Good afternoon. My name is Ella and I will be your conference operator today. At this time, I would like to welcome everyone to the M/I Homes Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Phillip Creek, you may begin your conference.

Thank you and thanks for joining us today. On the call is Bob Schottenstein, our CEO and President; Tom Mason, EVP; Derek Klutch, President of our Mortgage Company; and Kevin Hake, Senior VP. 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. Also during this call, we disclosed certain non-GAAP financial measures. A presentation of the most directly comparable financial measure calculated in accordance with GAAP and a reconciliation of the differences between the non-GAAP financial measure and the GAAP measure was included in our earnings release issued earlier today that is available on our website. With that, I will turn the call over to Bob.

Thanks, Phil. Good afternoon and thank you for joining our call to review our third quarter results. We reported another quarter of solid growth in revenue and earnings setting all-time third quarter records for M/I Homes with new contracts, homes delivered revenues and net income. During the quarter, we experienced good sales and healthy traffic. We sold 1,302 homes in the quarter, which is a 6% increase from last year and represents the highest number of new contracts for third quarter sales on our company’s 42-year history. Traffic was up more than sales suggesting that buyer interest remains high. However, buyers are showing more hesitancy in moving forward. In our view, this hesitancy is a result of the increase in mortgage rates that has occurred this year as well as higher prices than stretched affordability in some markets. But let me be clear, we are not experiencing a drastic falloff in as suggested by some of the recent reporting on the housing market. Demand is in our view still healthy overall. Companywide, our absorption and pace per community slowed in the third quarter from a year ago due largely to the factors I just mentioned, but nonetheless remained at pace consistent with prior years in the third quarter. Approximately two contracts per community per month. Last year’s third quarter was particularly strong. Our contracts were up 13% during last year’s third quarter, but even with that difficult comp, we still increased our contracts another 6% this year during the quarter. And I should note that our third quarter sales were slightly impacted in both of our two North Carolina markets during September as a result of Hurricane Florence. Our backlog sales value at quarter end increased 25% compared to last year’s third quarter to a record $1.1 billion and units…

Thanks Bob. New contracts for the third quarter increased 6% to a third quarter record of 1,302. Our new contracts were down 7% in July, up 9% in August, and up 18% in September. As to our buyer profile, about 33% of our third quarter sales were to first-time buyers compared to 34% in this year’s second quarter and 44% of our third quarter sales were inventory homes compared to 45% in this year’s second quarter. Our community count was 212 at the end of the third quarter, up 18% versus 2017’s third quarter and up 13% from year end. The breakdown by region is 88 in the Midwest, 95 in the South, and 29 in the Mid-Atlantic. During the quarter, we opened 16 new communities, while closing 13 and we opened 54 new communities in the first 9 months of the year. For 2018, our current estimate is that our average community count for this year should be up 10% to 15% from the average of 183 communities in 2017. We delivered 1,422 homes in the third quarter, delivering 48% of our backlog compared to 52% a year ago. Revenue increased 19% in the third quarter of this year reaching a third quarter record of $568 million. This was primarily a result of an increase in the number of homes delivered, higher average closing price, and record third quarter revenue from our financial services operation. Our average closing price for the third quarter was $390,000, a 7% increase when comparing to last year’s third quarter average closing price of $366,000. And our backlog sales price is $401,000, up 5% from a year ago. Land gross profit was $66,000 in the third quarter compared to $365,000 in last year’s third quarter. We sell land as part of our land management…

Thanks, Phil. Financial services operation benefited from the increase in homebuilder closings with higher mortgage volume compared to last year. While improving slightly, we continue to see lower pricing margins on loans originated due to competitive pressures. Despite those pressures, our mortgage and title operations achieved pre-tax income of $4.8 million in the third quarter. This was flat with the prior year after adjusting for approximately $400,000 of income from the sale of a portion of our servicing portfolio last year. Total pre-tax income was $5.2 million in 2017’s third quarter. The loan-to-value on our first mortgages for the third quarter was 81% in 2018, down from 82%. 78% of the loans closed in the third quarter were conventional and 22% were FHA or VA compared to 76% and 24% respectively for 2017’s same period. Our average mortgage amount increased to $305,000 in 2018’s third quarter compared to $292,000. Loans originated increased 12% from 902 to 1,011 and the volume of loans sold increased by 14%. For the quarter, the average borrower credit score on mortgages originated by M/I Financial was 747, up from 744 a quarter earlier. Our mortgage operation captured about 81% of our business in the third quarter compared to 80% in 2017’s third quarter. At September 30, we had $82 million outstanding under the MIF warehousing agreement, which is a $125 million commitment that expires in June of 2019. We also had $22 million outstanding under a separate repo facility, which we just extended this month. The repo facility now expires in October of 2019 and was also increased to $50 million from $35 million. Both facilities are typical 364 day mortgage warehouse lines that we extend annually. Now, I will turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, we have continued to manage our balance sheet carefully focusing on investing in new communities while also managing our capital structure. Total homebuilding inventory at 9/30/18 was $1.8 billion, an increase of $296 million above 9/30/17 levels. This increase was primarily due to higher investment in our backlog, higher community count and more finished lots, including our acquisition of Pinnacle Homes in Michigan in March. Our unsold land investment at 9/30/18 is $737 million compared to $645 million a year ago. And at 9/30 we had $341 million of raw land and land under development and $396 million of finished unsold lots. We owned 4,814 unsold finished lots with an average cost of $82,000 per lot and this average lot cost is 20% of our $401,000 backlog average sale price. Our goal is to maintain about a 1-year supply of owned finished lots. And the market breakdown of our $737 million of unsold land is $297 million in the Midwest, $309 million in the South, and $131 million in the Mid-Atlantic. Lots owned and controlled as of 9/30/18 totaled 29,600 lots, 47% of which were owned and 53% under contract. We owned more than 13,700 lots, of which 40% are in the Midwest, 46% in the South and 14% in the Mid-Atlantic. A year ago we owned 11,500 lots and controlled an additional 15,400 lots for a total of 26,900 lots. During 2018’s third quarter, we spent $81 million on land purchases and $64 million on land development for a total of $145 million and about 47% of the purchase amount was raw land. Our estimate today for total 2018 land purchase and development spending is $575 million to $600 million, which includes the $409 million spent year-to-date. At the end of the quarter, we have 497 completed inventory homes, which is about 2 per community and 1,436 total inventory homes. And of total inventory, 501 are in the Midwest, 700 are in the Southern region and 235 were in the Mid-Atlantic. At 9/30/17, we had 413 completed inventory homes and 1,168 total inventory homes. At 9/30/18, we had goodwill of $16 million as a result of our Detroit acquisition. Our financial condition continues to be strong with $835 million in equity and homebuilding debt-to-capital ratio of 48%. At 9/30/18, there was $223 million outstanding under our $500 million unsecured revolving credit facility. This completes our presentation. We will now open the call for any questions or comments.

[Operator Instructions] Our first question comes from the line of Thomas Maguire from the Zelman & Associates. Your line is open.

Hey, guys. Congrats on a great quarter. You mentioned the Smart Series and just a continued success there and wanted to follow-up on that and maybe differentiation between price points more broadly? How does that buyer, perhaps the more needs based buyer behaved differently relative to the customers looking at your move-up product in the face of higher rates and significant price increases through the year?

Who is it that asked that question? I didn’t quite get the name.

Thomas Maguire with Zelman & Associates.

Okay, Thomas, thank you. I don’t know that I can really give, it’s Bob Schottenstein, I don’t know if I can really give a clear distinction between the needs of that buyer versus our other buyer. What I would say is I think that because it is a lower price, frankly there is more demand. I also think that our Smart Series locations are very well located. I mean at the end of the day, all things being equal this is a location-driven business and we have put a lot of time and attention and to the quality of our locations both at the entry level, the Smart Series as well as the others. I think our Smart Series locations look great. Our Smart Series elevations, I think stand very tall compared to the competition. I think it’s just been very favorably received by buyers. And even with the rates moving up as much as they have, we have had some pricing power in our Smart Series line in contrast with the rest of our product. I wish we had more locations today, but I'm excited that we have a lot more coming online. A year ago, we were only offering the Smart Series in just a handful of places, now it's in over half of our markets and it's approaching 12% to 15% of company-wide sales. We're not going to become a Smart Series company. I've said this before, but it is going to be a greater percentage of our business than it is now in all likelihood going forward.

And just to give you a couple of pieces of information, at the end of the third quarter, our Smart Series communities were about 8% of total, but if you look at our third quarter sales, it was about 14% of our sales. The absorption pace is above company-average. The margins are above company-average. The average sale price is a little below $300,000. And as Bob said, we have plans to further expand that product especially in our Texas markets.

Got it. And then just broadly, can you just comment on what the selling environment was like from an incentive perspective during the quarter with a little bit of choppiness in demand. And then how should we think about that impacting margin next year, if at all in your opinion?

I don't know that, that there was anything unusual about incentives that I'm aware of during the third quarter. For the last number of years, we've run as – you could just look on our website and see this, we've run what we call our Dream Big campaign that typically runs from mid-September to mid-October. It did last year, it did again this year, but it's not a terribly significant incentive-driven kind of a program. I think that there's a little bit more incentivization going on I think, but I don't think it's anything significant. Look, mortgage rates are considerably higher today. The monthly payment on a $300,000 mortgage today is several hundred dollars a month higher than it was a year ago. And I think that's a factor in just skittishness and hesitancy in sort of buyer willingness to jump in and sign a contract. We believe in terms of margins, we don't give guidance on margins. We were at the low end of our range, if you will, of 20% to 21% in the second quarter. We hinted that we thought we'd be bit more closer to the middle or the higher part of that range in the third quarter, we're 20.5%. We think it's a 20% to 21% business and we think going forward, it will remain so for us based on what we know today.

Got it. Thank you.

Our next question comes from the line of Jay McCanless from Wedbush. Your line is open.

Hey, good afternoon, everyone. Apologize for my voice, I’m fighting a cold. The first question I had, Hurricane Michael, I know that probably went through some of the Carolina markets. Did you all lose any days from those – from that hurricane?

I don't recall that we did. I'm looking at my weather experts sitting across from me. I think that the biggest impact we had was from Hurricane Florence. And I wouldn't call it significant, at least the impact of Florence, but it was maybe a week of business in Charlotte and Raleigh and when there's only 52 weeks in a year and you lose a week, I guess that's you'd rather pick up a week than lose a week. But I think the closings will pick up but we lost the sales. The one thing is that it affected everybody pretty much the same. It didn't just rain in our communities, but it is what it is.

Got it. And then how much in the order count did Pinnacle contribute this quarter or Detroit as a whole contribute this quarter?

As far as units, Jay?

Yes, sir.

Detroit is about 10 communities for us. From a sales standpoint, it was about 100 sales.

Right. And then the next question I had, I know everyone has been talking about lower lumber prices. I think you are the first builder to really call it out and say that it did help your construction cost for the quarter and I'm assuming helped your gross margin a little bit as well. Are you seeing the same thing as we start the fourth quarter, and is there any opportunities for you guys maybe to do some pre-buying since prices are basically back to where they were at the beginning of ‘17 and help your gross margin little bit as you go into ‘19?

Lumber has helped us a little bit and what we've seen recently is it's continued to help us. Of course, there is other costs going the other way. Framing labor in certain markets had been issues. There's also the issue with some of the tariffs possibly kicking in this month. So, there is other issues in there. So, we're not really banking at this day that it's going to help us significantly with what's going on in the market, but lumber has definitely been a little bit of a help.

And then the last question I had, thank you for all the detail on the Smart Series, it sounds like that product is doing really well. But it sounds like in move up based on your comments, it sounds like pricing power may have eroded a little bit there. Are you guys doing some things like buying down mortgage rates or trying to put in some extra options to drive a little bit higher sales pace there or are you comfortable with where the pace is at this point?

We'd like the pace to be a little bit better. I think that I agree with your insight that as you move up the price line or the price ladder, the demand became a little bit choppier. As far as the mortgage incentivization, I'll let Derek Klutch respond to that in terms of some things that we've either thought about or done.

Yes, Jay, this is Derek. Yes, for the Dream Big that we talked about, we did offer below-market interest rates primarily on spectrums to close this year, but that was across the board, not just for the move up, and that was successful. It kept us in the 4s when the market rate was touching 5%.

That’s great. Thank you, guys. Appreciate it.

Thanks, Jay.

Thank you, Jay.

Our next question comes from the line of Alex Barron from Housing Research Center. Your line is open.

Yes. Thanks, guys. You mentioned that your community count is expected to go up 10% to 15% next year and you also said Washington D.C. has been a bit of a challenge. So, I was curious if you're going to try to grow the community count pretty much everywhere or would D.C. and mid-Atlantic being exceptions?

Well, first, Alex as far as that community count guidance that is for this year. We expect the average community count to be up 10% to 15% this year in ‘18.

Okay. No problem.

And as far as whether – and you can’t – and we will likely provide that same guidance for next year at the next call. But I would simply say that that's a company guidance and it does not – as it works through the system, not all markets are the same, some markets may stay flat, some may actually go down a little, some may go up considerably more. It's not a broad-brush 10% everywhere.

Exactly. We've talked about trying to get up to scale. Sarasota as a standalone operation, we're obviously opening stores in Sarasota. We have been pleased with our Texas markets. We are opening more communities in Texas and Carolina is one of the things we've suffered from, especially in Charlotte this year as we sold through a number of our communities last year. Charlotte for instance is opening quite a few this year. So, every market it's a little bit different, but we feel really good overall at that 10% to 15% growth for the year.

Got it. And then as far as the share buyback, I'm not sure if I missed it, but I heard you say $11 million. How many shares or what price did you guys buy those at?

Well we gave that – Jay, this is Kevin. This is a little over $11 million and it was 437,000 – just about 437,500 shares.

Got it. Okay. And then so if I'm interpreting correctly, the 18% increase in orders in September, you said the promotion you're running started in mid-September, so I'm guessing that helped that number?

I don’t think – I hope that I am not going to say something that would come out sarcastic, I don’t mean it to. It didn’t hurt. But as you look at our quarterly performance this year, last year, the year before, whether it’s first quarter, second quarter, third quarter you tend to see a little volatility from month to month that I don’t think necessarily gives us any pattern. There is so many different forces and factors with new communities opening, communities closing, where they are opening, what price point, pent-up demand, did we pre-sell, did we do that? Anyway, but I think the main thing I have tried to make this point is we are very decent not great, but very decent, very sustainable, very acceptable traffic levels across most of our models in the month of September, better than conversion. The conversion process is just a little bit slower right now, but there remains buyer interest and I think while I’d rather see interest rates in the low 4s than at 5, the fact is a lot of the fundamentals of the total economy would suggest that housing still has some room to run and you got to calm down somewhere and that’s where we calm down.

And Alex, just so we are clear, the Dream Big promotion was in September of this year, but was in September of last year also.

Good point. So, it’s a like-for-like comp.

And we really didn’t do anything more this year from a promotion incentive standpoint than we did last year. And as Bob said, I mean our traffic was solidly up double-digits each month in the third quarter, which we would hope it to be, because our community count was up 18% at the end of the quarter, but it’s just an issue of trying to get a higher conversion rate, people just being a little more hesitant and so forth.

Yes, I think it’s actually smart to use the rate buy-downs. Now are those buy-downs across the whole 30-year spectrum or are you just buying down like the first or second year, how does that work?

Each market is a little bit different. Each community is a little bit different. We are focused a little bit around finished inventory 30-year rate, it depends.

Yes. And Alex, this is Derek, it’s not a temporary buy-down, it’s a permanent buy-down.

It’s for all 30 years.

30 years.

Yes. It’s for all 30 years, Alex.

Got it. Okay, thanks a lot. That’s helpful. Take care.

Thanks.

[Operator Instructions] There are no further questions at this time. Presenters you may continue.

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

And this concludes today’s conference call. You may now disconnect.