M/I Homes Inc (MHO) 2013 Q2 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 second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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. Thank you for joining us today. On the call is Bob Schottenstein, our CEO and President, Tom Mason, EVP, Paul Rosen, President of our Mortgage Company, Ann Marie Hunker, our VP Corporate Controller, and Kevin Hake, Senior VP.

First, 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 turn the call over to Bob.

Thanks, Phil. Good afternoon and thank you for joining our call today. The second quarter was a strong quarter for M/I Homes, as we continued to make solid progress on many fronts. As stated in our release, we are very pleased with our improving results led by revenue growth, margin expansion, improved profitability, and strong sales.

For the quarter, we earned $7.3 million, a 128% increase, which is more than doubling the $3.2 million we earned in last year's second quarter. For the first six months, we had net income of $11.9 million, significantly greater than last year, and our net income for the first half of this year exceeds the amount we earned for all of last year. We remain very pleased with our sales performance. New contracts for the quarter increased 31% over last year and for the first six months, we have now sold 2,125 homes, a 34% increase over 2012. Our average sales price of homes in backlog increased to $293,000, up from $274,000 a year ago.

The net result of our improved sales and increase in average sales price is a June 30 backlog of 1,675 homes, 43% more than a year ago, with an aggregate sales value of $491 million, 53% great than a year ago.

We continue to be pleased with our new communities and our community openings. Our community count at quarter's end was 13% greater than a year ago. During the first half of 2013, we successfully opened 30 new communities and are on track to open approximately 40 more new communities during the second half of the year, thereby resulting in an approximate 25% increase in communities by year-end. And we project that are Southern region, led by our growth in Texas, will be adding the most new communities.

Our balance sheet and liquidity remain strong, with a substantial cash balance of $179 million at the end of the quarter, no outstanding borrowings under our revolving credit facility, and a healthy ratio of net debt to cap of 42%, which keeps us in a very solid position for continued growth. Earlier this month, we entered into a new $200 million, three-year unsecured revolving credit facility with nine banks. In terms of land and lots, we have a very strong land position, controlling over 17,000 lots. Phil will detail this later in the call, but let me just say that 35% of our owned and controlled lots are located in our Midwest markets. That would be Columbus, Cincinnati, Indianapolis, and Chicago. 41% of our owned and controlled lots are in our Southern markets, Tampa, Orlando, Houston, San Antonio, and Austin. And the remaining 24% are located in our Mid-Atlantic markets, Charlotte, Raleigh, and Washington, DC.

Our gross margins and our SG&A ratio each improved by over 100 basis points when comparing the first half of 2013 with last year's first half. As we look ahead, we will continue to stay focused on further improving both our gross margins and our SG&A ratio. With respect to this latter point, our SG&A ratio, it's important to keep in mind that scale matters and that our continued growth in our newer Texas markets will likely provide additional operating leverage.

In terms of Texas, we have been pleased with our diversification into the Texas markets and believe we are making very good progress. During the third quarter, we will be opening for sale in our first Austin communities, and, as announced just yesterday, we are indeed excited to be initiating operations in the Dallas-Ft. Worth area.

Before reviewing our three operating regions, let me make a few comments about our operating strategy and current market conditions. First, with respect to our strategy. We believe we can continue to improve our profitability and grow both our top line and bottom line by growing our market share in nearly all of our markets. We have been successful doing this for the past several years. Today, we are a top five builder in seven of our 13 markets. Keep in mind that four of the 13 are in Texas, where we are either still relatively new, that would be Houston or San Antonio, literally just getting started, that would be Austin, or not yet even open, and that would be Dallas. We feel very good about our footprint, our position within the markets, and our ability to grow.

With respect to housing conditions and the macro economy, conditions in our markets remain healthy and we believe they will continue to improve. Recently, we have seen a slowdown in sales in large part, in our view, due to this summer season. Clearly, some slowdown is also attributed to the recent spike in interest rates. As a result of this, as Phil will discuss in more detail, our pace of sales during the quarter slowed. Frankly, we experienced strong year-over-year sales from January through May and then our June sales were up by a modest 3% over last year.

As I indicated, we continue to believe that housing demand is good and that our markets will continue to improve. However, at times we believe this improvement will perhaps be more moderate and even uneven. That said, we remain optimistic about our business and look forward to the rest of the year. And three weeks into July, our sales are improved over last year.

Now, let me review our markets. First, the Midwest, which consists of our Columbus, Cincinnati, Indianapolis, and Chicago divisions. Our deliveries in the Midwest increased 17% for the first quarter compared with last year, while our new contracts in the Midwest were up 32% for the quarter. Out of the 788 homes we delivered companywide during the first quarter, the Midwest accounted for 298 of the deliveries or 38% of the total. As we've mentioned in previous calls, this ratio has continued to decline intentionally, down from 53% of our deliveries in 2009, all due to our strategic expansion and shifting of our geographic footprint towards our Southern and Mid-Atlantic regions.

We ended the quarter with 65 active communities in the Midwest. This is a 23% increase from June of last year. It's very important, however, to note that the growth in Midwest community count is primarily coming out of our Chicago and Indianapolis markets, which are stronger performing operations for M/I Homes.

Next, our Southern region, which is our markets in Tampa, Orlando, Houston, San Antonio, Austin, and now Dallas. As noted earlier, our Texas expansion is clearly contributing to our growth and we have also seen significant improvement in both of our Florida markets during the past 12 months. We're achieving solid results in both Orlando and Tampa. We have been growing our positions in these markets.

We delivered 249 homes in the Southern region for the first quarter. This was 33% more than a year ago and about a third of our total volume. Our new contracts, or our sales, increased 40% for the quarter year-over-year, and our -- with the dollar value of our sales backlog at quarter end was double the backlog from a year earlier in the Southern region. We increased our controlled lot position in the Southern region by nearly 4,100 lots, or about 142% more than a year ago. We had 40 communities in this region at the end of the quarter, which is an 18% increase year-over-year.

Finally, the Mid-Atlantic region, which consists of our divisions in Charlotte, Raleigh, and DC. New contracts were up 19% for the second quarter compared with 2012 and backlog value was up 45% at the end of the quarter from a year earlier. We delivered 241 homes in the Mid-Atlantic region during the second quarter, which is 32% more than a year ago. Both of our North Carolina markets and our market in Washington, DC has been performing well. We continue to look for good land opportunities and look to continue to grow our positions in these markets. Our total controlled lots in the Mid-Atlantic region at the end of the quarter was up 36% year-over-year.

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

Thanks, Bob.

New contracts for the second quarter increased 31% to 1,078, with a net absorption rate of 2.6 sales per community, per month versus 2.2 a year ago. And our traffic for the quarter was up 12%. Our sales were up 53% in April, while traffic was down 1%. Our sales were up 36% in May and traffic was up 6%, and our sales were up 3% in June and traffic was up 35%. As to our buyer profile, 38% of our second quarter sales were to first time buyers compared to about 44% in the first quarter. And 45% of our second quarter sales were spec sales, about the same percentage as the first quarter.

Our active communities increased 13% from 124 at the end of June last year to 140 this year. The breakdown by region is 65 in the Midwest, 40 in the South, and 35 in the Mid-Atlantic. During the quarter, we opened 15 new communities while closing 10. Our current estimate is to end the year with about a 25% higher community count than we began this year, opening about 70 new communities this year.

We delivered 788 homes in 2013 second quarter, delivering 57% of our backlog this quarter compared to 67% a year ago. Our cycle times have increased slightly, due primarily to sub-supplier issues, and slower local permitting and approval processes. Our average closing price for the second quarter was $281,000 a 9% increase over last year's $259,000. Revenue increased 37% in the second quarter, resulting from the increase in deliveries and the average closing price, along with strong results from our financial services operation.

In the second quarter, we recorded pretax charges of $1.2 million for impairment. The second quarter charges were for older land assets in our Midwest markets. We continue to work through these older assets. We are currently down to about 10 older Midwest communities.

We continue to focus on improving our gross margins, and expect to be aided in the future by a smaller percentage of our closings coming from our lower margin Midwest operations. Land gross profit, exclusive of impairments, was $900,000 in 2013 second quarter and for the six months, profit was $2.6 million, exclusive of impairments. We sell land as part of our land management strategy and as we see profit opportunities.

SG&A expenses decreased to 14.7% of revenue for the quarter compared to 15.6% a year ago. SG&A expense increased 29% reflecting our volume increases, our improved profitability, and our growth. These growth initiatives include higher sales office costs due to a large number of new community openings, and we expect to continue to see efficiencies in our SG&A expense ratio.

Interest expense increased $936,000 for the quarter compared to last year and increased $670,000 for the first six months compared to last year. Pretax income from operations was $8.6 million, compared to $4 million a year ago, and operating pretax income was $14.1 million for the first half of '13. Last year's full year operating income was $13.5 million. We generated $19 million of EBITDA for the quarter and covered interest 2.9 times for the trailing four quarters. We have $14 million in capitalized interest on our balance sheet compared to $15 million at year end 2012. This is less than 2% of our total assets.

We reported a non-cash after-tax benefit of $2.7 million in the second quarter for a valuation allowance related to our deferred tax asset, and at June 30, 2013, our gross deferred tax asset is $131 million and is fully reserved. Given our current and projected results, and improving market conditions, we continue to review this with our auditors and believe that we will be able to reverse the majority of our valuation allowance on our deferred tax assets by the end of this year.

Now, Paul Rosen will address our mortgage company results.

Thank you, Phil.

Our mortgage and title operations pre-tax income increased to $3.8 million in 2013 second quarter from 2012's $1.9 million. Our second quarter results included increased income attributable to an increase in loans originated, higher average loan amounts, higher margins on the loans sold. We also benefited from increased revenue from our loan servicing portfolio.

The loan to value on our first mortgages for the second quarter was 87% in 2013, the same as 2012 second quarter. We continued to see a shift towards conventional financing. 65% of the loans closed were conventional while 35% where FHA BA. This compared to 52% and 48% respectively for 2012 same period.

Overall, our average mortgage amount increased 3% to $234,000 in 2013's second quarter, compared to $228,000 in 2012's second quarter. The average borrower credit score on mortgages originated by M/I Financial was 738 in the second quarter of 2013 compared to 734 in 2013's first quarter. Our mortgage operation captured approximately 77% of our business in the second quarter, compared to 2012's 84%.

At June 30, 2013, we had $41 million outstanding under the M/IF Credit Agreement, which expires March 28, 2014, and $9 million outstanding under a separate $50 million repo facility, which expires November 12, 2013.

In the normal course of business, we receive inquiries from investors concerning underwriting matters on specific mortgages purchased from us. We thoroughly review and respond to each inquiry, and in some situations we engage an independent third party to review the files and information related to the origination of the mortgages in question.

Our reserve at June 30, 2013, with respect to these matters, was $2.8 million compared to $2.3 million at December 31, 2012. M/I Financial has not repurchased any loans this year.

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

Thanks, Paul.

As far as the balance sheet, we continue to manage our balance sheet carefully, focusing on investing in new communities while also managing our capital structure. Total home building inventory at June 30, 2013 was $615 million, an increase of $93 million over prior year levels. The increase is due primarily to higher investment in our sold backlog.

Our unsold land investment at June 30, 2013 is $271 million, a 16% increase compared to $234 million a year ago. Compared to a year ago, raw land and land under development increased 49% and finished unsold lots decreased 11%. At June 30, we had $155 million of raw land and land under development, and $116 million of finished unsold lots. We own 2,400 unsold finished lots with an average cost of $48,000 per lot and this average lot cost is 17% of our $293,000 backlog average sale price. And the market breakdown of our $271 million of unsold land is $94 million in the Midwest, $101 million in the South, and $76 million in the Mid-Atlantic.

Lots owned and controlled as of June 30, 2013 totaled 17,200 lots, 51% of which were owned and 49% under contract. We own 8,700 lots, of which 39% are in the Midwest, 42% in the South, and 19% in the Mid-Atlantic. Our owned and controlled lots of 17,200 is an increase of 62% versus a year ago. We believe we have a very good, solid land position.

During 2013 second quarter, we spent $56 million on land and $21 million on land development for a total of $77 million. Year to date, we have spent $137 million on land purchases and land development. And as to our 2013 land purchases year to date, about 44% were raw land deals, 27% were finished lot pickups under option contracts, and 29% had been bulk finished lot purchases. Our estimate today for total 2013 land purchase and development spending is approximately $300 million to $350 million, including the $137 million we've spent year to date.

At the end of the quarter, we had an $86 million invested in specs, 168 specs that were completed, and 535 specs under construction. This translates into about 5 specs per community. And of the 703 total specs, 260 are in the Midwest, 234 are in the Southern region, and 209 are in the Mid-Atlantic. And at June 30, 2012, we had 578 specs with an investment of $68 million.

Our financial condition continues to be strong with $179 million of cash at quarter end, and at June 20, the Company had no borrowings under our credit facility. And as we announced last week, we closed on a three-year, $200 million unsecured revolving credit facility, which will provide us with additional financial flexibility as we move forward.

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

(Operator Instructions) Your first question comes from the line of Alan Ratner with Zelman and Associates.

Hey guys, good afternoon.

Hey, Alan.

Appreciate all the commentary, especially around the recent trends, which everybody is very focused on. Just as far as June is concerned, I went back and checked some notes here and it looks like you guys were up against a really difficult comparison in a year ago. I think your orders were up over 50% in June and that looks like it was the toughest comp in the quarter. And one of the things that struck me was that your traffic was still up 35% year-over-year in June.

So I was hoping that maybe you can comment a little bit more on that and whether the increased traffic and obviously the tough comps still gives you some confidence that the market remains on firm footing despite what we're hearing from some other builders regarding the slowing, obviously, from higher rates.

Well, Alan, great question and thanks for looking back. We appreciate it and I think that's an insightful point. That said, we stand by what we said in our remarks and it's that number one, this is the summer. Typically, we do see somewhat of a slowdown. To suggest that interest rates have had no impact is I think not accurate. To suggest that they've had a material impact is also not accurate. They've had some impact and certainly we have been raising prices, and we also knew we were on a tougher comp.

And as I said, we remain optimistic. We believe housing markets generally are very healthy, will continue to improve, perhaps in a slightly more moderate or uneven pace than we had seen January through May. And even though it's always very difficult to try to give guidance mid-month, and we're certainly not in that business, three weeks into July, as I said, our sales are improved over last year.

So we're excited about the business. We're forever cautious just because you have to be in this business, but we're a lot more optimistic than we are not and we look forward to the rest of this year. We feel as good about our footprint and our communities within our markets as we have for a long, long time. And we think that housing conditions generally are getting better.

Understood. I appreciate that. And I guess then just on the -- just on traffic you're continuing to see, or at least the increase, curious if you might have any anecdotes you could share from your field operators just because it sounds like the people are still coming out. So are the higher rates, are people saying that they're just going to sit on the sidelines and wait to see what happens for more clarity? Or do you feel like that traffic number maybe doesn't reflect the slowdown you're witnessing and maybe we shouldn't read too much into that?

We're going to all be forever watchful because it hasn't been that long since whatever it was that we experienced not that long ago. But we feel good about the business and we feel good about the rest of the year. And we think that there is good demand and that there is good traffic, and we may see little spikes up and down here and there, but we think that a longer view from quarter-to-quarter as opposed to month-to-month I think will be much more telling in terms of supporting the belief that housing -- that new home sales will continue to improve.

And another point, Alan, also -- this is Phil, when you look at the 15 communities that we opened in the second quarter, kind of the way it worked out is that the big majority of those were right at the end of the second quarter. We really did not get that many sales out of those new communities. So again, opening 15 in the first and 15 in the second, and then thinking we're going to open 40 plus the second half is very exciting to us. So we are excited about our outlook.

Great. Thanks a lot. Good luck.

Thank you.

(Operator Instructions) Your next question comes from the line of Alex Barron with the Housing Research,

Hey, guys. How you doing?

Good, Alex.

I guess I wanted to ask regarding your conversion rate. I had kind of expected you guys to show a lot more operating leveraging this quarter, but I think a lot of it had to do with maybe a bit of shortfall in closings. And as I'm looking at the conversion rate, I don't see any other quarter or anytime in the recent history where you've delivered such few homes relative out of your backlog. I was wondering if there was something there, why you think that slowed down a bit.

Well, Alex, I mean did we hope to close a few more? The answer is yes. We were in that 60% range about three or four years ago. Again, we hope to get that up. As we said in the call, in our comments, we have had our cycle time increase slightly. There's obviously been some issues in our industry, as you well know, with subs and suppliers, framers, those types of people. So we've had houses in certain situations not get through the system as fast as we would like.

Also, some of the local municipalities, which have their own economic staffing issues, getting approvals done, getting permits done, some of those thing have slowed us down a little bit. But again, we do feel good about where we are, the increased profitability, our margins, our average sale price. It's continuing to move up a little bit. Obviously, we hope to close a lot of houses the second half of this year with our backlog about 500 homes higher than it was a year ago. We think we are making some progress now in cycle time, but some of those things have impacted us.

Yes, I think a lot of the operating leverage will probably come in the second half. As far as the corporate SG&A, I guess that seems to continue to climb every quarter. Was there something to the increase this quarter that was headcount or what was that related to?

We've had some increases in our headcount due to our growth. We've also had some increase in incentive compensation due to our improved profitability and with already making more money than we made all of last year, that's been an impact. And again, just some cost of corporate marketing and corporate systems. When you add additional divisions and those type things that does generate some more people and cost. But no, nothing really unusual, just growing.

Thanks, guys.

(Operator Instructions) We have a follow-up question from Alex Barron with the Housing Research.

I figured somebody else would be there. I guess just to elaborate a little bit more on the recent trends in sales with regards to the interest rate. If these rates kind of stay here, they don't come back down or maybe they even climb higher, how do you guys -- how are you guys positioned? How are you thinking about it from either -- do you not raise prices anymore? Do you increase incentives? Do you just kind of wait and see what happens? I mean how are you guys thinking about it?

Well, we think about it all the time. I'm not sure that we could say anything more than what we've already said, Alex. I wish I could maybe say something different, but there's really nothing more to say other than in terms of where interest rates are and where they might go, we believe that for the foreseeable future that the markets remain healthy and that housing conditions are good, and are likely to remain so. And we're looking to have a strong year this year, and we're looking to continue to grow in our markets.

And by any historical standard, rates are outstanding today and we think that they will remain at very what I call affordable levels at least for the foreseeable future. But there's no way to know and we'll manage it as it comes. But in terms of what we believe and how we see the business, we're optimistic.

Thanks.

(Operator Instructions) At this time, there are no additional questions in the queue.

We appreciate you joining us. Look forward to talking to you next quarter.

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