Hello, and welcome to today’s M/I Homes Incorporated Third Quarter Earnings Conference Call. My name is Bailey and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host Phil Creek. Sir, please go ahead when you’re ready.

Thank you. Joining me on the call today is Bob Schottenstein, our CEO and President; Susan Krohne, our SVP and Chief Legal Officer; Derek Klutch, President of our Mortgage Company; Ann Marie Hunker, VP and Controller; and Mark Kirkendall, VP, Treasurer. 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.

Thank you, Phil. Good afternoon and thank you for joining us today. We are pleased to report record financial results for the third quarter of 2022, highlighted by record revenue, record income and record earnings per share. Revenue increase by 12% to $1 billion, pre-tax income increased by 43% to $167 million, net income increased 45% to $132 million and earnings per share increased by 54% to $4.67. We were also pleased to report very strong margins and returns for the quarter. Gross margins improved by 230 basis points to 26.8%. Pre-tax operating margins improved by 270 basis points to 16.5% and our SG&A overhead expense ratio improved by 40 basis points to 10.3%. All of this resulted in a very strong return on equity of 27% during the quarter. Our record setting financial results reflect the strong market conditions and demand for new homes that we experienced throughout all of 2021, where the quality and quantity of new home demand within our markets was as good as we’ve ever experienced. On the other hand, things have changed dramatically since the beginning of this year due primarily to the unprecedented rapid rise in mortgage rates. In response to the Federal Reserve’s actions increasing the benchmark federal funds rate, mortgage rates have more than doubled since the beginning of the year and now exceed 7%. This has significantly impacted demand across all markets and all price points. Clearly, there are many factors that influence demand for homes including job growth, consumer confidence and general economic conditions. However, this recent very rapid and significant rise in rates is the primary reason why we and the entire industry have seen a noticeable pullback in demand. During the quarter, we sold 1,349 homes, 31% decline from the 1,964 homes that we sold in the…

Thanks, Bob. Our new contracts were down 40% in July, down 19% in August, and down 35% in September, and our cancellation rate for the third quarter was 17%. As to our buyer profile, about 51% of our third quarter sales were the first time buyers compared to 50% in last year’s third quarter. In addition, 56% of our third quarter sales were inventory homes compared to 51% in the second quarter. Our community count was 178 at the end of the third quarter compared to 176 a year ago, and the breakdown by region is 91 in the Northern region and 87 in the Southern region. And during the quarter, we opened 25 new communities while closing 15. We currently estimate ending 2022 with about 195 communities. We delivered 2026 homes in the third quarter delivering 39% of our backlog compared to 37% a year ago. And our third quarter deliveries were negatively impacted by Hurricane Ian. We started 1,563 homes in the third quarter down 30% from last year’s third quarter. Now at September 30, we had 5,800 homes in the field versus 5,300 homes a year ago, which is up 10%. We had over 20% more homes in the field at 6/30 versus the prior year. We continue to focus on balancing our production with our sales pace and market conditions. Revenue increased 12% in the third quarter, reaching a third quarter record, $1 billion. Our average closing price for the third quarter was an all-time record $487,000, a 13% increase compared to last year’s third quarter average closing price to $430,000. Now our backlog average sale price is $533,000, also an all-time record up from $471,000 a year ago. And our backlog average sales price of our Smart Series product line is $429,000. The average sales…

Thanks, Phil. Our mortgage and title operations achieved pretax income of $7.9 million compared with $9.9 million in 2021’s third quarter. Revenue decreased 3% from last year to $20.1 million due to a lower volume of loans closed and sold, and we continue to experience lower pricing margins due to competition for purchase business. The average loan-to-value on our first mortgages for the third quarter was 82%, the same as last year. 79% of the loans closed in the quarter were conventional and 21% FHA or VA compared to 81% and 19% respectively for 2021’s third quarter. Our average mortgage amount increased to $385,000 in the quarter compared to $349,000 last year. However, loans originated decreased to 1,263 loans, which was down 19% from last year, while the volume of loans sold decreased by 1%. Our borrower profile remains solid with an average down payment of over 18% and an average credit score on mortgages originated by M/I Financial of 745. Finally, our mortgage operation captured 76% of our business in the third quarter compared to 85% last year. Now, I’ll turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, we ended the third quarter with a cash balance of $68 million and no borrowings under our unsecured revolving credit facility. We have one of the lowest debt levels of the public home builders and our position well with our maturities. Our bank line matures in mid-2025 and our public debt matures in 2028 and 2030, and as interest rates below 5%. Our unsold land investment at September 30 is $1.2 billion compared to $990 million a year ago. At 9/30, we had $725 million of raw land and land under development and $509 million of finished unsold lots. During the third quarter, we spent $75 million on land purchases and $142 million on land development for a total of $217 million. At September 30, we owned 25,000 unsold lots and controlled 46,000 lots. Breakdown of the 25,000 unsold lots that we own is about 7,000 finished, 7,000 under development, and 11,000 raw. With current challenging market conditions, we are closely monitoring our lands span and for the 21,000 lots that we control, but do not own our risk dollars for those deals total $75 million. At the end of the quarter, we had 200 completed inventory homes and 1,855 total inventory homes. And of the total inventory, 946 are in the north region and 909 are in the southern region. At last year’s 930, we had 62 completed inventory homes and 1,042 total inventory homes. This completes our presentation. We’ll now open the call for any questions.

Thank you. [Operator Instructions] The first question today comes from the line of Jesse Lederman from Zelman & Associates. Please go ahead. Your line is now open.

Hi, thanks for taking my questions, and congrats on a strong quarter. I’m just curious, what would you estimate your net pricing is down sequentially when factoring in both base price reductions and incentives? And if you could give a little color on, which markets or which communities you are seeing incentives not needed and which you are seeing the most. Because I know Bob, you mentioned earlier in your prepared remarks that it really is on a community by community basis.

Yes, that’s a great question and a really hard one to answer. As you know, we don’t give – I know, we don’t give guidance, because you point that out in every one of your releases. And so I’ll – but I’ll try to be really responsive to what is really a good question. I think of the markets that we’re in; Austin is clearly the one that’s under the most pressure if you will, in terms of having gone through incredibly rapid rise in prices and runaway margins, not just for us, but for all the builders. And now we’re beginning to see inventories rise there, and that markets a tougher nut to crack right now. What we will do there is going to be different than what we might do in Dallas is an example, which seems to be holding up considerably better. There are so many factors that influence our pricing strategy. How much land do we own in that community? Are we buying lots on a finish take down? Is there a competitor right next door that is sitting on too much land and is doing some deep discounting because they believe that’s in their best interest point. Pricing look, I don’t know that we’re any smarter than else, but I’m going to be really blunt with you. Pricing is all art and very little science. And if it was easy, the average builder’s sales wouldn’t be down 20% to 50%. We would’ve dealt with it sooner. It’s very, very difficult to know exactly where to price to meet demand. We know that prices are going to come down and we know margins are going to come down. Are they going to come down 200 basis points, 300 basis points, 400 basis points more than that?…

Right. Yes, I really appreciate all the color, you were able to provide there. Just a quick follow up on one point, I know you said that there were some, on newer communities without having a risk backlog; you can lower prices without it being a price cut necessarily. So, if you were to compare the new price on those communities that are opening up to an existing community that may be in a similar area, how far below that existing community are those homes pricing?

I don’t know that I can give you a really accurate answer on that. Phil though has something he wants to say so…

Well, one thing interesting in it, I guess it did surprise us a little bit; the closing price in the third quarter was $487,000. And if you look at the average sale price on new contracts in the third quarter was $518,000. And again, we’re opening a fair amount of stores and buying large, as Bob said, our new stores are actually performing pretty well. During the third quarter, we opened 25 new stores. So, I mean you got to kind of some come down somewhere. I mean, are we kind of expecting, again not guidance ASPs to come down the next, year or so? The answer yet probably will. We’re trying to stay as affordable as we can, but obviously land prices have gone up, the last couple years. But it is just so much a subdivision business. I mean, its one issue opening a new store, its one issue if you’ve got a subdivision with the fair amount of backlog, it’s another issue if we’re on the tail end with five or 10 lots left, we’ll probably get pretty aggressive to move through that. So every community is just a little bit different right now, but we’re paying very close attention to all of them.

The other factor, and there’s just so many things, but we had this come up yesterday as we’re reevaluating as I hope I made clear in my remarks every land deal. Almost in the same way that we did, during the two week to three week period following the March of 2020 pandemic where every single land deal in our company, went into a pause reset mode. Luckily, we didn’t have to do too much other than spent the time figuring out what we might do, if the sky fell. But now we’re back in that same mode and reevaluating everything. And just yesterday we were looking at a deal where we intended to put a certain higher price line of homes in a particular community and in looking at how we might renegotiate or handle that deal, the question is should we try to put our more affordable smart series in that community instead because on average our Smart Series houses sell for about a $100,000 less than our more premium line. And so things like that also create a lot of muddled comparisons. You’re trying to compare apples-to-apples and make, just get a different variety of apple and but if a builder with an average price around $500,000, my guess is somewhere between 20 grand and 50 grand in price reductions are going to take place. I think with margin reduction over the next 12-months. I think that’s what you’re starting to see and hear, from just some of the things that are happening in the field.

That’s really helpful, Phil and Bob. Thanks. One more quick one, are there any communities existing now that you kind of have on your watch list that may, you’re watching for potential impairment?

Yes, but I don’t think it’s in any way material, it could be one community here or one there, but it’s – it’ll be a very, very small fraction of our land holdings. There might be a few dollars here and a few dollars there. There also will likely be some write-offs from some walkways. We did cancel some deals in the third quarter and we’re likely to, if we’re unable to renegotiate or extend, cancel some of these under option, we’ve earned the right to walk away. We don’t want to, but if we had to, as Phil shared in his primary remarks, if we had to walk away from every single deal, that’s a manageable number. I mean, we don’t want to spend $75 million or $80 million, but we could write a check for tomorrow and not have to borrow a penny from the bank to do it. So, I’m not bragging about being in that position, I’m just want to make it clear that’s the position we’re in. There will be – I don’t know if 5% or 10% of the deals will walk away from maybe more than 10%. If we can’t get them repriced or extended to buy more time, we’ll see. We’ve always said we feel great about our land position and we do. We’ve got a lot of time, a lot of sweat equity, a lot of effort. And in addition to expense in getting these deals tied up, we didn’t do so because we didn’t like them, we did it because we love these deals. But if they don’t make sense under the current environment, we’ll take the action necessary.

That’s very helpful. Thank you. I’ll pass it on.

I want to just underscore, because sometimes people will hear different things. I don’t think the – I don’t see any material impairments. It’d be very insignificant compared to our total land holdings.

Understood. Thank you again.

Thank you. [Operator Instructions] There are no further questions registered at this time, so I’d like to pass a conference call back over to Phil Creek for any closing remarks.

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

This concludes today’s conference call. Thank you all for your participation. You may now disconnect your line.