M/I Homes, Inc. (MHO) Q3 2026 Earnings Call Transcript

Operator: Good morning, and welcome to the M/I Homes, Inc. Third Quarter Earnings Conference Call. My name is Lacey, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Mr. Phillip G. Creek Please go ahead.

Phillip G. Creek: Thank you for joining us today. With me is Bob Schottenstein, our CEO and president and Derek J. Klutch, president of our mortgage company. 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 nonpublic 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 will turn the call over to Bob.

Robert H. Schottenstein: Thanks, Phillip. Good morning, and thank you for joining us today. Our third quarter results reflect the increasingly difficult market conditions impacting the overall economy, consumer behavior, and obviously the home building industry. In the face of these conditions, we produce solid results generating $87 million of pretax income equating to an 8%-plus return. Conditions changed notably during the quarter. Perhaps the best evidence of explaining the intra quarter volatility is the movement in the benchmark 10-year US treasury bond. July 1, the-- 10-year treasury was at 4.5%. By August 1, it had risen to 4.75%. It then began to rise at a faster pace, particularly during September, and by September 30, it had reached 5.3%. In similar fashion, the average par contract interest rate for a 30 year fixed rate mortgage increased by nearly 100 basis points during the quarter. Going from roughly 6.75% at July 1 to close to 7.75% at September 30. The combination of these rising rates along with elevated fuel prices concerns with inflation, and the continued conflict in Iran, have clearly impacted consumer confidence and demand and have contributed to growing economic uncertainty. As of today, mortgage rates have come down slightly, which is very good news. But the current choppy and challenging conditions may continue for some time. Regardless, this is not the first time we have managed through challenging conditions. We have been in business for 50 years. And during times like this, execution matters more than ever and a strong balance sheet is absolutely essential. I am proud to share that on both of these counts, M/I Homes is very well positioned to navigate the current market conditions. During the quarter, our teams executed at a very high level. And as I will explain in more detail in a few moments, our balance sheet is rock solid. As strong as at any time in our 50-year history. For the quarter, we sold 1.86 thousand homes, 2% less than a year ago and for the first 9 months of 2026, we have sold 6.6 thousand homes which is 5% more than a year ago. We continue to use mortgage rate buy downs as our primary incentive to drive sales. With rates rising during the quarter, the cost of such buydowns has increased. Thereby impacting our margins. We have carefully managed the nature and extent of rate buy downs as we deal with rising rates. And I might add, while rate buy downs are clearly important at this time, well located communities, quality product, and thoughtful design are just as, if not more important. When I talk about how much execution matters during times like this, the quality of our product, the strength of our communities, and the skills of our sales associates all make a meaningful difference in our results. In other words, nearly every builder is buying down rates. But the builder results from 1 builder to another clearly differ. And the difference is often all about execution. During the quarter, we closed 2.24 thousand homes, a 2% decrease compared to a year ago. Year to date, we have closed 6.36 thousand homes which is 4% less than a year ago. Our third quarter total revenue decreased by 5% to $1.08 billion and pretax income decreased 38% to what I mentioned earlier, $87 million. Our gross margin, excluding inventory charges, was 21.3% 23 basis points lower than a year ago, down primarily due to the higher cost of rate buy downs and higher lot costs versus a year ago. Our mortgage company's capture rate for the quarter was 96% 1 of the highest capture rates we have ever seen and certainly 1 of the highest capture rates in the history of the home building industry. We continue to see quality buyers in terms of credit worthiness with average credit scores of 748 and average down payments over 16%. Our Smart Series line of homes, which as most of you are our most affordable line of homes and generally appeals to the first time home buyer continues to be an important contributor to our sales performance. Of note, during the quarter, our Smart Series sales comprised about half of our sales. The other half went to second time or move up buyers. We ended the quarter with 246 communities and estimate that at the end of this year, our community count will be about 5% higher than last year. Respect to some comments about our markets, our division income contributions in the quarter were led by Chicago, Columbus, Minneapolis, Dallas, and Charlotte. New contracts during the third quarter in our Northern region increased by 1%. New contracts in our Southern region decreased by 4%. Our deliveries in the Northern region increased by 1% compared to last year and represented 42% of our company wide total. in our Southern region decreased by 5% over last year and, of course, represented the other 58% of deliveries. We have an excellent land position. I repeat, we have an excellent land position. Our owned and controlled lot position in the southern region decreased by 12% compared to last year and increased by 13% versus last year of the northern region. 41% of our total owned and controlled lots are in the North and the other 59% in the southern region. Company wide, we own on our books approximately 23.4 thousand lots which is roughly a 2.5-year supply. In addition, we control approximately 25.6 thousand lots via option contracts resulting in a total of roughly 49 thousand owned and controlled lots, equating to about a 5-year supply. My earlier remarks, I spoke about how critically important a strong balance sheet is in times like this. And as I said, our balance sheet is rock solid. and continues to be in excellent condition. We ended the third quarter with an all time record $3.3 billion of equity equating to a book value per share of $130. We had 0 borrowings under our $900 million unsecured revolving credit facility, and we ended the quarter with over $600 million in cash. This has resulted in a debt to capital ratio of 18% and a net debt to capital ratio of 2%, 1 of the lowest debt levels in the homebuilding industry. Moreover, in looking at our balance sheet, it is important to recognize that we are 1 of the few builders that does virtually 0 land banking. there is no confusion about what is on our books, and what is not. And our balance sheet has essentially 0 goodwill on it. We are very proud of our financial condition. In closing, though these are more challenging times, we remain quite confident in the long term fundamentals of the homebuilding industry. With our strong land position, well located geographic footprint, well located communities, diverse product offering, and strong balance sheet M/I Homes is well positioned to manage through this current cycle. And with that, I will turn it over to Phillip.

Phillip G. Creek: Thanks, Bob. Our new contracts were down 2% when compared to last year. They were up 15% in July, down 6% in August, and down 16% in September. And our cancellation rate for the quarter was 12%. 50% of our third quarter sales were to first time buyers, and 80% were inventory homes. Our community count was 246 at the end of the third quarter, up 6% versus a year ago. The breakdown by region is 103 in the Northern Region, and 143 in the Southern Region. During the quarter, we opened 27 new communities while closing 15. We currently estimate that our 2026 year-end community count will be about 5% higher than last year. We delivered 2.24 thousand homes in the third quarter, and about 35% of our third quarter closings came from inventory homes that were both sold and delivered within the quarter. And this also compares to 35% in last year's third quarter. As of September 30, we had 5.2 thousand homes in the field, versus 5 thousand homes in the field a year ago. And our construction cost and cycle time were flat in the third quarter. Compared to the second quarter. Our revenue decreased 5% in the quarter This decline was due to fewer homes delivered and our average sale price declined also. Our gross margin was 20.9% for the quarter, including $5 million of inventory charges. Excluding these charges, our gross margin was 21.3%. Our third quarter SG&A expenses were 13.1% of revenue, compared to 11.9% a year ago. And our third quarter expenses increased 5% versus a year ago. Increased costs were primarily due to our increased community count. Interest income, net of interest expense for the quarter was $3.6 million and our interest incurred was $9.2 million. Our pretax income was 8% for the quarter, and our return on equity was 9%. During the quarter, we generated $103 million of EBITDA compared to $157 million in last year's third quarter. And our effective tax rate was 23% in the third quarter compared to 24% in last year's third quarter. Our earnings per diluted share for the quarter decreased to $2.56 per diluted share from $3.92 last year. And our book value is now a record $130 per share. With that, I will turn it over to Derek J. Klutch to address our mortgage company results.

Derek J. Klutch: Thanks, Phillip. Our mortgage and title operations achieved pretax income of $13.4 million compared to $16.6 million in 2025's third quarter. Down 19% Revenue decreased 5% from last year to $32.7 million due to lower margins on loans sold, a lower average loan amount, and a slight decrease in the number of loans originated. The average loan to value on our first mortgages for the third quarter was 84%. Consistent with 2025's third quarter. 63% of the loans closed in the quarter were conventional, and 37% FHA or VA. Compared to 55% and 45%, respectively, for 2025's third quarter. Our average mortgage amount decreased to $403 thousand in 2026's third quarter compared to $406 thousand last year. Loans originated decreased to 1.83 thousand loans, which was down 1% from last year while the volume of loans sold decreased by 5%. Finally, as Bob mentioned, our mortgage operation captured 96% of our business in the third quarter. This was up from 93% last year. Now, I will turn the call back over to Phillip.

Phillip G. Creek: Thanks, Derek. Turning to the balance sheet, our financial position continues to be very strong We ended the third quarter with no borrowings under our $900 million credit facility. And had a cash balance of $620 million. We continue to have 1 of the lowest debt levels of the public homebuilders, and are well positioned with our maturities. Our bank line matures in late 2030 and our public debt matures in 2028 and 2030. Our unsold land investment at September 30, 2026, is $1.9 billion compared to $1.8 billion a year ago. And at September 30, we had $853 million of raw land and land under development and $1.1 billion of finished unsold lots. During the third quarter, we spent $135 million on land purchases and $155 million on land development. For a total of $290 million. At 090 lots and controlled 49 thousand lots. At the end of the quarter, we had 721 completed inventory homes, and 3.24 thousand total inventory homes. And of the total inventory, 1.04 thousand are in the northern region, and 1.9 thousand are in the Southern Region. Last year at 09, we had 776 completed inventory homes, and 3 thousand total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $200 million remaining under our current board authorization. Since the start of 2022, we have repurchased 21% of our outstanding shares. This completes our presentation. We will now open the call for any questions or comments.

Operator: As a reminder, if you would like to ask a question, please press *1 on your telephone keypad. Your first question comes from the line of Alan Ratner with Zelman and Associates. Please go ahead.

Alan Ratner: Hey, good morning. Thanks for all the detail and taking my question.

Robert H. Schottenstein: Thanks, Alan. This is Bob. Good to talk to you.

Alan Ratner: Likewise. You know, you guys have been probably 1 of the most nimble builders over the last decade or so in terms of making some modest adjustments to your business model and strategy based on market conditions You know, I am thinking, obviously, the growth in the Smart Series and kind of adjusting the spec mix based on market conditions. We have been in a challenging market for a while now, but it sounds like things have kind of taken another leg down this quarter with not much certainty or outlook for improvement in the near term. So I am curious whether this more recent leg down and the move higher in rates is causing you to maybe think through the strategy heading into 2027 and just thinking through your model, whether it is the mix of your business at spec versus BPO or price point or just strategy? I am curious if you are kind of making any adjustments or beginning to think about making any based on the current market reality.

Robert H. Schottenstein: that is a great question. You know, the first thing I want to say is you cannot know what you do not know. Right? I mean, sorry for you know, saying something so obvious. But at the beginning of this year, I do not know if too many people that predicted that we would see not only the kind of rate movement that we have seen, which has trended considerably up rather than flat or down, But I do not think anyone believed or even had in their crystal ball that there would be a war beginning at the end of the first quarter and that has it has continued now for 6 months. And all of the related economic impacts that it has had, which I think have impacted in a negative way consumer confidence. But that is been well documented. You have written about it as articulately as anyone. Having said all that, in good time and in bad, I think that-- and I did not always know this, but it could not be clearer to me today as it-- maybe it was not as clear 20 years ago. But in good time and in bad, there is no financial piece of paper that is more important than your balance sheet. And when things are more challenging, the importance of the balance sheet becomes more and more important. Not because you think, you know, that we are about to enter a tsunami or some hundred year flood or something. But because you have to be prepared to deal with unexpected things like we have sort of seen happen this year, I do not think the sky is falling. I do not believe that. Nobody knows for sure. I still think that there is so many positive underlying fundamentals that support the long term health and vitality of the homebuilding industry. We are not gonna start selling a bunch of land. We have got a great land position. Are we going to be more careful about new deals? Yes, we are. But we control enough land both on and off of our books to be able to manage whatever come what may. We are not gonna make any material changes Maybe in a few markets, we might adjust our product mix a little bit company wide. I do not see us making a lot of material changes to that. there is a bit of a lead time associated with that anyway. I think we have a great strategy. And I think that we have been doing the right things So it is easy to say execution matters. We are not perfect. We do not do everything A+,, but we do a lot of things really well. You know, the 96% capture rate in our mortgage operation yet another. it is highest in the industry. That we did-- it is-- that is not dumb luck. A year ago, it was 93%, and that was the highest in the industry. pay a lot of attention to sales training more than ever More sales training going on in our company today than at any time in our 50-year history. And that did not just start when rates went up 100 basis points. that is been going on since the beginning of the year. Because you have to keep getting better. And I love the way we think about land. We were 1 of the few builders that was never romanced into doing land banking and a lot of off balance sheet stuff. Maybe we should have. I do not know. But I like that we control it. And I like that we are not paying the premium for it. And I am liking that our best deals are not potentially cross-collateralized with a land banker who may be looking to call a bad deal. My point is you know, we have our hands firmly on the rudder. If we do not go in the right direction, it is our fault. But we are really intensely focused on what we can control and our customer service scores are the highest in company history. Our home readiness scores, has to do with the completeness of the home, at the time of closing, are the highest in company history. This is all third party tabulated. Our Google review scores across all of our divisions are the highest in company history So when you talk about execution and focusing on controllables, there is a lot to really feel good about. But this is a-- these are tough conditions. You know? July conditions were a whole lot better than September, and August was a whole lot better than September too. But I do not see any reason for some radical change. Yeah. We are gonna watch new hiring. We are gonna control expenses. You know, we are gonna do all the things that my guest, most of our peers are gonna be doing right now as well. as we are dealing with all these uncertainties But I do not think the sky is falling. And I could not be a-- home building is a cyclical business. This is not your first rodeo either. You have seen the cycles. Maybe we are due for a bit of 1 because things have been pretty good for quite some time. But I would not want to be any other builder. I would not want to be anywhere else. I love our geographic footprint. You know, there is times when Florida is a lot better than the Midwest. And there is times when Texas is the strongest. You know, and these things come and go and go up and down. But in balance, we have got a very dominant position in the Midwest, a tremendous position in the Carolinas,, you know. Florida is a little bit of a struggle right now, particularly the West Coast. But remain extremely bullish long term on Florida. And Dallas and Houston remain 2 of our best operations out of our 17. So, you know, just trying to tell it like I see it.

Phillip G. Creek: And, Alan, 1 other thing I would add, I would sure echo what Bob says about how much execution matters. Obviously, having a really, really strong clean balance sheet, having a lot of liquidity is really important. So we continue to always focus on that. We have kind of reduced starts a little bit. You know, due to market conditions. You will see that our spec levels a little over 3 thousand in total. And our finished spec levels being in that, you know, 700 range is pretty much flat where it was a year ago even though we do have 5% more stores. So we are not trying to force anything, because demand, you know, is an issue. But, again, we will just continue trying to, you know, block and tackle better than others.

Alan Ratner: Very helpful. Thank you very much for all the color. Thanks, Alan.

Operator: Your next question comes from the line of Buck Horne with Raymond James. Please go ahead.

Buck Horne: Hey. Good morning, guys. Appreciate all that color. Very helpful. Yeah, wanted to follow-up a little bit on--

Robert H. Schottenstein: Good morning.

Buck Horne: To follow-up kind of on what you are seeing in you mentioned the West Coast Of Florida. It looks like at least in early October, you guys have made some more significant pricing adjustments on some quick move-in homes, particularly in Tampa and Sarasota. Maybe follow up on kind of how Florida is trending in general for you and how you think those pricing adjustments will take? And are you making any more significant either incentive adjustments or pricing adjustments in other regions in October?

Phillip G. Creek: Buck, as Bob said, you know, Florida and Texas you know, have been a little more challenging in general, you know, than the Midwest and The Carolinas have been. We have had a very, very strong operation in Florida, especially for years. Orlando has actually held up, you know, pretty good for us. Tampa, you know, Sarasota had been a little more challenging. We obviously make, you know, adjustments on a community basis. Periodically as we need to. And we are excited about our. You know, still a little bit of a start up operation in Fort Myers in Naples. But I would not say we are doing anything you know, significantly. You know, again, it is kind of a subdivision by subdivision situation. You know, if you just look at our you know, new contracts, you know, in the third quarter, Actually, you know, compared to the prior year, you know, Sarasota was up. You know, Tampa was down a little bit. You know? So it is kind of a little bit of a mixed bag in Florida. But overall, it still continues to be challenged. But you know, we still feel really good about our leadership teams and really good about our opportunity there.

Robert H. Schottenstein: The only thing I might add Fort Myers Naples, exceeding our expectations. We are off to a very good start there. And, obviously, it is it is a relatively new division for us. But very optimistic about that. I just wanna underscore, we probably have 1 of the best teams in our company in Tampa. So whatever the market may come, I have got tremendous confidence that we will figure it out.

Buck Horne: No. Appreciate that. Yeah. And go Rays, right? So 1 quick 1 on labor availability. It seems like there is been a lot more discussions about, you know, whether it is immigration enforcement activity or just other complications with you know, getting crews out to job sites on time. Are you seeing any effects of labor availability or immigration enforcement so far here in the through the third quarter?

Phillip G. Creek: You know, in certain markets, and it seems to kind of come and go You know, we have issues with ICE and those type issues. Overall, you know, we feel good about where we are. We do have a few more houses in the field, today than we did a year ago. We do desire to grow. We talked about, you know, community count being up, you know, 5% at the end of this year. From a land position, you know, we could be doing. And I think also from a labor standpoint, we could be doing, you know, probably 1 thousand or 1.5 thousand more homes a year if the demand was there. that is the biggest issue we have right now. So I would not say that, labor is a huge issue. You know, from a cost standpoint, you know, especially with all the gas increases and diesel and land develop and those type of things, we feel pretty good about our, construction costs and land development costs have continued to be pretty flat. So we continue to, you know, focus on all those blocking and tackling things, Buck. And wish we were making more progress, but, you know, we feel pretty good about what we are doing.

Buck Horne: Appreciate the color. Sounds like you are doing a great job under the circumstances. Alright. Good luck, guys.

Phillip G. Creek: Thanks, Buck.

Operator: Your next question comes from the line of Jay McCanless with Citizens Bank. Please go ahead.

Jay McCanless: Hey. Good morning, everyone.

Phillip G. Creek: Hey, Hey.

Jay McCanless: So on the SG&A, could you talk about how much-- were there any onetime items in there? Or is that just where the level is now with the higher community count?

Phillip G. Creek: You know, Jay, as we said, our SG&A expenses were up about 5%, you know, which is similar to community count. You know, for every community, in general, you have a couple more salespeople. You know, you have construction people, etcetera. So in general, that community count increase, does increase that. Are we spending a little more money on the advertising promoting side, yes, we are. But the biggest issue is just, you know, the impact of increased community count, which you know, we have talked about. You know, we sure like to increase that community count, you know, 5% to 10% a year is kind of our goal. Been able to do that the last couple years and this year. Okay.

Jay McCanless: And then the next question I had, you know, you guys gave a lot of useful commentary about shifting into more move up product last quarter. I guess, could you talk about what the numbers were? and I think you gave them already, but maybe talk about what the numbers for move up were this quarter and kind of following on Alan's question, are you guys looking to pivot more into move up into 2027 than what you did in 2026?

Phillip G. Creek: You are talking about the move up buyer categories that we are talking about?

Robert H. Schottenstein: Communities. Yeah. I mean, I did not follow Buck, Jay, I did not follow the question.

Phillip G. Creek: Will you reask it?

Jay McCanless: Sure. You know, last quarter's conference call, you guys talked about shifting into more move up communities, focusing more on the move up buyer Could you talk about what you are doing this quarter? But then also, kind of following on Alan's question, are you looking for ways to maybe change that mix of move-up communities in 2027?

Robert H. Schottenstein: Not really. what is in place in select markets and I am not gonna mention which ones because there is no reason to. But in select markets, we. There is a greater emphasis on more move up than first-time. That began probably 3 to 6 months ago. And that will continue. So nothing has really changed in the last couple of quarters In many of our markets, we have a very good mix right now and I do not see it changing much. But clearly, in 2 or 3 or maybe 4 of our markets, we are shifting the mix a little bit more towards the move up. That. that is already underway. it is playing out as we speak. And you know, that is that is not a change during the third quarter. That was something that we started earlier this year. And these were markets where over 75% of our business was first time We never really felt great about that even before the move up became more in vogue. We always felt you know, sometimes things just sort of end up a certain way. I never want too many eggs in 1 basket Because we do not have to do that. We are not going to.

Jay McCanless: Got it. And then the last question I had, just could you talk about what the incentive levels were this quarter and how they are trending to start the fourth quarter?

Phillip G. Creek: Well, obviously, our margins, have been going down. And as Bob said, you know, we primarily use incentives in mortgage rate buy downs. Every community is a little different. You know, as far as. Especially with first time buyers, they tend to need, you know, more help also with closing costs. I think also 1 of the things in the marketplace right now in general is I think, you know, the first thing all buyers expect is a reduced competitive interest rate and you are seeing in certain markets a little more price reduction, So it is kind of hard to figure out, you know, all the different breakdown of incentives. Incentives definitely did increase as we went through the quarter. But, again, it is just a community by community standpoint. you know, we are having customers go a little bit more toward ARM products now. Than they were before. But that is something that is just always changing that, you know, we just have to deal with, and we track that every day and work on it every day in every community.

Jay McCanless: Okay. Great. that is all I had. Thanks, guys.

Phillip G. Creek: Thank you, Jay.

Operator: There are no further questions. I would now like to turn it back to Phillip Creek for closing remarks.

Phillip G. Creek: Thank you very much for joining us. Look forward to you next quarter.

Operator: This concludes today's conference call. You may now disconnect.