M/I Homes Inc (MHO) 2015 Q1 法說會逐字稿

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

Thank you for joining us. Joining me on the call today is Bob Schottenstein, our CEO and President; Paul Rosen, President of our Mortgage Company; Ann Marie Hunker, 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, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the Company undertakes no obligation to update any forward-looking statements made during this call.

I'll now turn the call over to Bob.

Thank you, Phil. Good afternoon and thank you all for joining us to review our first quarter results. We were very pleased with our first quarter results highlighted by a 26% increase in pre-tax income, a 13% increase in new contracts, and a 16% increase in backlog sales value. Revenue for the quarter increased 12% to $263 million despite a slight 3% decline in homes delivered. Our quarterly pre-tax income improved to $15.7 million compared to $12.5 million last year. A number of factors contributed to our improved profitability. One, our average sale price of homes delivered increased 9% to $325,000 a home resulting in a 12% increase in revenue. Second, gross margins for the quarter were 21.7%, in line with last year's first quarter and 170 basis points sequentially better than our gross margins that we incurred in the fourth quarter of 2014.

Third, we improved our operating leverage by reducing our SG&A expense ratio by 50 basis points. This resulted in further improving our operating margin. And fourth, as Paul Rosen will highlight in a few moments, our financial services segment also produced strong results during the quarter with income up 6% from a year ago. In terms of our sales, we were particularly pleased to increase our new contracts as I indicated earlier by 13%. By region, our new contracts increased by 12% in the Midwest, 23% in the South, and 1% in the Mid-Atlantic. Our increase in sales was achieved despite a slight 3% to 4% decline in community count. Looking ahead, we remain on track to open approximately 70 new communities this year and to thereby increase our community count by 15%. We're excited about the location and quality of these new communities that we plan to open this year, many of which will be opened during the second half of the year.

With our improved sales performance, our backlog increased to 1,613 homes with a total sales value of $577 million, again a 16% increase over a year ago. Our average sale price of homes in backlog is $358,000, which is 10% higher than a year ago. Our financial condition is strong with shareholders' equity of $554 million and our net debt to capital ratio equaled 48% at the end of the quarter. I'll now give some more specific information on our three regions. First, the Southern region, which is comprised of our two Florida and four Texas markets. In the Southern region we had 275 deliveries for the quarter, unchanged from a year ago. This represents 38% of our total volume. As I mentioned before, new contracts in the Southern region increased 23% for the quarter. We are achieving solid results in both Orlando and Tampa, our two Florida markets, and we have been growing our position in each of these markets.

Tampa sales were strong during the quarter and our Orlando market came close to matching the very strong sales pace that we saw in last year's first quarter. We fully expect Tampa and Orlando to continue to perform well for us in 2015 as new communities come online. In our growing Texas operation, Dallas and Austin both contributed significantly to our sales and deliveries. Of course, this was comparatively in relative startup mode a year ago. Houston and San Antonio were relatively flat compared to last year. We are seeing a slower selling environment in Houston, but improved margins and we continue to monitor market conditions there as job growth has slightly slowed down. The dollar value of our sales backlog in the Southern region at the end of the quarter was 25% higher than a year ago.

We decreased our controlled lot position in the Southern region by 367 lots, a decrease of 4% from a year ago and we actually had 54 communities in the Southern region at the end of the quarter representing a 4% increase from March of last year. Next is the Midwest region. Our four Midwest markets had collectively 248 deliveries in the first quarter, this was 35% of the total. As we've indicated during the past several years, this ratio has declined significantly shifting from 53% of deliveries in 2009 to now 35% today as we have strategically expanded and shifted our geographic footprint and this shift has been very successful for us. Our deliveries in the Midwest decreased 4% for the first quarter compared with last year while new contracts in the Midwest were up 12% for the quarter.

Sales backlog in the Midwest was up 15% from a year ago in dollar value and our controlled lot position in the Midwest decreased 8% compared to last year. We ended the quarter with 64 active communities. This was a decrease of 4% from March of last year. The demand in each of our Midwest markets is solid and we expect each market to contribute a meaningful level of profits in 2015. Chicago had another solid quarter for us and continues to be one of our better performing markets. Indianapolis and Cincinnati are both off to a strong start in the first quarter with continued improvement in sales even with fewer communities. And finally, the Columbus market continues to see improved margins for M/I Homes due to the opening of newer communities that will come online.

Finally, the Mid-Atlantic region, which consists of our DC operation and our Charlotte and Raleigh, North Carolina operations. New contracts were up 1% for the first quarter compared with 2014 and backlog value was up 5% at the end of the quarter from a year ago. We ended the quarter with 35 active communities in the mid-Atlantic region, down about 10% from a year ago. We delivered 194 homes in the Mid-Atlantic region or 27% of the total. This volume was down 4% from last year. Our Charlotte operation had a strong quarter with improvement in both sales and closings. Our Raleigh volume was off a little bit as new communities have not yet come online, but I want to mention and highlight that Raleigh continues to be one of our better performing markets.

In Washington DC, our sales were up, but deliveries fell off as margins have slipped as demand in the DC market remains a bit sluggish. We expect Charlotte and Raleigh to both perform well in 2015 as new communities come online and we expect to see steady results in our DC division. Our total controlled lots in the Mid-Atlantic at the end of the quarter decreased by 12% from last year. In closing before I turn the call over to Phil to more thoroughly review our financial results, let me just say that we are off to a good start in 2015. With the strength of our backlog and planned new community openings, we are poised to have a very solid year. We remain focused on growing our market share, increasing our profits and improving our returns, and continuing to invest in attractive well located land opportunities. Phil?

Thanks, Bob. New contracts for the first quarter increased 13% to 1,108. Our traffic for the quarter was up 8% and our community count was down 3%. In March we sold 461 homes, our biggest sales month since March of 2005. Our new contracts were up 7% in January, up 20% in February, and up 12% in March. As to our buyer profile, about 40% of our sales were to first-time buyers and about 40% of our first quarter sales were inventory homes. Our active communities were 153 at the end of the first quarter. The breakdown by region is 64 in the Midwest, 54 in the South, and 35 in the Mid-Atlantic. During the quarter, we opened 14 new communities while closing 11.

Our current estimate is to end the year with about 15% higher community count than we began the year with the majority of our new communities opening in the second half of 2015. We delivered 717 homes in 2015's first quarter delivering 59% of our backlog compared to 58% a year ago. Revenue increased 12% in the first quarter compared to the same period last year as a result of both an increase in the average closing price and third-party lot sales. Our average closing price for the first quarter was $325,000, a 9% increase over last year's $299,000 and our backlog average sale price is $358,000, up 10% from a year ago. Our building cycle times for homes were about the same in the first quarter as 2014's fourth quarter, however, certain markets continue to have challenges.

Our construction and land development cost increased slightly when compared to the first quarter of last year. Our gross margin was 21.7% for the quarter, flat compared to the same period in 2014 and up 170 basis points over 2014's fourth quarter. Land gross profit was $5.2 million in 2015's first quarter compared to $1.3 million in 2014's first quarter. The majority of these 2015 land sales profits came from our Southern region. We sell land as part of our land management strategy. Last year we made $3.6 million from land sales. Our first quarter SG&A expenses were 14.1% of revenue, improving 50 basis points compared to 14.6% a year ago. In dollars our SG&A expenses increased 8% in the first quarter compared with last year.

Interest expense increased $292,000 for the quarter compared to last year and we had $16 million in capitalized interest on our balance sheet compared to $14 million a year ago. This is about 1% of our total assets. We continue to focus on improving our profitability and our returns. In the first quarter, our pre-tax income increased 26% on revenue growth of 12% and our pre-tax income percentage increased to 6% from 5.3% a year ago. Our effective tax rate was 39% in 2015's first quarter, which approximates our annual rate. Our earnings per diluted share for the quarter was $0.31 per share. This per share amount reflects $1.2 million of dividends paid to our preferred shareholders during the quarter.

Now, Paul Rosen will address our Mortgage Company results.

Thanks, Phil. Our mortgage and title operations pre-tax income increased from $4.7 million in 2014's first quarter to $5 million in the same period of 2015. Our first quarter results increased due to loans originated increasing from 493 to 568 and an increase in the average loan amount. The loan to value on our first quarter mortgages was 85% in 2015, the same as 2014's first quarter. We continue to see a shift towards conventional financing. 71% of the loans closed were conventional and 29% were FHA/VA. This compares to 67% and 33% respectively for 2014 same period. Our average mortgage amount increased 6% to $266,000 in 2015's first quarter compared to $252,000 in 2014's first quarter.

The average borrower credit score on mortgage originated by M/I Financial was 739 in the first quarter of 2015 compared to 736 in 2014's fourth quarter. The mortgage operation captured 82% of our business in the first quarter compared to 2014 76%. On March 31, 2015 we had $65 million outstanding under MIF credit agreements, which expires June 26, 2015 and $7 million outstanding under a separate repo facility, which expires November 3, 2015. Both facilities are typical 364-day mortgage warehouse facilities that we extend annually.

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 carefully in new communities while also managing our capital structure. Total homebuilding inventory at March 31, 2015 was $959 million, an increase of $235 million above March 31, 2014 levels primarily due to higher investment in our backlog and increased land spend. Our land investment at March 31, 2015 was $470 million, a 32% increase compared to $357 million a year ago. At March 31, we had $251 million of raw land and land under development and $219 million of finished unsold lots. We owned 3,300 unsold finished lots with an average cost of $66,000 per lot and this average lot cost is 18% of our $358,000 backlog average sale price.

And the market breakdown of our $470 million of unsold land is $127 million in the Midwest, $204 million in the South, and $139 million in the Mid-Atlantic. Lots owned and controlled as of March 31, 2015 totaled 19,450 lots, 56% of which were owned and 44% under contract. We own 10,936 lots of which 31% are in the Midwest, 45% in the South, and 24% in the Mid-Atlantic. We believe we have a very good solid land position. During 2015's first quarter, we spent $51 million on land purchases and $38 million on land development for a total of $89 million and about 45% of the purchase amount was raw land. Our estimate today for 2015 land purchase and development spending is $400 million to $450 million, which includes the $89 million we spent in our first quarter.

At the end of the quarter, we had 413 completed inventory homes, about three per community and 872 total inventory homes. And of the total inventory; 261 are in the Midwest, 409 are in the Southern region, and 202 are in the Mid-Atlantic. And at March 31, 2014, we had 305 completed inventory homes and 782 total inventory homes. We believe we are well positioned with our spec levels. Our financial condition continues to be strong with $554 million in equity and net debt to cap ratio of 48%. At March 31, 2015, there was $90 million outstanding under our $300 million unsecured revolving credit facility.

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

(Operator Instructions) Michael Rehaut, JPMorgan.

It's actually Jason Marcus in for Mike. So, you saw a very strong sales pace increase in the quarter and I wondered if you could talk a little bit more about that improvement in the context of your pricing and incentive trends during the quarter? And also from a regional perspective, which markets are you seeing the most pricing power and how are you thinking about your incentive levels at the current sales pace?

It's a great question. I think that the improvements in sales absorption per community was for the most part a result of improving conditions, the spring selling season getting off to a pretty solid start. We feel really good about the location of our communities. My highlight is that we saw the most improvement in our sales performance in the South although the 1% improvement in the Mid-Atlantic I think was particularly noteworthy given that our community count in the Mid-Atlantic region was down around 10% so we felt good even about that 1%. But I really think our margins have held up well, sequentially up quite a bit from fourth quarter, in line with last year's first quarter. I think that it's mostly a function of what was not in every market, certainly we've seen a little bit of softening in Houston as I mentioned and I think that for us San Antonio has been a wee bit soft too. But I think that as you look across the other 11 markets, we had pretty good demand and good traffic in our models.

Okay. And next question, just going back to Texas. I know you said most of the markets in Texas were pretty solid, but you saw a little bit of softening in Houston. I know in general I think Texas saw a pretty significant decline in actually in overall jobs in March. So, just wanted to see how you're handling the Houston market in terms of new land purchases and just what you're seeing overall in the land market there?

We're still a little bit a newcomer in the Houston market. If it was our largest market, the issue might be more acute for us. But with our price point being where it is, which caters more to a [mover] buyer there, which I think is the buyer that's maybe a little skittish right now perhaps more so maybe then a lower price buyer. We're sort of watching the situation as is. We have a lot of confidence in the Houston market. We expect to continue to grow there. We do have some new community or actually our new communities were down slightly from a year ago in Houston. We did incur some delays in getting some communities open that we started to work on getting opening last year. But we're expecting to open new communities there later this year and I think that the long-term prognosis for the market is good and we have a lot of more optimism about it than not. We're going to watch it. We think our investment level there is very comfortable and very manageable.

Okay. Then the last question just on the outstanding preferred stock. I wanted to see how you guys are thinking about that and if you have any intention of repurchasing that remaining amount in the near future?

I think we'll have Kevin Hake, our Treasurer, answer that.

Jason, we really haven't had any change in our thinking on the preferred. We took the $50 million of it out some time ago and continue to look at it as a helpful piece of our capital structure at this point in terms of equity, the remaining $50 million. So, we don't have any immediate plans to do anything with it.

Okay. Thanks.

Alan Ratner, Zelman & Associates.

Solid quarter. Question on the price. If I look at your backlog price $358,000, it's trending well above your delivery price. I think the spread's about 10%, which is one of the widest spreads we've seen in quite a while. So, I was hoping you could just talk a little bit about what you're seeing on the pricing side, if that's a function of mix or whether you're seeing some pricing power returning to the market and how should we think about that flowing through to deliveries over the next few quarters?

Alan, it surprised us a little bit that the first quarter was as low as it was, it was really more of a mix issue. Also we continue to work on our inventory home level. Our spec level is lower than it was at year-end, we feel good about working that down; but still with 40% to 50% of our sales continuing to be the spec level kind of makes it more of a difficult number to predict. But we have had eight straight quarters of increase in average sales price and backlog and 10% in the last four quarters, we would expect that to improve the next couple of quarters as opposed to going down the way it did the first quarter, it was really just a little more mix in the first quarter.

You're referring just to the delivery price meaning that was what was lower than you were expecting because of more spec there?

Yes, just more of a mix issue. We don't make projections on those types of things, but sure think with $358,000, we would start inching up a little bit from what it was the first quarter.

Got it. And in terms of the pricing power, if you look at your current community count, roughly what percentage are you raising prices so far and any estimate on kind of the magnitude of those price increases?

That's always a real hard number. If you kind of look and again we don't have any gross profit projections out there, but what we kind of saw in the first quarter on new orders, margins have not moved around a lot. As Bob said, we feel real good about the new communities that we are opening. The Midwest has continued to be really solid for us. Florida, I think Carolinas have also been solid. Little weakness in DC and we're just really getting going in Texas. But we feel pretty good about where we are with the margin standpoint, always working and trying to improve those margins, but --.

I appreciate that. That's very helpful. And then if I could squeeze in one more. Bob, I thought I heard a comment that you said margins in Houston were actually trending up and I wanted to confirm that and if that's true, what's driving that because I would imagine it's getting a little bit more competitive from an incentive standpoint?

Well, I think it is going to get more competitive. I think that the answer to the question about margins is really more mix than anything else and I think that's the case in Houston too when you look at it year-over-year in terms of where we're selling and what's closing and so forth. We're optimistic about [housing], but like you and so many others, this recovery is by no means linear and there's a lot up and down and where we really think we can push pricing, we have. But most of the margins that we're seeing is what we sort of expected to see when we underwrote the deals and we're pleased that that's the case.

Great. Thanks a lot and good luck.

Lee Brading, Wells Fargo.

Wanted to follow up on a couple of things on the cost side. Are you seeing much pressure in the material at all, on the material side and on the labor side. You guys did a good job obviously of holding your gross margins here and I was wondering if you're seeing any pressures on the cost side down?

We haven't seen anything significant. Lumber actually has been pretty good, concrete's moved around a little bit, it's kind of specific market by market. Cycle time has been a little challenging in some of the Texas markets. But when we look at the cost increases, the first quarter of this year and what we kind of see for the next couple of quarters, maybe 1% or 2% compared to a year ago, but nothing real significant.

This is more intuition than data driven, but I think that if we had to project where there might be some increases, it would be more in the labor side than the material side.

Okay. And then on the note payable or the revolver, you said you were down the $90 million. How much availability do you have that at this point of time?

We have the full amount other than what's outstanding.

$90 million of outstanding.

Yes, $300 million line.

So, we have $210 million.

(multiple speakers) But we also give a projection in the Q. We think we are going to be borrowing some. Yes, we've given guidance. We gave at beginning of the year and we've kept at this time, which is that we expect to have peak usage of about $150 million.

And we feel very comfortable with that, Lee.

And you mentioned 40% of your buyers were first-time buyers and I was wondering if you could comment a little bit about that category. We've a couple of builders in the last couple of days talk about that category doing pretty well and I was wondering if you guys are seeing anything different or is it something similar to others?

I want to say this about it. This is Bob Schottenstein speaking. The fact that they're first-time buyers just means that it's the first time they're buying a house as opposed to a 24-year old that just got a job out of college. The term is a broad term. I think that the millennials, sort of getting tired of that term, are clearly sitting on the sidelines and being very slow to enter the new home market. They're supporting all the apartment developers right now. But I don't know if you want to add anything to that?

If you look that stat the last few quarters, Lee; like we said it was 40% the first quarter of this year, it was 39% in the fourth quarter of 2014, it was 38% in the third quarter of 2014, and 40% the second quarter of 2014. So, it really has not moved around much to us. Again, when you look at our average sale price, I mean we don't compete at the lower most affordable end of the entry level. One of our goals is to bring people to our product line so we're kind of in that top part of the first-time buyers, but it hasn't changed a whole lot for us.

I would just say that our first-time homebuyers come to us pretty well qualified and generally have pretty good credit scores. So, we're pretty happy with those customers.

Your credit score of 739 definitely speaks to that. And the last question here is on the (inaudible) in lending, I know others have talked about this. On August 1, I guess there's going to be some paperwork additions to the process and I was curious how you guys are set up for that, is that going to be a big hurdle or how big of an issue is it I guess?

It's a very significant issue to the industry. We actually have three plans in place so we feel pretty comfortable if a first line of defense, our systems and procedures aren't 100% in place, we have both a second level plan and a third level plan. So we feel it will be from our customer's point of view, which is homebuilder and home buyers, we don't think that they will see any interruption at all.

Thank you very much.

And there are no further questions at this time.

We appreciate you joining us and look forward to speaking to you next quarter. Thanks.

And this does conclude today's conference call. You may now disconnect your line.