time on Southern.

Yes, I'm (multiple speakers).

(multiple speakers) are you just focused on the Southern?

Yes, yes, yes.

Well, again, it's primarily Texas, but we also have had an increase in Orlando and Tampa. Bob talked about those markets have improved. We have a leadership position there. So it's pretty much across all five of our operations there, Tampa, Orlando, Houston, Austin and San Antonio.

Okay. And are you guys still kind of looking to enter other markets? And if so, would it be more on an acquisition basis or a greenfield?

At this point, there's no present plans to enter any new markets. But we're always looking where we think it might make sense and beyond that, there's really no comment.

It just depends on what option we were to find, Alex. I mean the key is to find a really, really good operator. Sometimes, those operators have businesses, sometimes they don't, et cetera, but again we're open to different opportunities.

Right. And I know you just obviously came to the market. Most of other builders have been coming it seems more often and ramping up their land spend. Is that something you think might be a possibility again in 2013?

So this is Kevin, you're talking about coming to market for raising debt or --

Right, yes.

We are always looking. You're right, we just did a convertible and equity issuance in September. We do a lot of time and effort on planning the left side of our balance sheet and looking at our projections for spending and how many communities we're going to opening in each of our markets and we're always considering whether we have the capital in place that we need [for lease] the next 12 months and we're always looking at that. Right now, nothing planned, but we're always looking at it.

Okay, and got it, thanks.

Thank you.

(Operator Instructions) There are no additional questions at this time.

Thank you very much for joining us, look forward to talking to you the end of first quarter.

Thank you. This concludes today's conference. You may now disconnect.