M/I Homes, Inc. Q3 FY2025 earnings call

Key Points

• Despite challenging market conditions, the third quarter was solid with $140 million pretax income, though down 26% from the prior year's record. Pretax income was 12% of revenue, gross margins 24%, and return on equity 16%.
• Closed a record 2,296 homes in the third quarter, a 1% increase year-over-year. Total revenue decreased 1% to $1.1 billion. Smart Series sales comprised 52% of total sales.
• Cycle time improved by about 10 days compared to the prior year and first quarter. Ended the quarter with 233 communities, on track to grow community count by 5% in 2025.
• Balance sheet was strong with $3.1 billion of equity, book value per share $120, up 15% y-o-y. Unsecured credit facility extended to 2030 with borrowing capacity increased to $900 million, with zero borrowings and over $700 million in cash.
• Mortgage and title operations had a strong quarter, capturing 93% of the company's business, up from 89% the prior year.

In the homebuilding segment, M/I Homes generated $140 million of pretax income in the third quarter, down 26% from the prior year. Total revenue was $1.1 billion, a 1% decrease. The Smart Series, the most affordable line of homes, contributed about 52% of total sales during the third quarter. The mortgage company had pretax income of $16.6 million, an increase of 28% from the prior year's third quarter, and revenue increased 16% to $34.6 million. The mortgage operation captured 93% of the company's business in the third quarter, up from 89% the prior year.

Forward-Looking Statements

• Expect community count to be about 5% higher in 2025 compared to 2024.
• Balance sheet strength provides flexibility as market conditions evolve.
• Optimistic about the industry benefiting from undersupply of homes and growing household formations.
• Target to grow community count in the 5-10% range annually, with existing markets offering growth opportunities.

Risks Discussed

• Challenging market conditions and uneven demand.
• Intramarket volatility within divisions, with week-to-week fluctuations in sales.
• Inventory charges contributing to gross margin decline, including $7.6 million in inventory impairments and lot deposit due diligence costs.
• Potential impact of tariffs on raw materials and construction costs.
• Local zoning regulations acting as a significant impediment to housing affordability and volume growth.

Q: Could you talk about orders, seasonality, and the use of incentives, including quantifying incentives mix between price and mortgage buy down closing costs?

A: Robert Schottenstein discussed the challenging market with intramarket volatility, emphasizing the use of mortgage rate buy downs to drive traffic and sales. Margins are down due to these buy downs, with the majority of margin decline attributed to rate buy downs. Seasonality has some intramarket variability, and incentives are selectively used on a subdivision basis.

Q: Can you comment on gross margin trends in Northern and Southern regions, and aggregation of Texas and Florida markets?

A: Robert Schottenstein noted differences in markets within regions, with Orlando performing stronger than Tampa/Sarasota in Florida. Texas has a transition, but markets like Dallas and Houston are strong. Demand and margins hold up better in some areas than others within regions.

Q: Have you had discussions with the administration regarding housing policies, and thoughts on local zoning regulations?

A: Robert Schottenstein mentioned being aware of discussions on housing affordability, with local zoning regulations identified as a major impediment to affordability and volume. Policies at local and federal levels are needed to help unlock housing and improve affordability.

Q: Talk about gross margin trends going forward, land costs, and if margins are close to bottom?

A: Robert Schottenstein stated margins are closer to the bottom than last quarter, but uncertainty remains. Margin pressures include higher land costs and a mix of specs and to-be-built homes. Phil Creek added specs have lower margins and land development costs have stabilized somewhat.

Q: Comment on regional order growth trends, North vs South, and market outlooks?

A: Robert Schottenstein expressed bullishness on Midwest markets like Columbus, Cincinnati, Chicago, and Minneapolis. Florida has some struggles, Texas is in transition but has economic vitality. Diversity of markets is important, and all markets are watched closely.

Q: Discuss SG&A, selling expenses, and co-broker strategies?

A: Phil Creek noted SG&A expenses were up 6% y-o-y due to more communities, more people, and slightly higher sales commission rates. Robert Schottenstein mentioned the company is not incentivizing traffic by paying brokers more, focusing on internal sales efforts and lead generation instead.

Q: Thoughts on gross margins of spec vs build-to-order homes, co-broker spend, and M&A?

A: Robert Schottenstein said spec homes have slightly lower margins than build-to-order. On co-broker spend, the company is focused on internal efforts. There are no current M&A plans, with focus on growing existing markets and maintaining a strong balance sheet.