Key Highlights

  • Adjusted EPS of USD 2.70 trailed the USD 3.25 estimate and fell from USD 4.14.
  • Revenue of USD 1.08 billion fell 5% and missed the USD 1.11 billion estimate.
  • Gross margin excluding inventory charges was 21.3% as rate buy-down costs rose.
  • Book value per share reached a record USD 129.94, with USD 50 million repurchased.

M/I Homes (NYSE:MHO) reported third-quarter results on Wednesday, Oct. 21, with adjusted diluted EPS of USD 2.70, short of the USD 3.25 estimate. Revenue of USD 1.08 billion also landed under the USD 1.11 billion estimate, down 5% from a year earlier. GAAP diluted EPS was USD 2.56, against USD 3.92 in the third quarter of last year.

M/I Homes is a single-family homebuilder with operations in 17 markets across nine states, from Ohio and Illinois to Florida and Texas. Shares were down 6.9% at USD 115.50 in Wednesday trading.

Gross Margin Took the Hit

The metric that moved most was gross margin. It came in at 20.9%, or 21.3% excluding USD 4.7 million of inventory charges. The income statement implies a comparable figure near 24.5% a year ago. Management tied the decline to the rising cost of mortgage rate buy-downs, which the company uses as its main sales incentive, and to higher lot costs.

Costs below the gross line also rose against a smaller revenue base. Selling and general expenses were 13.1% of revenue, versus 11.9% a year earlier, with the company citing a larger community count. Operating income fell to USD 83.3 million from USD 135.3 million, and pre-tax income dropped 38% to USD 86.9 million.

Net income was USD 66.6 million, versus USD 106.5 million. Adjusted EBITDA was USD 103.4 million, against USD 156.6 million a year earlier.

Demand Softened as Rates Rose

Chief Executive Officer Robert Schottenstein said conditions worsened during the quarter. The 10-year Treasury yield climbed from 4.5% at the start of July to 5.3% by Sept. 30, and the average 30-year fixed mortgage rate rose by close to 100 basis points, to about 7.75%. He also pointed to elevated fuel prices, inflation worries and the conflict in Iran as weighing on consumer confidence.

New contracts totaled 1,861, down 2%. Monthly results swung from an increase of 15% in July to declines of 6% in August and 16% in September. Deliveries fell 2% to 2,241 homes, and the average closing price eased to USD 460,000 from USD 477,000.

Backlog ended at 2,046 homes, down 7%, with a sales value of USD 1.1 billion, down 9%. The cancellation rate was 12%, unchanged from last year. The company ended the quarter with 246 communities, up from 233.

A company executive said demand, not land or labor, is the main constraint, and that the builder has capacity for 1,000 to 1,500 more homes a year if buyers were there.

Balance Sheet and Buybacks

Shareholders' equity reached a record USD 3.3 billion. Book value per share rose to USD 129.94 from USD 120.44. Cash stood at USD 620.6 million with no borrowings under the USD 900 million credit facility, and the homebuilding debt to capital ratio was 18%.

The company repurchased USD 50 million of stock in the quarter and has USD 200 million left under its authorization. The mortgage unit posted pre-tax income of USD 13.4 million, versus USD 16.6 million, while its capture rate rose to 96% from 93%.

Owned and controlled lots totaled 48,934, which management described as about a five-year supply.

Markers to Follow

The next filings give a read on whether September's drop of 16% in new contracts carried into the fourth quarter. Other items to watch include gross margin excluding charges, the level of buy-down incentives, the path of mortgage rates after a slight easing noted by management, and the planned increase of about 5% in year-end community count.