M/I Homes (MHO) Q3 2026 earnings call transcript

Thank you for joining us today. With me is Bob Schottenstein, our CEO and President, and Derek Clutch, 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, 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'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% 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 U. S. 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 a 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 actually 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'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'm proud to share that on both of these counts, MI Homes is very well positioned to navigate the current market conditions. During the quarter, our team's 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 1,861 homes, 2% less than a year ago. and 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 buy-downs as our primary incentive to drive sales. With rates rising during the quarter, the cost of such buy-downs 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 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 buy downs 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've 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 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 know, 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. 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 two-and-a-half-year supply. In addition we control approximately 25 lots via option contracts resulting in a total of roughly 49 owned and controlled lots equating to about a five 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 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. And 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, MI Homes is well-positioned to manage through this current cycle. And with that, I'll turn it over to Phil.

Thanks, Bob. Our new contracts were down 2% 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 2,241 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.

And this also compares to 35% in last year's third quarter. As of 930, we had 5,200 homes in the field versus 5,000 homes in the field a year ago, and our construction costs 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. Exit 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 pre-tax 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. 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'll turn it over to Derek Clutch to address our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved pre-tax 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 $403,000 in 2026's third quarter, compared to $406,000 last year. Loans originated decreased to 1,835 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'll turn the call back over to Phil.

Thanks, Derek. As far as 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 one of the lowest debt levels of the public home builders 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 93026 is $1.9 billion compared to $1.8 billion a year ago. And at 930, 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 930, we owned 23,000 lots and controlled 49,000 lots. At the end of the quarter, we had 721 completed inventory homes and 3,242 total inventory homes. and of the total inventory, 1,338 are in the northern region and 1,904 are in the southern region. Last year at 930, we had 776 completed inventory homes and 3,001 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'll now open the call for any questions or comments.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

Thanks, Alan. Good to talk to you.

That's a great question. And, you know, the first thing I want to say is you can't know what you don't know, right? I mean, sorry for saying something so obvious, but at the beginning of this year, I don't know of too many people that predicted that we would see not only the kind of rate movement that we've seen, which has trended considerably up rather than flat or down, but I don't 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 continued now for six months, and all of the related economic impacts that it has had, which I think have impacted in a negative way consumer confidence.

That's been well documented. You've written about it as articulately as anyone. Having said all that, in good time and in bad, I think that, and I didn't always know this, but it couldn't be clearer to me today as it maybe wasn't as clear 20 years ago, but in good time and in bad, there's no financial piece of paper that's more important than your balance sheet. and when things are more challenging, the importance of the balance sheet becomes more and more and more important. Not because you think, you know, that we're about to enter a tsunami or some, you know, 100-year flood or something, but because you've got to be prepared to deal with unexpected things like we've sort of seen happen this year.

I don't think the sky is falling. I don't believe that. Nobody knows for sure. I still think that there's so many positive underlying fundamentals that support the long-term health and vitality of the home building industry. We're not going to start selling a bunch of land. We've got a great land position. Are we going to be more careful about new deals? Yes, we are. Will we control enough land, both on and off of our books, to be able to manage what may come?

We're not going to make any material changes. Maybe in a few markets we might adjust our product mix a little bit company-wide. I don't see us making a lot of material changes to that. There's a bit of a lead time associated with that anyway. I think we have a great strategy, and I think that we've been doing the right things.

It's easy to say execution matters. We're not perfect. We don't do everything A plus. But we do a lot of things really, really well. The 96% capture rate in our mortgage operation is yet another. It's highest in the industry.

That's not dumb luck. A year ago it was 93%, and that was the highest in the industry. We pay a lot of attention to sales training more than ever. There's more sales training going on in our company today than at any time in our 50-year history. And that didn't just start when rates went up 100 basis points. that's been going on since the beginning of the year because you've got to keep getting better.

And I love the way we think about land. We were one 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 don't know. But I like that we control it. And I like that we're not paying a premium for it. And I'm liking that our best deals aren't 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 don't go in the right direction, it's our fault. But we're really intensely focused on what we can control, and our customer service scores are the highest in company history.

Our home readiness scores, which 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's a lot to really feel good about.

But this is a, you know, 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 don't see any reason for some radical change. Yeah, we're going to watch new hiring. We're going to control expenses. You know, we're going to do all the things that, I guess, most of our peers are going to be doing right now as well as we're dealing with all these uncertainties. But I don't think the sky is falling, and I couldn't be a, you know, home building is a cyclical business.

This isn't your first rodeo either. You've seen the cycles. Maybe we're due for a bit of one because things have been pretty good for quite some time. But I wouldn't want to be any other builder. I wouldn't want to be anywhere else. I love our geographic footprint. You know, there's times when Florida's a lot better than the Midwest, and there's times when Texas is the strongest.

You know, and these things come and go and go up and down. But in balance, we've got a very dominant position in the Midwest, a tremendous position in the Carolinas. You know, Florida's a little bit of a struggle now, particularly the West Coast, but remain extremely bullish long-term on Florida. And Dallas and Houston remain two of our best operations out of our 17.

So, you know, I'm just trying to tell it like I see it.

And, Alan, one other thing I would add, I 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'll see that our spec levels, a little over 3,000 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're not trying to force anything because demand, you know, is an issue. but again we'll just continue trying to you know block and tackle better than others very helpful thank you very much for all color thanks alan your next question comes from the line of buckhorn with raymond james please go ahead hey good morning guys appreciate all that color very helpful um yeah i wanted to follow up a little bit on hey good morning um i wanted to follow up kind of on what you're seeing in uh you mentioned the West coast of Florida.

You know, Buck, as Bob said, Florida and Texas have been a little more challenging in general than the Midwest and the Carolinas have been. We've had a very, very strong operation in Florida, especially for years. Orlando has actually held up pretty good for us Tampa Sarasota have been a little more challenging We obviously make adjustments on a community basis periodically as we need to and we are excited about our, you know, still a little bit of a startup operation in Fort Myers and Naples. But I wouldn't say we're doing anything significantly. You know, again, it's kind of a subdivision by subdivision situation. if you just look at our new contracts in the third quarter.

Actually, compared to the prior year, Sarasota was up. Tampa was down a little bit. So it was kind of a little bit of a mixed bag in Florida. But overall, it still continues to be challenged. But we still feel really good about our leadership teams and really good about our opportunity there.

The only thing I might add, Fort Myers-Naples, exceeding our expectations. We're off to a very good start there. And obviously it's a relatively new division for us. But very optimistic about that. I just want to underscore we probably have one of the best teams in our company in Tampa. So whatever the market may come, I've got tremendous confidence that we'll figure it out.

you know in certain markets and it seems to kind of come and go you know we have issues with you know 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 you know to grow we talked about you know community count being up you know five percent 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 1,000 or 1,500 more homes a year if the demand was there. That's 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 development and those type things. We feel pretty good about our, you know, construction costs and land development costs have continued to be, you know, 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're doing.

Thanks, Buck. Thanks, Buck.

Morning, Jay.

you know jay as we said our sgna expenses were up about five percent you know which is similar to community count you know for every community you know in general you have a couple more sales people you know you have construction people etc so in general that community count increase uh 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've talked about. You know, we sure like to increase that community count, you know, 5% to 10% a year is kind of our goal. We've been able to do that the last couple of years and this year.

You're talking about the move-up buyer categories?

Buck, Jay, I didn't follow the question. Will you re-ask it?

Not really. what's in place in select markets, and I'm not going to mention which ones because there's no reason to, but in select markets, there is a greater emphasis on more move up than now. That began probably three to six months ago, and that will continue. So nothing has really changed in the last couple of quarters. in many of our markets we all we have a very good mix right now and i don't see it changing much but clearly in two or three or maybe four of our markets we're shifting the mix a little bit more towards the move up that that's already underway it's playing out as we speak um and and you know that's it's not a change and during the third quarter that was something that we started actually 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 one basket because we don't have to do that. We're not going to.

Well, obviously our margins have been going down. And as Bob said, we primarily use incentives in mortgage rate buy-downs. Every community is a little different, as far as, especially with first-time buyers, They tend to need more help also with closing costs. I think also one of the things in the marketplace right now in general is I think 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's kind of hard to figure out all the different breakdown of incentives.

Incentives definitely did increase as we went through the quarter. But, again, it's just a community by community standpoint. You know, we're having customers go a little bit more toward ARM products now than they were before. But that's something that's just always changing that, you know, we just have to deal with. And we, you know, track that every day and work on it every day in every community.

Thank you, Jay.

Thank you very much for joining us. Look forward to talking to you next quarter. This concludes today's conference call. You may now disconnect.