M/I Homes, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you for joining us today.

With me is Bob Schottenstein, our CEO and President, and Derek 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 non-public items with you directly. 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 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 pre-tax income, equating to an 8%+ 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 1st, the 10-year Treasury was at 4.5%. By August 1st, it had risen to 4.75%. It then began to rise at a faster pace, particularly during September, and by September 30th, 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 30th. 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 actually come down slightly, which is very good news. The current choppy and challenging conditions may continue for some time. Regardless, this is not the first time we've managed through challenging conditions. We've 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. 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 1,861 homes, 2% less than a year ago. For the first nine months of 2026, we have sold 6,598 homes, which is 5% more than a year ago. We continue to use mortgage rate buydowns 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 buydowns as we deal with rising rates.

I might add, while rate buydowns 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 one builder to another clearly differ, and the difference is often all about execution. During the quarter, we closed 2,241 homes, a 2% decrease compared to a year ago. Year to date, we have closed 6,361 homes, which is 4% less than a year ago. Our third quarter total revenue decreased by 5% to $1.08 billion, and pre-tax income decreased 38% to what I mentioned earlier, $87 million.

Our gross margin, excluding inventory charges, was 21.3%, 320 basis points lower than a year ago, down primarily due to the higher cost of rate buydowns and higher lot cost versus a year ago. Our mortgage company's capture rate for the quarter was 96%, one of the highest capture rates we have ever seen, and certainly one of the highest capture rates in the history of the home building industry. We continue to see quality buyers in terms of creditworthiness, with average credit scores of 748 and average down payments over 16%. Our Smart Series line of homes, which as most of you know, are our most affordable line of homes and generally appeals to the first-time homebuyer, 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. With 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, our closings 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 in the northern region. 41% of our total owned and controlled lots are in the north, the other 59% in the southern region. Company-wide, we own on our books approximately 23,400 lots, which is roughly a 2.5-year supply. In addition, we control approximately 25,600 lots via option contracts, resulting in a total of roughly 49,000 owned and controlled lots, equating to about a 5-year supply. In 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 zero 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%, one of the lowest debt levels in the home building industry. Moreover, in looking at our balance sheet, it's important to recognize that we are one of the few builders that does virtually zero land banking. There's no confusion about what's on our books and what isn't. Our balance sheet has essentially zero goodwill on it. We're 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 home building 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. With that, I'll turn it over to Phil.

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. 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 2,241 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.

This also compares to 35% in last year's third quarter. As of 9/30, we had 5,200 homes in the field versus 5,000 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. 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.