Good morning, everyone, and welcome to the M/I Homes Second Quarter Earnings Conference Call. This call is being recorded on Wednesday, July 23, 2025. I will now hand it over to Phil Creek. Please proceed.

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President; and Derek Klutch, President of our mortgage company. First, to address regulation for 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'll turn it over to Bob.

Thanks, Phil. Good morning, and thank you for joining us. As outlined in today's release, M/I Homes had a very solid second quarter, highlighted by record second quarter revenue, record second quarter homes delivered, and continued strong returns including 25% gross margins, 14% pretax income, and a 17% return on equity. We were very pleased to post these results given the challenging macroeconomic backdrop. When we last spoke on our first quarter earnings call, we commented on the demand challenges we faced during the last half of 2024 as well as during the first quarter of this year. Little has changed as we continue to face challenging and choppy conditions, primarily due to higher interest rates, which have contributed to uncertainty and impacted consumer confidence. Throughout this year, we have strategically and effectively used mortgage rate buydowns to drive traffic and incentivize sales. Though such buydowns have impacted profitability and margins, they have been most successful as we strive to balance price and pace across our 234 communities. So while our second quarter new contracts were down 8% from a year ago, we were pleased to record a monthly sale pace of 3 homes per community. Moreover, we were pleased to see a sequential improvement in new contracts from May to June. We have repeatedly said that the long-term fundamentals of our industry are sound and that housing will benefit greatly from the current undersupply of homes and growing household formations, particularly in our markets. There's little doubt that many potential buyers are sitting on the sidelines, waiting for a better rate environment and an improvement in consumer sentiment. As we go forward, we will continue to use rate buydowns to drive traffic as we manage our operations to meet the demands of the current environment. We feel very good about our business and believe that we can continue to drive performance and produce solid returns and profitability. In the second quarter, we closed a record 2,348 homes, a 6% increase compared to a year ago. Our second quarter total revenue, also a record, increased by 5% to $1.2 billion, and pretax income decreased 18% to $160.1 million, largely due to the decline in gross margins to 25%, but still a very good 14% pretax income return. We continue to see quality buyers in terms of creditworthiness, with strong average credit scores of 746 and an average down payment of 17%. We ended the second quarter with a record 234 communities and remain on track to grow our community count in the balance of 2025. We believe our 2025 average community count will increase by about 5% from 2024. Our division income contributions in the second quarter were led by Columbus, Dallas, Orlando, Chicago, Minneapolis, and Charlotte. New contracts for the second quarter in our Northern region decreased by 13%, while new contracts in our Southern region decreased by 4%. Our deliveries in the Southern region increased by 8%. Deliveries in the Northern region increased 2% from a year ago. 59% of our deliveries come from the Southern region, with the other 41% from the Northern region. We have an excellent land position. Our owned and controlled lot position in the Southern region increased by 7% compared to a year ago and decreased by 7% versus last year in the Northern region. 31% of our owned and controlled lots are in the North, and the other 69% are in the South. Company-wide, we own approximately 24,500 lots, which is slightly less than a 3-year supply. In addition, we control via option contracts approximately 26,000 additional lots resulting in a total of 50,500 owned and controlled lots, equating to about a 5- to 6-year supply. Our balance sheet is the strongest in company history. We ended the second quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $117, which is up 17% from a year ago. We also ended the quarter with 0 borrowings under our $650 million unsecured revolving credit facility and $800 million of cash. This resulted in a debt-to-capital ratio of 18%, down from 20% a year ago and a net debt-to-capital ratio of negative 3%. As I conclude, let me just state that we remain very optimistic about our business. Given the strength of our balance sheet, the quality of our communities, and the tremendous land position that we have, we are well positioned as we begin the third quarter of 2025. And with that, I'll turn it over to Phil.

Thanks, Bob. Our new contracts were down 8% for the quarter when compared to last year. They were down 12% in April, down 12% in May, and up 1% in June, and our cancellation rate for the quarter was 13%. 51% of our second quarter sales were to first-time buyers and 73% were inventory homes. Our community count was 234 at the end of the second quarter compared to 211 a year ago, and the breakdown by region is 99 in the Northern region and 135 in the Southern region. During the quarter, we opened 23 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered 2,348 homes in the second quarter, delivering 82% of our backlog, and 36% of our second quarter deliveries came from inventory homes that were sold and delivered in the quarter. As of June 30, we had 5,100 homes in the field versus 5,000 homes in the field a year ago. Our revenue increased 5% in the second quarter, and our average closing price for the second quarter was $479,000, a 1% decrease when compared to last year's average closing price of $482,000. Our second quarter gross margin was 24.7%, down 320 basis points year-over-year and down 120 points from our first quarter of 2025. Our cycle time slightly improved in the second quarter compared to last year, and our second quarter SG&A expenses were 11.3% of revenue compared to 11.0% a year ago. Our second quarter expenses increased 7% versus a year ago, and these increased costs were primarily due to our increased community count and additional headcount. Interest income, net of interest expense, for the quarter was $4.4 million. Our interest incurred was $8.7 million. We are pleased with our returns for the second quarter given the challenges facing our industry. Our pretax income was 14%, and our return on equity was 17%. During the quarter, we generated $169 million of EBITDA compared to $200 million in last year's second quarter, and our effective tax rate was 24.3% in the second quarter compared to 24.4% a year ago. Our earnings per diluted share for the quarter decreased to $4.42 per share from $5.12 per share last year, down 14%, and our book value per share is now $117, a $17 per share increase from a year ago. Now Derek Klutch will address our mortgage company results.

Thanks, Phil. Our mortgage and title operations achieved pretax income of $14.5 million, a slight increase from $14.4 million in 2024's second quarter. Revenue increased 2% from last year to a second quarter record $31.5 million due to higher margins on loans sold, a higher average loan amount, and an increase in loans originated. Average loan to value on our first mortgages for the second quarter was 83% compared to 81% in 2024's second quarter. We continue to see an increase in the use of government financing, as 51% of the loans closed in the quarter were conventional and 49% FHA or VA compared to 69% and 31%, respectively, for 2024's second quarter. Our average mortgage amount increased to $403,000 in 2025's second quarter compared to $395,000 last year. Loans originated increased to 1,865, which was up 15% from last year, while the volume of loans sold increased by 10%. Finally, our mortgage operation captured 92% of our business in the second quarter, up from 87% last year. Now I'll turn the call back over to Phil.

Thanks, Derek. As to the balance sheet, we ended the second quarter with a cash balance of $800 million and no borrowings under our unsecured revolving credit facility. We continue to have one of the lowest debt levels among public homebuilders and are well positioned with our maturities. Our bank line matures in late 2026 and our public debt matures in '28 and '30 and as interest rates below 5%. Our unsold land investment at June 30, '25 was $1.7 billion compared to $1.5 billion a year ago. And at June 30, we had $894 million of raw land and land under development and $803 million of finished unsold lots. During 2025's second quarter, we spent $102 million on land purchases and $139 million on land development for a total of $241 million. On June 30, we owned 24,500 lots and controlled 50,500 lots. And at the end of the quarter, we had 586 completed inventory homes in 2,726 total inventory homes. And of the total inventory, 1,011 are in the Northern region and 1,715 are in the Southern region. On June 30, 2024, we had 372 completed inventory homes and 2,150 total inventory homes. We spent $50 million in the second quarter repurchasing our stock and have $150 million remaining under our current board authorization. Since the start of 2022, we have repurchased 14% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

The first question comes from Alan Ratner at Zelman & Associates.

Bob, nice job in a tough environment. Congratulations.

Alan, good to hear from you. Thank you.

Nice to hear from you guys as well. Bob, I guess, first question, just kind of more bigger picture, I was hoping you could just provide a little bit more commentary across your footprint and kind of differentiation and the trends you're seeing by price point, by geography, which ones are the relative winners and losers in the current market?

Yes, I'll attempt to provide that. There is a lot of week-to-week volatility throughout the month. I noticed that another builder mentioned that one week can be strong while the next isn't as good, resembling a heart rate monitor, which aligns with our experience. Overall, our Midwest markets have slightly outperformed the Carolinas, although the Carolinas are still performing well. We're just beginning in Nashville, so I'm hesitant to comment on that as it feels premature regarding our performance there. Florida presents a mixed situation; Orlando has been much stronger for us than Tampa. Both Sarasota and Tampa have been a bit sluggish, although conditions in Tampa improved slightly as the quarter went on, which we were pleased to see. We've faced many delays in launching communities in Sarasota, affecting our performance there more than the broader market conditions. On a positive note, Fort Myers and Naples have started off well, although it's still early days. In Texas, Dallas is noticeably softer than it was a year ago when it was one of the strongest housing markets in the country. It's not in terrible shape, but it isn't what it used to be. Houston is also experiencing some softness, though not as much as Dallas. Austin seems to be gradually improving. San Antonio is somewhere in between, highly sensitive to interest rates concerning the buyer demographics. In summary, across all 17 of our markets, I'm pleased to be in each one of them. Columbus, Indianapolis, Chicago, and Minneapolis are performing well, as is Charlotte. In Raleigh, we're transitioning with communities being launched, and I'm optimistic about all these areas. If we weren't already in these markets, we would consider entering them. Florida appears to be resetting, especially on the West Coast from our perspective, but I'm optimistic about Florida’s long-term future. While I'm not personally looking to move there, I believe many others are. Florida remains a sought-after destination despite occasional weather issues. I also maintain high optimism about Texas. Some of the margins we previously saw in Dallas and Houston may not be fully sustainable long-term, but both remain strong housing markets. I believe Texas accounts for around 15% of new home sales in the U.S., a trend I expect to continue. We appreciate our position and see plenty of opportunities, and I’m glad we're not limited to just one area. We have no plans to expand further west, as we believe there’s substantial growth potential in our current markets. We hold a leadership position in over half of our markets, ranking as one of the largest builders. Overall, while the market is clearly challenging, it's not dire. I'd rate the conditions as a C to C-plus, and they've been consistent for a while. Those of us who have been around understand what a low market looks like, and we’re nowhere near that point. The fact that we can achieve a 14% income in this environment is remarkable. Any double-digit pretax income is noteworthy, and being able to achieve this in 2025 is something we take pride in. We've reduced our cycle time, and our customer service and home readiness scores are at their highest ever, which is a testament to our commitment to quality as these scores are independently evaluated. As I reflect on our business, I’m confident in our land position. I saw a report suggesting we have too many secondary communities, but I’m not certain I fully understand that perspective. Our land holdings are exceptionally well-located, and despite current conditions, many of our communities are performing at a high level.

Well, I appreciate that big rundown. And I think the tertiary community is more a function of the markets you're in as opposed to the submarkets within those markets. I would agree with you on the land position quality, for sure. I guess you kind of brought up some of the normalization in margins in Texas. And just kind of curious, I know you don't guide on margin, but still generating a pretty healthy overall margin, but it is down a couple of hundred basis points year-on-year. I'm just curious as you think about the normalization on margin, what are the headwinds and tailwinds that you're facing today as you look out over the next year or so?

Yes, that's a great question. I'm not sure anyone truly knows the answer. I believe our margins are starting to stabilize, though they may decrease slightly. I don't anticipate another significant drop of 100, 200, or 300 basis points. Higher interest rates will likely persist for a while, impacting margins as we continue to buy down mortgages. We've moved from the upper 20s in margins to the mid-20s, and I don't think they'll decline much further; they might drop to around 24 or 23, but they could also remain stable at their current levels. I feel we've settled into a certain range, and I don't expect rates to increase in the coming quarters. In fact, there's a possibility they might begin to decrease, which would greatly benefit margins. However, I have some concerns about the effects of tariffs, which is a challenging situation to assess. Initially, we anticipated a worse impact. So far, there has been minimal effect. We source about 20% to 30% of our lumber from Canada, though it's not the full amount. I don't see this scenario as disastrous; we will adapt and find our way through it. I believe we are close to where we are likely to remain for the next several quarters.

That's encouraging to hear. If I could ask one last question about the order trends by month, I found it interesting that your orders decreased by 12% in April and May but increased by 1% in June. I understand there are various factors that affect this, so I'm curious if you could elaborate on that for a moment. Did you implement any specific strategies?

It was interesting. There was a noticeable uptick in traffic in June, but it didn't last the whole month. There was that period where we all sort of thought rates were starting to drop. And it was interesting how that seemed to impact traffic and buyer sentiment for a few hours. I think I saw where someone else commented on that in the last day or so; I can't remember. But we saw that. And we don't really comment on current conditions, but I think things are settling in a little bit here, and I think it's going to continue to be a fight one buyer at a time. But that's what we've been doing all year. We've been doing that since last year at this time almost. And I think that sometimes comps can be impacted when you open a brand-new series of communities all in 1 month, and all of a sudden, it shoots that month up. But period-to-period, I think our sales have held up well, and I believe they'll continue to relative to market conditions.

Appreciate all the color, guys. Good luck and talk soon.

Talk to you soon, football season is on, Alan, start getting excited.

The next question comes from Ken Zener at Seaport Research Partners.

Bob, Phil, everyone. Regarding the margin stability and interest rates, I generally agree with you. However, could you provide some operational insights on the South, particularly Texas and Florida, though I believe you mentioned Texas is more significant for you. The segment margins showed gross margins of 24% in the first quarter. Those have declined sequentially from the fourth quarter. Can you elaborate on the margin differences between Florida and Texas? It would help us understand the business composition better.

A year ago, our margins in Texas were strong, especially in Dallas and Houston, which have major operations for us. Excluding Austin, which is still in a reset phase, those margins were among the best in the company, even surpassing Florida. They have decreased slightly, but they remain quite good, as we are averaging nearly 25%. Currently, margins in Texas are a bit better than those in Florida.

And one of the things that I've been focusing on, which surprises me, is do you have census data saying there's all this new home inventory for sale. You can exclude homes for sale not started, but like to make it comparable to public, are you seeing in your markets the new home inventory as high as the census is suggesting, which is 30-plus percent above long-term averages? Or is it not necessarily the case where you see such nominally high inventory units? It's just more demand that's affecting you guys.

I’ll attempt to address that. I’m not certain that I’m looking at the same figures as you. Regarding the large public builders, all of us are producing significantly more spec homes, which contribute to that inventory number, than we were two years ago, and possibly even a year ago. This factor is certainly involved. However, due to the current rate environment, our decision to increase the number of spec homes has been crucial to our performance. The rate buydowns are essential for encouraging people to purchase a home and proceed to closing, but it’s quite challenging—and often prohibitively expensive—to secure a long-term rate lock. The most appealing rate buydowns, which are the ones most buyers are utilizing, are available on homes that can close within 60 days. If we lack the inventory, we cannot provide that option. On the flip side, listings have increased in nearly every market we operate in, and in some cases, significantly, including existing homes. A major financial advantage we and other new homebuilders have over existing homes is our ability to offer rate buydowns, something the typical seller of an existing home lacks the capacity to do swiftly. They could offer it, but they don’t have the same agility or operational capability that we do. So, I'm uncertain if that fully addresses your question.

No, it does. I guess you ask different builders this, but do you guys respond to the census data requests because I know many of the other public builders actually don't respond to those. Do you guys provide data to the census?

I don't know that we do. If we do, I'm not aware of it. I'll have to check that. I actually don't pay that much attention to a lot of that data because it's so dated, and I'm not sure how reliable it is.

The next question comes from Buck Horne at Raymond James.

Congrats on a great quarter in a difficult environment. I wanted to just go back to the kind of the monthly progression of the order trends you guys were highlighting. Others have kind of commented that incentives increased as the quarter progressed or there was a need to kind of accelerate some incentives, which is kind of going to lead to a little bit of further margin erosion into the third quarter. I'm just kind of wondering, as you guys saw an uptick in your orders in June, was that due to a more heavy decision on incentives? Or was that more of an organically driven demand lift?

I believe it's more the latter. We aren't really implementing many incentives, aside from rate buydowns, which is our main incentive. There have been times, whether week-to-week or every few weeks, where the cost to buy down the rate to our desired level for both government and conventional loans has fluctuated, by about 50 to 100 basis points. Some builders might be more aggressive with incentives beyond rate buydowns, but most have not, which I find positive. There's always someone doing something we believe doesn't make much sense because a house can only be sold once and well-located lots are valuable. I'm not sure if you have anything to add.

It's very hard to project what margins are. In the second quarter, approximately 36% of our closings were spec sales that were sold and closed during the quarter. Additionally, in the first half, we opened 50 new stores, which affects our operations. You only have one opportunity to open correctly, so we need to be cautious with pricing and incentives, especially with new communities. Generally, our higher-priced homes tend to maintain their value and margins better these days. Selling spec homes is an art; currently, about 70% of our sales are specs. While specs usually have lower margins compared to to-be-built homes, it's crucial to know which house to spec on which lot and how to manage incentives for specs. As mentioned, there is greater efficiency in buying down rates quickly. Overall, predicting margins is challenging, but we feel positive about our current position.

That's good. I appreciate the color. And I guess, thinking about the specs and kind of your projected community count growth in the back half on top of the new openings you've already achieved here. So I'm just wondering how you're thinking about the start pace through year-end. Do you need to accelerate more specs to hit your delivery goals? Or do you have enough product in process right now?

We're trying to manage a lot of things. I did mention that at midyear, we had 5,100 homes in the field versus 5,000 a year ago. Our store count is up about 10%. So we do have more stores. We do have more people. We do have higher SG&A. So obviously, we need a certain amount of volume. But having said that, we're not trying to force it; land is a very important commodity to us. It takes a long time to get locations and get those zoned, approved, and get the specs and the models built. So again, we're trying to drive a certain amount of volume, but we're not trying to force volume like certain other builders are.

Bob, I really appreciate the bullishness on Florida in particular. So it's good to hear that Tampa's finally, things seem to have turned the corner as well.

Yes, I think the steering wheel is heading in the right direction, though I wouldn't say it's completely turned the corner yet.

The next question comes from Jay McCanless at Wedbush.

Bob, good to talk to you. So I think, Bob, you talked about it in one of your answers, but at roughly 25% to 30% lumber coming from Canada, have you all tried to plan out or map out what type of gross margin impact that might have if they do knock that tariff rate up to 34%?

Yes. I think I said 20% to 30%. But Phil, I don't think it's too early to know right now because I don't think we have any division that gets the entire lumber. It's pieces and parts of certain kinds of wood that come out of Canada but...

Certain components can be swapped out in various ways. At this point, we haven't observed anything that suggests a major increase is imminent. Overall, our construction costs have remained relatively stable over the past few quarters. While land prices have generally risen, land development costs have stabilized. Therefore, based on our current insights, we don't expect any significant increases in the latter half of this year. If any changes do occur, we believe there are a few strategies we can employ.

That's good to know. The second part of your question, as Bob mentioned, is about margins trying to level out. We're concerned that if lumber prices increase along with what seems to be a more aggressive promotional environment in the coming months, builder gross margins could be under pressure. I'm trying to understand where that's headed. The other question I have is about the northern market, which Pulte mentioned yesterday. You noted that the Northern market is performing better. Are there any plans to expand again in that region, whether through mergers and acquisitions or by adding communities? I'm curious about your thoughts on this, especially given the strong affordability in some of those northern markets.

We are pleased to be operating in three distinct regions, possibly four if we consider the Carolinas and Nashville as somewhat central. Specifically, we have a strong presence in the Midwest, Florida, and Texas. I am quite optimistic about all these regions. Currently, the Midwest appears to be performing slightly better. We have significant operations in Columbus, Chicago, and Minneapolis, along with a rapidly expanding presence in Indianapolis. Our Cincinnati operation is performing at its strongest level since we began there in 1990. We have heavily invested in our Midwest markets and are ready to invest further. Each of these markets has a growth plan for the next few years, which we believe is realistic. All the cities are forecasting household formation growth, and like much of the country, they are facing a housing shortage with many potential buyers waiting on the sidelines. While we don't want to exaggerate our optimism, we see considerable potential in this area and anticipate an overall increase in our volume in the Midwest.

If you look at it, Jay, overall, in the 17 markets we're in, we do not have a single division today doing 1,000 units. And we think that we can do that in a few of our divisions. As we look out the next couple of years, again, assuming that things do get a little bit better, which we think they will, worst case, next year, we think we can do 12,000, 13,000, 14,000 houses in our 17 markets. But again, we want profitable growth; we'd like to control our most risky asset land. We like to stay within that 2- to 3-year range of what we own. And today, we own about 25,000 lots. I think we continue to conservatively and cautiously grow the business. We think we have the leadership teams, and we think we're pretty good at land and product and those types of things. So we are getting to the point where we're starting to get to the scale we need in Fort Myers and Nashville, which we just opened a couple of years ago. But again, there's a number of builders doing 2,000, 3,000 units even in some markets. And again, we're not doing 1,000 in any market yet. So we think we're really positioned to grow a lot, but we want to grow smart, grow profitably and also provide good returns.

Great. And then on SG&A, I know you guys said that SG&A dollars were up because of headcount increases and community count, I guess, are you getting close to maybe what the run rate is going to be at this higher level of operations? Or do you think there might be some more increases in SG&A dollars going forward on a quarterly basis?

I think there'll be some continued increase, Jay. I mean we opened 50 new stores, the first half. Last year, all year, we opened 72; we expect in the second half to open a similar number as the first half. We talked about having community count growth on an average up like 5%. So we're probably going to continue to have higher headcount; there are certain costs associated with more stores. So realistically, we do think SG&A dollars will probably continue to go up. As far as volume, again, we do have a few more houses in the field than we had a year ago. Hopefully, our closings will continue to be pretty strong, but that is based on us having to continue selling a lot of specs at reasonable profit levels. So that's kind of what we're focused on.

Okay. Got it. And then the last question I have, I don't know if you guys have looked at this, but a couple of builders have actually disclosed where their average mortgage rate is in the backlog at this point? Could you talk about that and maybe what your gross margin backlogs or the gross margin and backlog looks like?

I mean the margin in the backlog today is a whole lot different than it was at the end of the first quarter, maybe down 50 or 100 basis points, as Bob said, there continues to be margin pressure. There could be somewhere downward margins; I don't think anything significant. That just kind of depends. As far as the mortgage rates and those types of things, that's not something that we've disclosed in the past. I don't think incentives have changed a whole lot. Most builders these days with the 30-year rate around 7. Most people are 150, 250 basis points below that generate the traffic and the sales we want. So I don't think that's changed a whole lot.

We have no further questions. I will turn the call back over to Phil Creek for closing comments.

Thank you for joining us. Look forward to talking to you next quarter.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.