M/I Homes Inc (MHO) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the M/I Homes Fourth Quarter and Year-End 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. I would now like to turn today's conference over to Phil Creek. Please go ahead.

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

Thanks, Phil and welcome, everyone. Welcome to our fourth quarter and full-year 2015 conference call. We're very pleased with our strong performance in 2015, as we continue to make important and meaningful progress in a number of areas. Our pre-tax income for the year posted a significant 36% increase to $94.8 million. As noted in our release, the $94.8 million of income excluded the one-time charge we incurred in refinancing our senior notes. As Phil will discuss later in the call, we were very pleased to have successfully completed the refinancing in December, where we replaced our $230 million 8.625% notes, which were due in 2018 with a new issuance of $300 million of 6.75% notes, which are due in 2021.

Our 2015 results included a 40 basis point increase in our gross margins and a 70 basis point reduction in our SG&A overhead expense ratio. As a result, we were able to improve our 2015 full-year operating margins by more than 100 basis points. For the fourth quarter, closings increased to 13% and revenues rose 27%. For the year, total revenues increased 17% and the number of homes closed increased 4% to 3,883 homes, which is our highest closing volume since 2006.

Given the challenges we and many other builders faced in 2015 from labor shortages, particularly unusual weather delays as well as delays in getting a number of our new communities open, we were very pleased with our 2015 closings.

In terms of sales, our new contracts were up 16% in the fourth quarter. For the year, we sold 4,093 homes which was 12% better than 2014. Our new contracts have now increased at an annual compounded rate of 12% per year since 2008. And our revenues have grown at a 13% compounded annual rate since 2008. We believe these are very solid growth rates over the past seven years -- seven-year period, which represents the emergence from the housing recession. And these growth rates represent one of the highest in our industry over at that particular seven-year period.

We ended the year with a backlog of $569 million, 34% higher than a year ago, and our highest dollar backlog value since 2005. Backlog units at year-end were up 25%. During 2015, as planned, and in line with previous guidance, we increased our community count by 17%, ending the year with 175 active communities. We expect to continue growing our community count in 2016 and Phil will address this in more detail in his comments.

Our Financial Services business also had a very strong year in 2015 with fourth quarter pre-tax income up by 70%. For the year, our financial services income totaled $19.4 million, 37% higher than in 2014. Paul Rosen, the President of our Mortgage and Title operations, will talk more about this in a few minutes. I do, however, want to acknowledge and thank Paul and his team for running a very profitable and exceptionally well-managed business that complements and enhances our core home building business and helps us more fully and effectively serve our home buyers.

From a balance sheet standpoint, we ended 2015 with 22,000 lots under control. That's an 8% increase over 2014. Phil will detail the specifics of our lot position in his remarks. At this time, however, I want to point out that premier locations -- that is, locations that are not just well located, but well developed communities that are situated in desirable submarkets and quality school districts -- is a core strategic goal of our Company. We feel very good about the quantity, and perhaps most important, the quality of our lot position.

We ended 2015 with nearly $600 million of net worth and a healthy 50% net debt to capital ratio. And we have ample liquidity under our $400 million unsecured credit facility.

Now I'll provide a little bit more detail about our regions and the housing markets within them. Beginning with the Southern region, which consists of our two Florida markets, Orlando and Tampa, as well as our four Texas markets, Houston, San Antonio, Austin and the Dallas/Fort Worth area.

In the Southern region, we had 483 deliveries during the fourth quarter, 1,447 for the year or 37% of total Company volume. New contracts in the Southern region increased 10% during the fourth quarter, 17% for the full year. We are achieving very solid results in our two Florida markets. Tampa and Orlando sales were strong throughout the year and we expect both of these markets to continue to perform well for us in 2016. In our growing Texas operations, Dallas and Austin, both contributed significantly to deliveries compared with being in relative start-up mode in those markets a year ago.

While San Antonio was relatively flat year-over-year, we have seen a pickup in sales in San Antonio recently. We continue to monitor market conditions in Houston. As has been well-documented, demand in Houston remains sluggish there as job growth has slowed. The dollar value of our sales backlog in the Southern region at year-end was up 31% from the beginning of the year. And we had 66 communities in the Southern region at year-end, which represented a 32% increase from a year ago. As for our four Texas divisions specifically, we had 38 communities at year-end versus 32 a year ago. All in all, we continue to be very excited about the growth opportunities we have throughout the Southern region.

Next is the Midwest region, which now consists of Columbus, Cincinnati, Indianapolis, Chicago and our newest market, Minneapolis/St. Paul. On December 1, we acquired the operation of the top 10 Minneapolis builder known as Hans Hagen Homes. The Minneapolis operation will further enhance our geographic position in what we consider to be a very healthy and dynamic housing market. We are very pleased to be open and operating in the Twin Cities.

In the Midwest region in 2015, we had 455 deliveries in the fourth quarter and 1,470 deliveries for the year. This represented a 3% increase from a year ago and 37% of our total, the same percentage as we had in the Southern region. New contracts in this region were up 35% for the quarter with noticeably strong sales in both Columbus and Cincinnati. Our sales backlog in the Midwest was up 48% from the start of the year in dollar value and our controlled lot position in the Midwest region increased 43% compared to last year. Both of those numbers are positively impacted by the Minneapolis acquisition.

We ended the year with 73 active communities in the Midwest, which is 18% higher from a year ago. Chicago and Indianapolis both had very good years for us in 2015 and we are expecting good things from all five Midwest markets in 2016. Demand in each remains good.

Finally, the Mid-Atlantic region, which is our -- consists of our operation of Washington, DC, as well as our operations in Charlotte and Raleigh, North Carolina. New contracts in the Mid-Atlantic region were up 4% for the fourth quarter compared with 2014. Backlog value was up 14% at year-end and we ended the year with 36 active communities, down 5% from the start of the year. We delivered 315 homes in the Mid-Atlantic region during the fourth quarter, a 14% increase from last year, and delivered 1,019 homes in this region for the year. So the Mid-Atlantic region represents 26% of total deliveries. Our two Carolina markets, Charlotte and Raleigh, are worth noting as each had a very strong year for us in terms of sales and deliveries. On the other hand, demand in the DC market remains a bit sluggish. Our total controlled lots in the Mid-Atlantic at year-end decreased 9% from last year.

As I conclude my remarks, let me just say a few more things about our business and our outlook for 2016. First, with our strong year-end backlog, the quality of our land position and the fact that we operate in many of the best housing markets in the United States, we believe we're well positioned to continue growing and further improving our profitability in 2016.

Finally, 2016 also promises to be a milestone year for M/I Homes, as we will be celebrating our 40th year in business. We are really proud of our history and all that we've accomplished since our founding in 1976. As we go forward and begin our 40th year, we will continue to focus on those core values that have so materially contributed to our past success and that have allowed us to reach this day, and that is having a great team of dedicated people who are committed to quality, who are committed to operating with integrity and who are committed to delivering superior customer service to our customers.

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

Thanks, Bob. New contracts for the fourth quarter increased 16% to 897 and our [traffic] for the quarter was up 17% and our community count was also up 17%. Our new contracts were up 14% in October, up 20% in November and up 14% in December. As to our buyer profile, 38% of our fourth quarter sales were to first time buyers, which was flat compared to 2015's third quarter. And 51% of our fourth quarter sales were inventory homes compared to 49% in 2015's third quarter. Our active communities were 175 at the end of 2015. The breakdown by region is 73 in the Midwest, 66 in the South and 36 in the Mid-Atlantic. During the quarter, we opened 20 new communities while closing 11. And for the year, we opened 62 new communities and closed 37. For 2016, our current estimate is that our average community count for the year should be up 5% to 10% over 2015 levels.

We delivered 1,253 homes in 2015's fourth quarter, delivering 70% of our backlog compared to 71% a year ago. Revenue increased 27% in the fourth quarter compared to same period last year, primarily as a result of an increase in both average closing price and number of homes delivered. For the full year, revenue increased 17%. Our average closing price for the fourth quarter was $360,000, a 12% increase over last year's $322,000. And our backlog average sales price is $372,000, up 7% from a year ago. We recorded an impairment charge of $3.6 million in the fourth quarter; this relates to certain communities in our DC market.

Our building cycle times for homes were slightly higher in 2015's fourth quarter than 2014's fourth quarter and our construction and land development cost increased slightly when compared to the fourth quarter of last year. Our gross margin was 20.2% for the quarter versus 20.0% a year ago, and for the full year of 2015, our gross margin was 21.2%, up 40 basis points from prior year.

Land gross profit exclusive of the impact of impairments was $1.1 million in 2015's fourth quarter and $7.4 million for the full year of 2015. This compares to $800,000 in 2014's fourth quarter and $3.6 million for the full year of 2014. Our fourth quarter SG&A expenses were 12.5% of revenue, improving 120 basis points compared to 13.7% a year ago. This reflects greater leverage from higher closing revenue.

For the year, our SG&A expense ratio improved 70 basis points to 13.3%. We continue to focus on improving our operating efficiencies. Interest expense increased $1.8 million for the quarter compared to last year and increased $4.2 million for the 12 months of this year. This is due to higher borrowings, offset in part by lower weighted average borrowing rate. We have $17 million in capitalized interest on our balance sheet compared to $15 million a year ago, about 1% of our total assets.

With respect to income taxes during the quarter, we had a tax rate of 42%. Our rate during the quarter was unfavorably impacted by changes in state apportionment mix, which reduced the value of our state NOL carry-forward. Excluding this adjustment, our effective rate for the quarter was 38% and we estimate a 39% tax rate for 2016. Our earnings per diluted share for the quarter were $0.43 a share. This per share amount reflects $1.2 million of dividends paid to our preferred shareholders and our debt charge.

Now Paul Rosen will address our Mortgage Company results.

Thanks, Phil. Our mortgage and title operations pre-tax income increased from $3 million in 2014's fourth quarter to $5.1 million in the same period of 2015. Our fourth quarter results include an increase in loans originated from $771 million to $906 million, an increase in average loan amount. Additionally, we were well positioned through the year-end to aggressively market our loans during the chaotic regulatory environment, which resulted in higher margins on loans sold. The loan-to-value on our first mortgages for the fourth quarter was 83% in 2015 compared to 86% in 2014's fourth quarter. 74% of the loans closed were conventional and 26% were FHA, VA. This compares to 73% and 27% respectively for 2014's same period.

Overall, our average mortgage amount increased 11% to $299,000 in 2015's fourth quarter compared to $269,000 in 2014's fourth quarter. The average borrower credit score on mortgages originated by M/I Financial was 738 in the fourth quarter of 2015 compared to 736 in 2015's third quarter. Our Mortgage operation captured 82% of our business in the fourth quarter compared to 2014's 80%.

Due to the high volume of fourth quarter closings, we temporarily increased our warehouse facilities to $150 million through February 1, 2016. At December 31, 2015, we had $105 million outstanding under the M/IH credit agreement, which is a $110 million commitment that expires June 24, 2016, and $19 million outstanding under a separate repo facility, which expires November 1, 2016. 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. First, 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 12-31-2015 was $1.1 billion, an increase of $193 million above December 31, 2014 levels. This increase is primarily due to higher investment in our backlog, higher community count and more finished lots. Our land investment at 12-31-2015 is $597 million, a 27% increase comparing to $470 million a year ago. At December 31, we had $257 million of raw land and land under development and $340 million of finished unsold lots. We owned 4,559 unsold finished lots with an average cost of 75,000 per lot. And this average lot cost is 20% of our $372,000 backlog average sale price.

The market breakdown of our $597 million of unsold land is $184 million in the Midwest, $227 million in the South and $186 million in the Mid-Atlantic. Lots owned and controlled as of 12-31-2015 totaled 22,422 lots, 51% of which were owned and 49% under contract. We own 11,399 lots of which 34% are in the Midwest, 41% in the South and 25% in the Mid-Atlantic. During 2015's fourth quarter, we spent $55 million on land purchases and $16 million on land development for a total of $115 million.

And for 2015, we spent $438 million on land purchases and land development. About 50% of the purchased amount was raw land. Our estimate today for 2016 land purchase and development spending is a total of $425 million to $475 million. At the end of the quarter, we had 483 completed inventory homes, which are three per community, and 872 total inventory homes. And of the total inventory homes, 270 are in the Midwest, 409 are in the Southern region and 193 is in the Mid-Atlantic. At 12-31-2014, we had 460 completed inventory homes and 979 total inventory homes.

Our financial condition continues to be strong with $597 million at equity and net debt to cap ratio of 50%. And at 12-31-15, there was $44 million outstanding under our $400 million unsecured revolving credit facility.

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

(Operator Instructions) Michael Rehaut, JPMorgan.

Hi, good afternoon. This is actually Jason in for Mike. So in terms of your backlog conversion, it was pretty strong for the quarter. I wanted to see if you could talk a little bit about the labor environment that you're seeing. Looks like you weren't as impacted by some of the delays that you saw over the last few quarters. And I guess more broadly, if you could talk about labor cost and if that was the main driver of the sequential gross margin decline or if there's some other factors that you'd point to.

It's Bob Schottenstein. I'll take the first part of that question and I'll let somebody else here answer the second part. I think that the labor issues probably stabilized for us throughout the year. It was a bit of a challenge during the first quarter, slightly less of a challenge during the second; you sort of got used to it in the third and then I think we were beginning to do a better job managing it by the fourth.

So every market is a little bit different, but I think that -- and I think the other thing is, I think we were successful in closing a few more spec homes in the fourth quarter than in quarters in particular, maybe two and three. And so I think it was the aggregate of those things. As far as pricing and margins, Phil, maybe you want to talk about that.

Yes. I guess just a little more information. It looks like our costs were up about 2% to 3% last year. Labor issues continue to be a challenge and every market tends to be a little bit different. From a margin standpoint, we were very pleased that our fourth quarter margins were above a year ago. Our full-year margins were above a year ago. We think we did a pretty good job managing pricing and pace. So overall we felt pretty good about our margins in 2015.

Then just moving on to sales pace, you had improvements in the Midwest and Mid-Atlantic, but in the Southern region it looks like you had a 13% decline in sales pace. Just wanted to see if you could give a little bit more color on what the driver of that was.

Well, I think that part of it's impacted by the slowdown in sales that we experienced in Houston, where not many communities met their pace or absorption objectives. I think I mentioned in my comments that we had particularly strong years in Tampa and Orlando and we did -- and San Antonio was a little sluggish. So I think there were some puts and takes, and the takes may have exceeded the puts slightly. Phil, I don't know if you or Paul or anyone else want to comment on that.

No, I think that it was a little slower in some of our Texas markets and Florida was very strong the year before or so.

And then lastly, given where your stock is trading and the discount to book value, just wanted to get your thoughts around potential share purchases. Is that something that you'd consider? I know you haven't done it in a while.

No, that's true. We haven't done it in a while. And this is probably the same way we answer -- I was trying to go back and see how we answered it the last time it was asked, because we felt the same way then that we do now, and that is that something you always look at, you always discuss and you hopefully are thoughtful about it. I think we are, not just with ourselves and certainly with our Board. Right now -- and I share your view of the stock price in terms of where it's trading below book value and in our judgment it's nowhere near any kind of reflection of our performance.

The fact is that we feel that the best use of our capital is where it's headed now, which is back into our markets, which growing income 36% year-over-year excluding the one-time debt charge. What we see in terms of the conditions in the field today, our outlook for this year, even though we provide no guidance, we do expect to continue growing, not just in terms of top line, but bottom line and improving margins and returns. And when you take all that into account, that's -- right now we have no plans to buy back any shares. Kevin is that -- you're looking at me noddingly. I assume that that's sort of how you see it as well.

Yes. Remember we always -- like you said, we always look at it and continue to consider potential use of some amount of cash, but right now we think we have good investment opportunities.

Alan Ratner, Zelman & Associates.

Congratulations on all the progress, and we agree that the performance certainly is very strong and the growth is impressive. Bob, you guys made an acquisition during the quarter. You haven't been too acquisitive in the past, although you have bought a couple of companies to enter new markets. So I was curious just given what's going on in the capital markets, whether you think there's going to be more opportunity for M&A. And if so, are there specific markets that you're targeting for growth or are you really just looking to grow organically at this point?

I think both -- we want to always keep one eye very closely on our balance sheet. We -- our debt levels are -- our debt to cap ratio is around 50% and that's about as high as we'd like to see it go just in terms of the way we want to manage the ship. But we believe that -- but the good news is we do not need to open up in any new markets to achieve our current and multi-year growth goals, but the fact is there are other markets that we continue to look at. And the possibility that we might open up in another market or two over the next 12 months to 18 months, I think is -- it's at least worth noting.

Whether it happens or not will depend upon finding not just the right market, but the right leader to help us run that operation. Whether it would be a pure start-up or combined or consisted of something like we did in Minneapolis, where we bought a relatively small builder, but still a builder whose units, they were doing 125 or so -- Hans Hagen was doing around 125 units to 140 units a year, which will rank them I think 10th in the Minneapolis/St. Paul market, so they were technically a top 10 builder. The acquisition of that size is possible, if you could find the right one, right land position and so forth.

But back to the answer, we don't need to open up in any new markets to achieve our growth goals, we believe we have meaningful organic growth, maybe not in all, but certainly in almost or most of our -- almost all or most of our markets, but we are looking.

Great. That's very helpful. And if I can ask a second separate question, you guys entered Texas over the downturn and I think there is maybe some concerns now that you entered a little bit on the later side, especially given what's going on in Houston. So I was hoping you could just give us an update on what percentage of your inventory actually is in Houston today maybe in dollar terms. And any comments on the margins you're achieving there currently, because I think there is some concern that pricing could come under pressure and trigger some impairments. I don't think you've taken any to date, but any kind of sensitivity you can give around that would be really helpful.

But let me just say a couple of things first. We entered five new markets between 2008 and Dallas was, I think 2013; Chicago plus the four Texas markets. And in hindsight, there is not one -- there is no part of this that feels anything but that they were all the right decisions. We feel really good about having done that. And we do not feel that -- I mean Houston is what it is. When you're in 14 markets, there's always going to be something, someplace, somewhere. And I haven't seen too many instances where that hasn't been the case. It's just sort of reality of life.

So we feel really good about our operation in Austin. The Dallas -- Dallas is off to a very good start as I indicated. While things were sort of sluggish in San Antonio, we're seeing improving conditions there. And in terms of asset deployment and intensity, we feel okay about Houston. Phil, you want to add something to that?

Yes. As far as, Alan, in total we have 175 active communities end of the year and as we said 38 of those communities are in Texas. There were 32 of them at the end of 2014. So again, as of the end of 2015, 38 of 175 communities are in Texas. And the breakdown of the four divisions, I mean, there is a few less in Dallas, because it's more of a start-up, that type of thing, but it's kind of evenly spread.

As far as the investment level and risk or whatever, we feel really pretty good about our land position, our investment level. We did take a $3.5 million impairment that was in DC, as Bob talked about -- we've talked about the last couple of calls. Demand has been a little bit weak there and I think a lot of other builders share that.

As far as investment levels, we talked about we have $597 million of unsold land on our books at 12-31-2015, and of that $597 million of unsold land, $227 million is in the South region. That includes the four Texas divisions and also the two Florida divisions. But overall we feel we're like in a good shape. Have we invested as much in Houston and DC, some of those markets, had it been a little slowing down? No, we're always mindful of the market conditions and so forth as we make investments. But we feel really pretty good about our investment level, our spec levels, our land position. We feel like we're in pretty good shape.

Great. I appreciate that. And I guess just if I could ask a little bit differently then. So would you just say or summarize that your Texas markets and Houston specifically, your land strategy is pretty comparable to the Company average in terms of your supply, finished lot, raw land split? In other words, it's not unique and you're not optioning more land there or more quicker turn deals that's pretty consistent with the rest of the portfolio?

It's very consistent with the other divisions.

Great. Okay, thanks a lot, guys. Good luck.

Alex Barron, Housing Research Center.

I wanted to ask I guess regarding Houston, kind of what is your outlook for starts for this year? Do you expect it to be flattish or down some percent? So that's kind of my first question.

I think overall, our view is that markets in general will be a little bit better this year. As far as Texas, we're probably more that things are probably going to be a little more challenging with things going on there. So we're a little more conservative --.

Not necessarily all of Texas, but Houston.

Houston, for example.

For Houston. Yes. Your question was specifically Houston. Are you asking from a macro standpoint what do we see happening there?

Yes. Not necessarily for you, but just what your take is on the overall macro for this year in terms of starts year-over-year?

I think it's pretty consistent with what we're seeing for most of the forecasters and that is that it's still a very large market. But there's pressures, there is negative pressures, job growth has slowed and I think, best case, starts will be flat, but starts will probably be off slightly. But we're in markets now where starts were up 4% or 5%, and our business was up 15%. And it's so location price product and community-driven at the same time.

So I appreciate the question, but I have to provide the fact that individual performance can radically be different. Chicago is one of our best operations and it's not rated as a very good market.

Right. My other question I guess was regarding the Mid-Atlantic, where you guys said you had an impairment. What kind of a land deal was that? Was that a development deal or finished lots? And I guess what triggered that? Was it some competitor acting or how -- why did that happen?

It was a couple of communities, Alex. It was one community that we developed. There was also some developed lots. And it's really been driven more by the weakness in the market there in the last year or so. And us basically writing down some assets to what we think the market value is to move down through the pipeline. We think we have one of the cleanest balance sheets in the business. We don't really have anything mothballed or hail type thing. We continue to work through our assets. It really was more market-driven and we thought it was a good business decision to deal with that now.

Okay. And then if I could ask one last one on the acquisition you guys did in Minnesota. How many homes did that builder do last year? Just to have some idea of the size of their operation?

I mentioned it earlier, so I think around 125.

Yes, 2014.

In 2014, they did 125 homes. We acquired them in the fourth quarter of 2015.

Michael Rehaut, JPMorgan.

I think he already asked his question.

Lee Brading, Wells Fargo.

Hi, this is actually Melissa Zayas on for Lee. Wanted to -- I guess following up on that last question on the impairment and given you've been talking about sluggishness in the DC market for a while, do you foresee any sort of additional impairments in communities in that market or was it like this sort of addressed that?

Those kinds of things are all like hard to predict based on market conditions and competition and so forth. We think that we very much dealt with the issues that we felt we needed to. Again we tend to work through assets as opposed to postponing some of those type of things, but we felt like we dealt with everything we needed to right now.

And then on liquidity front, you paid down a good amount of your revolver this past quarter with cash and maybe some high yield proceeds. I think in the past you guys have mentioned something about being comfortable with the peak usage in the 150 to 200-ish range. And I was wondering what your thoughts are for 2016 in terms of -- do you think you'll repeat that type of revolver fundings to fund 2016 growth.

We haven't given any guidance yet at this point for our peak usage this year, 2016. This is Kevin. And I expect we will be -- we do have our sort of our budgets rolled up and our planning that we will give something probably when we put out our 10-K, but at this point we haven't given necessarily a peak amount. We certainly wouldn't expect it to be any higher than I think where we peaked last year. We did get in the range of $70 million of proceeds of excess from the refinancing of our senior note. So we're growing the business, but I think it'd be something less than where we peaked last year.

(Operator Instructions) And at this time, there are no further questions. I would now like to turn the floor back over to management for any closing remarks.

Thank you very much for joining us.

Thank you for participating in today's conference. You may now disconnect.