M/I Homes, Inc. Aktie

Hello, and welcome to the Annual Meeting of Shareholders of M/I Homes. [Operator Instructions]

It is now my pleasure to turn today's meeting over to Robert H. Schottenstein, Chairman, Chief Executive Officer and President of M/I Homes. The floor is yours.

Thank you. Good morning, and welcome to the 2026 Annual Meeting of the Shareholders of M/I Homes. My name is Bob Schottenstein, and I'm the President, Chief Executive Officer and Chairman of the Board of Directors.

We are holding this year's annual meeting in a virtual-only format. I would now like to take a moment to introduce the directors of the company who are present electronically for today's meeting. Phil Creek, who is also an Executive Vice President and our Chief Financial Officer; Michael Glimcher; Lisa Ingram; Nancy Kramer; Bruce Soll; Norman Traeger, who is retiring from the Board upon the expiration of his term at this annual meeting; Kumi Walker and Jean Smith. Jean has been nominated for election to the Board to fill the vacancy created by Mr. Traeger's retirement.

If the meeting will now come to order, I would like to ask Susan Krohne, our Chief Legal Officer and Secretary, who will also act as Secretary of this meeting and run the formal part of this meeting to report on the notice for this meeting. Susan?

Thank you, Bob, and good morning, everyone. First, if you have not done so already, please take a moment to familiarize yourself with the rules of conduct for this annual meeting, which are posted on the meeting center screen.

On April 10, 2026, written notice of this meeting, our annual report, a proxy statement and a proxy card were mailed to all shareholders of record as of the close of business on March 16, 2026, the record date for this meeting.

The tabulation of today's votes will be conducted by Tammie Marshall of Computershare, the company's registrar and transfer agent, who will act as Inspector of Elections for this annual meeting. In addition to counting the votes, Ms. Marshall will also determine the number of votes which are present in person or by proxy.

Ms. Marshall has made available on the meeting center screen a list of shareholders of record certified as of the record date. This list will remain open for inspection by shareholders until the close of the meeting. A copy of the proxy statement and annual report are also available on the meeting center screen.

If you join this virtual meeting as a shareholder and you have already submitted a proxy, you do not need to vote during the meeting. If, however, you have joined the meeting as a shareholder and wish to vote during the meeting, you may do so by clicking on the Cast Your Vote link that is located on the left side of the meeting center screen and vote any time before we declare the polls closed.

The polls are now open, and we will close the polls immediately following the consideration of the last matter to be voted upon at this meeting.

I now ask Ms. Marshall to report on the number of votes entitled to be cast at this meeting.

Thank you, Susan. As of the record date, there were 25,590,109 common shares outstanding and votes eligible to be cast at this annual meeting. Of such amount, 23,332,353 shares are present in person or by properly executed proxy. As a result, a quorum exists for this meeting.

Thank you. There are three matters to be considered at this annual meeting. First, the election of 3 directors for terms expiring in 2029. Second, an advisory resolution to approve the compensation of the company's named executive officer known as say-on-pay; and third, a proposal to ratify the appointment of Deloitte & Touche as the company's accounting firm for 2026.

Please note that shareholders will have the opportunity to ask questions regarding each matter being voted upon at this meeting when such matter is addressed. In addition, shareholders will have the opportunity to ask general questions about the company following the formal part of this annual meeting. To ask a question, shareholders should click on the dialogue icon in the upper right corner of the meeting center screen.

With respect to the first matter, the 3 nominees for election as directors are Philip G. Creek, Eugene D. Smith and Bruce A. Soll. Subject to our majority voting policy described in the proxy statement, a plurality of the votes of the outstanding common shares is required to elect each nominee. May I have a motion with respect to the election of directors?

My name is Anne-Marie Hunker, and I am a shareholder of the company. I move for the adoption of the following resolution: Resolve that Philip G. Creek, Eugene D. Smith and Bruce A. Soll be elected to serve as directors of M/I Homes until the 2029 Annual Meeting of Shareholders and until their successors are duly elected and qualified or until their earlier resignation, removal from office or death.

My name is Scott Turner, and I'm a shareholder of the company. I second the motion.

Thank you. Are there any questions regarding this matter? We will now turn to the second matter, which is the approval on an advisory basis of the compensation of the company's named executive officer. The affirmative vote of a majority of the outstanding common shares is required to approve this proposal. May I have a motion with respect to the matter?

I move for the adoption of the following resolution: Resolved that the shareholders approve on an advisory basis, the compensation of the company's named executive officers as disclosed in the proxy statement.

I second the motion.

Thank you. Are there any questions regarding this matter? We will now turn to the third matter, which is the ratification of the appointment of Deloitte & Touche as the company's accounting firm for 2026. The affirmative vote of a majority of the outstanding common shares is required to ratify the appointment. May I have a motion with respect to this matter?

I move for the adoption of the following resolution: Resolved that the appointment of Deloitte & Touche as M/I Homes' accounting firm for 2026 is ratified on behalf of the company.

I second that motion.

Thank you. Are there any questions regarding this matter? At this time, I now ask those shareholders who intend to vote during the meeting and have not already done so to complete the submission of their votes on the meeting center screen.

[Voting]

At this time, I declare the polls closed. Ms. Marshall, will you please report?

Yes. Thank you. Ms. Secretary and Mr. Chairman, I hereby report that Philip G. Creek, Eugene D. Smith and Bruce A. Soll have been elected to the company's Board of Directors; two, the compensation of the company's named executive officers has been approved by the shareholders; and three, the ratification and appointment of Deloitte & Touche as the company's accounting firm for the 2026 has been appointed.

Thank you, Ms. Marshall. The certificate of the Inspector of Elections will be included in the records of the meeting. The formal part of this meeting is concluded, and we will now answer appropriate general questions submitted by our shareholders, if any. There are no questions. The meeting is adjourned.

This concludes the meeting. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the M/I Homes First Quarter Earnings Conference Call. [Operator Instructions]

This call is being recorded on Wednesday, April 22, 2026. I would now like to turn the conference over to Mr. Phil Creek. Please go ahead.

Thank you for joining us today. On the call is Bob Schottenstein, our CEO and President; Derek Klutch, President of our mortgage company.

To address regulation for our 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.

I'll now turn the call over to Bob.

Thanks, Phil. Good morning, everyone, and thank you for joining us today. We had a very solid first quarter, highlighted by revenues of $921 million, pretax income of $89 million and a strong pretax income return of 10%. Clearly, during the quarter, new home demand and homebuilding conditions continue to be challenged, challenging and impacted by affordability and even consumer confidence, the conflict in the Middle East and general uncertainty and volatility in the broader economy. Despite this, we were very pleased to increase our first quarter new contracts by 3%, generate gross margins of 22%, and produce a return on equity of 12%.

Our sales momentum from late last year continued into January and February, even with the winter storms that had a pretty significant impact on a number of our markets at the beginning of the year. During this period, we saw improved traffic and heightened homebuyer activity as we begin the spring selling season. However, market conditions slightly shifted at the end of February and into March as events in the Middle East pushed mortgage rates up higher, impacted gas prices and contributed to further market uncertainty.

In managing all of this, mortgage rate buydowns continue to be an important part of our sales strategy. We continue to successfully balance margins and sales pace at the community level and offer mortgage interest rate buydowns both on spec sales and to-be-built sales as a leading incentive to promote our sales activity.

During the quarter, we closed 1,914 homes a 3% decrease compared to a year ago. Our first quarter total revenue decreased 6% to $921 million, and pretax income decreased 39% to $89.2 million. Still, we ended the quarter with a record $3.2 billion in shareholders' equity, and our book value per share is now at a record $125, up 11% from last year.

As I mentioned, our sales improved 3% year-over-year. We sold 2,350 homes during the quarter. Our monthly sales pace averaged 3.4 homes per community, consistent with 2025. We continue to see high-quality buyers in terms of creditworthiness with average credit scores of 747 and an average down payment of 15%.

Our Smart Series, which is our most affordable line of homes, continues to be an important contributor to our sales performance. During the first quarter, Smart Series sales were about 47% of total sales compared to 53% a year ago. Company-wide, about half of our buyers are first-time homebuyers, while the other half are first, second or third move up. The diversity of our product offering remains an important factor and contributing to our sales performance and overall profitability. We ended the first quarter with 230 communities and are on track to grow our community count in 2026 by an average of about 5% from 2025.

Turning to our markets. Our division income contributions in the first quarter were led by Chicago, Columbus, Dallas, Orlando and Raleigh. New contracts for the first quarter in our Northern region decreased by 4%, while new contracts in our Southern region increased by 8% compared to a year ago. Our deliveries in the Northern region decreased 9% compared to last year and represented just under 40% of our company-wide total. Our Southern region deliveries increased by 1% over a year ago and represented the other 60% of our deliveries.

We have an excellent land position. Our owned and controlled lot position in the Southern region decreased by 13% compared to last year, and increased by 21% compared to a year ago in our Northern region, 40% of our owned and controlled lots are in the Northern region, the other 60% in the South.

Company-wide, we own approximately 24,200 lots, which is slightly less than a 3-year supply. In addition, we control approximately 25,800 lots via option contracts, which results in a total of roughly 50,000 owned and controlled lots equating to about a 5-year supply.

Our balance sheet continues to be very strong. As I previously mentioned, we ended the first quarter with an all-time record $3.2 billion of equity, 0 borrowings under our $900 million unsecured revolving credit facility and over $750 million in cash. This resulted in a debt-to-capital ratio of 18%, and a net debt-to-capital ratio of negative 2%.

As I conclude, I'll remind everyone that 2026 marks our 50th year in business. We're very proud of our record and look to build on our success in 2026. Given the strength of our balance sheet, the breadth of our geographic footprint and excellent land position and well-located communities along with a diverse product offering, we are well positioned to continue delivering very solid results in 2026.

With that, I'll turn the call over to Phil.

Thanks, Bob. Our new contracts were up 3% when compared to last year. They were up 11% in January, up 7% in February and down 6% in March. Our cancellation rate for the quarter was 8%. Our monthly new contracts increased sequentially throughout the quarter.

Last year's March new contracts were the highest month of 2025. 50% of our first quarter sales were the first-time buyers and 70% were inventory homes. Our community count was 230 at the end of the first quarter compared to 226 a year ago. The breakdown by region is 91 in the Northern region and 139 in the Southern region.

During the quarter, we opened 22 new communities while closing 24. We delivered 1,914 homes in the first quarter. About 50% of these deliveries came from inventory homes that were both sold and delivered within the quarter. And as of March 31, we had 4,600 homes in the field versus 4,800 homes in the field a year ago.

Revenue decreased 6% in the first quarter. Our average closing price for the first quarter was $459,000, a 4% decrease when compared to last year's first quarter average closing price of $476,000. Our first quarter gross margin was 22%, down 390 basis points year-over-year due to higher home buyer incentives and higher lot costs versus the same period a year ago.

Our first quarter SG&A expenses were 12.7% of revenue versus 11.5% a year ago, and our first quarter expenses increased 4% versus a year ago. Increased costs were primarily due to increased selling expenses, increased community count and additional headcount. Interest income, net of interest expense for the quarter was $3.1 million. Our interest incurred was $9 million. We had solid returns for the first quarter given the challenges facing our industry. Our pretax income was 10% and our return on equity was 12%.

During the quarter, we generated $99 million of EBITDA compared to $154 million a year ago, and our effective tax rate was 24% in the first quarter, same as the prior year first quarter. Our earnings per diluted share for the quarter was $2.55 per share compared to $3.98 last year, and our book value per share is now $125 a share, a $12 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 $14.1 million, a decrease of 12% from $16.1 million in 2025's first quarter. Revenue decreased 1% from last year to $31.2 million due to slightly lower margins on loans sold and a lower average loan amount, but offset by an increase in loans originated.

Average loan to value on our first mortgages for the quarter was 85% compared to 83% in 2025's first quarter, 66% of the loans closed in the quarter were conventional and 34% FHA/VA, compared to 57% and 43%, respectively, for 2025's first quarter. Our average mortgage amount decreased to $401,000 in 2026 this first quarter compared to $406,000 last year. Loans originated increased to 1,579 loans, which was up 3% from last year, while the volume of loans sold increased by 1%. Finally, our mortgage operation captured 96% of our business in the first quarter, up from 92% last year.

Now I will turn the call back over to Phil.

Thanks, Derek. Our financial position continues to be very strong. We ended the first quarter with no borrowings under our $900 million credit facility and had a cash balance of $767 million. We continue to have one of the lowest debt levels of the public homebuilders and are very well positioned. Our bank line matures in 2030 and our public debt matures in 2028 and 2030, and has interest rates below 5%.

Our unsold land investment at the end of the quarter was $1.9 billion compared to $1.7 billion a year ago. At March 31, we had $844 million of raw land and land under development, and $1 billion of finished unsold lots. During 2026 first quarter, we spent $79 million on land purchases and $104 million on land development for a total of $183 million.

At the end of the quarter, we had 740 completed inventory homes and 2,584 total inventory homes. And of the total inventory, 999 are in the Northern region and 1,585 in the Southern region. At March 31, 2025, we had 686 completed inventory homes and 2,385 total inventory homes. We spent $50 million in the first quarter repurchasing our stock and have $170 million remaining under our Board authorization. In the last 4 years, we have repurchased 18% of our outstanding shares.

This completes our presentation. We'll now open the call for any questions or comments.

Your first question comes from the line of Natalie Kulasekere from Zelman & Associates.

I'm just curious, have you received any form of communication regarding any cost increases from your vendors because of fuel prices, maybe it could be a fuel surcharge stacked on top of your existing contracts? And if you have, do you think it's something that you could negotiate with your trade partners?

Thanks, Natalie. The short answer is yes. The issue of increased fuel has come up in several divisions. I don't know if it's come up everywhere. I'm aware of 2 or 3 or 4 instances where it has and it could well be more.

So far, there hasn't been much impact. In fact, so far, I think there's been no impact. Having said that, if the conditions were to persist at worse, at some point, we've been in business for 50 years, and one of the things we're most proud about is not only the consistency of our strategy, but the long-standing relationships both at the national level and at the local level that we have with so many of our subcontractors and suppliers, many of whom we've been doing business with for a long, long time. And one of the reasons that we're able to do business with people for a long time is we try to deal very fairly with them both in good time and in bad.

You didn't ask maybe this as part of your question. But during the last year, we've gone back to a number of those subcontractors from our point of view and sought to see cost reductions. We had a very, very aggressive, intense internal cost reduction effort that we launched, I think, a little over a year ago, maybe a little more than a year ago in anticipation of the current conditions with declining margins and so forth. And we had quite a bit of success doing that. We know that's a 2-way street, and there's times that they work with us. There's times that we're going to have to work with them. So far on the gasoline and oil situation, though, I'm not aware of any impact, unless you are, Phil. I hope that's helpful.

Yes. And I guess I just have one more follow-up. So your ASP within the $470,000 to $480,000 range, if not higher across most quarters since 2022. So is there anything specific that drove this lower this quarter? And if so, how should we look at it going forward? Should it kind of be lower than the $470,000, $480,000 range? Or do you think it's going to -- do you reckon it's going to climb back up to that?

It surprised me that it was -- we knew it would be lower. I didn't think it would be maybe quite this much lower. It's not that much. When you really look at it, $470,000 versus $460,000. Having said that, affordability is the favorite buzzword in our industry today other than maybe rate buydowns as I think about it. But affordability is up there. And really, it began in our company about 5 years ago where we began a very concerted effort to produce more affordable product, particularly attached townhome product. Company-wide, it's probably maybe 20% or 25% of our business, somewhere in there. It moves a little quarter-to-quarter with new communities and so forth and timing of closeouts.

And I think it's -- I actually think it's more mix than anything else. I'd expect our average sales price to be at this level, maybe slightly higher, so they bounce around in this -- in the upper 4s for the foreseeable future.

[Operator Instructions] Your next question comes from the line of Kenneth Zener from Seaport Research Partners.

I wonder, given your Smart Series, very successful, 47, I'm just going to call it half. And how -- can you talk to that. Are most of your intra-quarter order closings coming from the Smart Series almost by definition because it's like prebuilt? Is that the correct assumption that I'm making?

Not necessarily. We manage our spec levels or inventory home levels on a subdivision-by-subdivision basis. And it's less related to maybe the price point of the community at times than -- I think it's more -- it more relates to the location of the community where we think the buyers are coming from. Clearly, I think there's a few more specs with attached product because you build building by building. And some of that is Smart Series, some of it isn't.

I don't think there's really any discernible difference between intra-quarter closings coming from Smart Series spec homes versus the other half of our business. And by the way, not every Smart Series buyer is a first-time homebuyer either. It's just a product line that we've tried to push really hard to take advantage of bringing our price points down.

But Phil, do you want to add something?

Yes. And overall, we feel really good about where our spec levels are. As Bob says, it really varies community to community. This has been a higher percentage, about 50% of the closings occurring within the quarter. Reduced cycle time has helped. It doesn't take us as long to get houses built as it did a year ago. We're also trying to continue to be focused on when we put specs out there, let's make sure we put the right specs out there on the right lots. We're like most builders, we would prefer to have more dirt sales, more to-be-built sales, because, in general, those houses have more upgrades, higher price point, higher margins. But you also have to balance off when you're offering interest rate buydowns when you start getting longer term, it's harder to get those effective rate buydown. So a lot of those things are being balanced off. But overall, we were pretty pleased with the quarter with our closings, but we feel good about our investment level in specs.

The other thing I'll mention just because it gets a lot of attention. For years, the differential in margin between specs and to-be-builts has been an issue in our industry where anywhere from 100 or 200 points -- 100 or 200 basis points of margin erosion occurred between specs and to-be-built, in some cases, 300, 400, 500 points. It sort of moves around market-to-market and period to period. It's that issue has never been lost on us. We've always, always tried to generate more to-be-built than spec sales.

Having said all that, we're also trying to successfully balance pace. And we've -- initially, when we first got into rate buy-downs, it was strictly for specs. But for some time now, we've been heavily focused on rate buy-downs for to-be-builts as well because they do generate higher margins. And it should go without saying, but I guess I'll say it anyway, all of that gets poured into the strategy, which we think has helped us generate very strong returns compared to our peers quarter-to-quarter.

Yes. And I see that. I wonder if homebuilding doesn't -- the companies in general, you're not unique in this, you don't report the segment data and you have 2 segments, right, with the South Texas and Florida being big inputs there. Given the margin swings that we had over [indiscernible] 18 months where the North is now doing better than the South yet as I look at your new contracts and closings, I see that North is declining in terms of the mix, right, as a percent of the total, just the year-over-year change was down in the North, for example, on deliveries. Can you talk to how much of that, the margin we're seeing is just that the higher-margin North isn't flowing through? And then maybe comment a little bit on the Southern mix. I think in the past, you've talked about, right, Texas being larger than Florida in that southern segment. If you could just give us a little sense of how those different regions are impacting the margins.

Happy to do it. In general, over the last year or so, our margins have held up better in our Midwest markets than in our Florida markets. For a while, our Florida markets had some of the best margins in the company. That's not the case today. We have had very strong margins in Dallas for a long time. They are lower now than they were in that market, like many is off a little bit. But comparatively speaking, and to give good context, we still have very solid margins in Dallas.

The percentage of our business, our Texas markets, which really you can't claim newness anymore, they were new for a while, but those markets are really growing a lot for us. And our margins in Charlotte are very strong. We have very solid margins in Raleigh as well. It's sort of market to market. I think I mentioned that our most profitable divisions in the first quarter were Chicago, Columbus, Dallas, Orlando, Raleigh, but I don't want to leave out Charlotte or as I think about Cincinnati, Minneapolis, very solid operations in these markets.

Look, I wish all 17 of our markets were performing at a high level. But most are. And we're very encouraged by that. When I say high level, given the conditions holding up quite well, I think right now, if I had to identify any part of our business that is feeling the pinch more than others, it would be the West Coast of Florida, really from Tampa down through Sarasota. That appears to be the most challenging right now. It's not horrible, but it's just nowhere near what it once was, and we're working through it.

We're really pleased with where we are having the 17 markets, having the diversification. Sure, we all remember a couple of years ago how hot Florida and Texas were, but those markets have come back down. The Midwest [ airline ] has never got quite that hot. And plus, we have a really good presence. We talk about meaningful presence all time. We have a good presence in most of our markets. We're a pretty big player. So having this diversity in markets and also in price points and products. So we do have 50% first-time buyers, but that tends to be the [ 400 or 450 ] type price point as opposed to that kind of down and dirty, which there's a whole lot of competition.

So again, we try to react to every market based on what the competitive landscape is, land position and those type of things, we try to really focus on having better locations in better schools, near better shopping, better transportation, again, try to give people a reason to buy, not just price. So that's what we focus on.

Your next question comes from the line of Jay McCanless from Citizens.

So sticking on kind of the questions on the North. Could you talk about the increase year-on-year in the lots from the North? And is that something that potentially could help gross margins down the road?

I think that the increase in the lot position, some of it's -- what's the right word, episodic. I don't know if that's the right word or not. Sometimes things come on at different times because they're delayed and it skews a quarter. We have a lot of opportunity to grow in Indianapolis, still Chicago, Minneapolis, Columbus, Cincinnati, maybe slightly less so in Detroit. But you take those others, we believe we can grow our operations there 5% to 10% a year for the foreseeable future. In some cases, maybe slightly more.

We have a lot of growth opportunities. Having said that, though, in Charlotte and Raleigh, our Raleigh operation has underperformed from a volume standpoint, not profitability, in large part just because of the incredible delays we've experienced in bringing some new deals to market. We're super excited about where we -- as we look out over the next number of quarters, we're very excited about what we have coming on in Raleigh over the next several years.

And we still have big plans to grow in Houston and Dallas, maybe slightly less so in Austin, but still -- we still intend to grow in Austin, and we're growing in San Antonio. Big plans for Fort Myers, Naples. We're really just getting started there. We expect that to be a very meaningful contributor to us down the road. Tampa and Orlando, we've had top 5 positions in both those markets for a long, long time and are not going to give up market share in either place.

And then Nashville. Nashville has been a slower start for us. I thought we'd be a little further along than we are right now. The only encouraging thing is I don't think we're alone. You tend to see that with other builders as well. But having said that, we're clearly going to grow our operation there this year. It's well, well ahead of where it was a year ago. And all of this should contribute as the markets -- I mean we don't know what's going to happen with the economy. We'll adjust as necessary what will happen to margins down the road.

I think that over time -- I mean, I don't know what will happen, but I think over time, we've always pushed very hard to be in the upper tier. And I believe we -- wherever homebuilding margins settle, I think you'll see M/I in the upper tier of margin performance relative to our peers. Our mortgage operation contributes to that as well. We had a 95% plus capture rate in the first quarter given all the activity with rate buy-downs, even though I'm very proud of our mortgage operation. If we weren't at least a 90% capture rate, I think that would require a discussion because it seems like everybody should be going through our mortgage company with all the rate buy-downs that we and our peers are doing. But having said that, M/I Homes capture rates the highest in the industry, and we're very proud of that. And that contributes to profitability as well.

And also, Jay, this is Phil. Just to add as far as from a land position standpoint, I mean, you know what we try to do, we really focus on what do we own, and we own today about 24,000 lots. A year ago, we owned about 25,000. It's kind of changed a little bit inside. Today, we own almost -- we own 10,000 finished lots. We like to own about a year of supply. And with our run rate, a little less than 10 right now, we're really well positioned there. Our finished lot cost today is up about 5% versus a year ago. Land development costs have kind of settled down a little bit the last couple of quarters.

So we feel like we're really in a good situation from a land position standpoint. Bob talked about growth. We do have a few more -- a few less houses in the field than a year ago. But again, when we're building houses faster, we don't need to put the investment out there as fast. So we're trying to be efficient. We're trying to have specs where we need it. So again, we are very focused on trying to continue our growth, but we want it to be profitable growth with solid returns, not just give a bunch of houses away. We think we do have a really good land position. So we are excited about where we are.

That's great, guys. So the second question I had, if you think about Smart Series, are most of those communities located in the Southern region? Or I guess what's the mix between the Northern and the Southern for the Smart Series communities?

I think it's pretty evenly balanced with a couple of exceptions. San Antonio is almost 90% Smart Series, our communities there. Houston approaching 90% Smart Series, maybe even a little higher. But if you take those out and look at the other 15 markets, it's pretty close to 30% to 50% of our business. They tend to have slightly higher absorptions. So it skews and distorts the actual sales number. But it's somewhere between 1/3 and 1/2.

That's good to know, Bob. And then if you could, Phil, maybe talk about what the gross margin looks like in backlog at the end of the quarter.

Sorry, the backlog?

Yes. Gross margin and the backlog at the end of the quarter.

It really hasn't changed much, Jay. And of course, the backlog is not that big. We are focused on trying to do more to-be-built houses with higher margins in general and so forth, really hasn't moved much. The thing that's hard is that like this quarter, when half of our closings got sold and closed in the quarter. So it's just really, really hard to predict average sale price, really hard to predict margins because so much stuff goes through.

Yes. I mean I know that you all would love to see us give margin guidance. I think it's a bit of a -- I'll just say it, fools errand. There's just so much uncertainty. During our last conference call, we weren't talking about a war. We weren't talking about $4 gas prices. In 90 days, look how things like that have changed. It's very, very hard to predict what's going to happen. Conditions right now are marked with uncertainty.

Having said that, I think housing is holding up pretty damn well. I've seen a whole lot worse, and so has anyone that's been in this business more than a couple of years. We've been in business 50 years, this is going to be 1 of our 5 or 6 best years in company history, and that's pretty damn good. Sign me up. So I think we're very well positioned to deal with the conditions as they are. I think we were encouraged that our first quarter gross margin sequentially were almost the same as they were in the fourth quarter. Does that mean they're leveling off? I guess we'll know when we know. I just know that we'll continue to do everything we can to push profitability. We're very proud in this environment to have a double-digit pretax income percentage of 10%, not easy to do. I know a couple of builders do, but most don't. And I think that it's one thing to say we're focused on profitability. It's another thing to deliver it, and I think we're delivering it.

And we spend a lot of time, Jay, talking about flow, not just the flow of spec inventory. For instance, at the end of the quarter, as I said, we have about 740 completed specs. At the end of the first quarter of last year, it was 686. We also not only track those getting through, that doesn't mean we fire sell them to move them through. But again, we don't want to get too big on specs. We also keep track very closely at what specs are coming through the system, are they drywall or what's the stage of them.

So again, not just throw specs out there, [ willy-nilly ] every subdivision. But what can we work through? What is the demand? What can we settle at a decent margin? And we do the same thing at land. We make sure that when we buy raw land, we get into development. We put the finished lots out there that we need that we can work through. But again, trying to do a better job on managing our investment levels. But again, we think we're in good shape, and we can react to whatever we need to.

The last thing I'll say, and it sounds like we're patting ourselves on the back, maybe we are, never gotten the build-to-rent business, we were the only builder that didn't, don't land bank, we're one of the only builders that doesn't. Our strategy has been pretty damn consistent for as long as I've been here. Focus on our communities, we focus on quality, we strive to deliver the highest levels of customer service that we can. And we try to produce -- build our homes in excellently well-located A communities all the time. There's no issue that distracts us from pace and margin on a community-by-community basis. Nothing gets more attention than that in our company. And we have, within certain of our cities, special rate buy-down programs that are only applicable to certain lots in certain communities. We don't paint with a broad brush. We really try to manage this business on a subdivision-by-subdivision basis even within markets. And that's what we've always done. And that's what our management team is focused on, and it's worked for us.

Right. That's great. And actually, could you -- any qualitative, not quantitative, but qualitative commentary you can give about traffic or web traffic for April, just again, given some of the uncertainty that's out there? And then also, if you don't mind, Phil, can you repeat what the monthly order cadence was? I missed that part.

The only thing I'll say about traffic is given the market, I've been pleased with our traffic through the first quarter and through April so far. That's -- we'll just leave it at that because we don't -- the month is far from over, and we're optimistic, but we'll see.

Phil, do you want to comment on this?

We're really focused also, I mean, we're opening a lot of stores. Last year, we opened about 80. This year, we plan on opening more than 80. So we're trying to open them the right way. In general, they're at a higher price point where we see a little more steady demand these days. But again, just staying on top of it community by community.

Right. And Phil, if you could, what was the monthly order cadence again, please?

During the quarter?

Yes.

Yes, the first quarter, let's see, Jay, we were up 11% in January. We were up 7% in February. March was down 6%, but last year's March was the highest month of last year. And we did sell more houses in February than we did in January. We sold more houses than March than we did in February. So overall, we were pretty pleased with our sales.

[Operator Instructions] Your next question comes from the line of Buck Horne from Raymond James.

I kind of want to ask you the questions in slightly different ways. I'm wondering thinking sort of the monthly cadence of -- or just how you responded to March's volatility in terms of incentives, did you have to -- or did you increase or lean into certain incentives more in March to try to offset the mortgage rate volatility or conversely, was there just enough natural seasonal demand where you kind of were able to keep the same strategy in place? I'm just kind of wondering if there's a potential carryforward to second quarter margins just due to the incentives that were provided.

Normally, I wouldn't want to get too specific, even though it's all on our website for our competitors to see. But I'll just say what has worked for us on specs for the most part is even though we've got see people working with the [ 2/1 ] and the [ 3/2/1 ] buydowns, some buyers, some subdivisions, we see some ARM product. But the vast, vast majority of our buyers want one thing, and that's a 30-year fixed rate mortgage. And what we have led with for quite some time now and been pretty consistent with it on homes that can be delivered within roughly 60 days, so call it inventory homes is a [ 4/7/8 ] rate on both FHA/VA as well as conventional. And we've also offered on to-be-builts that has a long-term rate lock a rate in the very, very low 5s. And we have found those 2 things, there are some exceptions, it's probably more than 2 or 3 or 5 exceptions, but we have 200-plus communities. The vast majority of our communities, those programs are what is working for us now and resulted in our 3% year-over-year increase in sales.

The cost went up, went down, then it went up during the quarter. It went down before we started bombing Iran. And then afterwards, it went up. And it's been bumping around quite a bit since. We live in a minute to minute news cycle where there's a constant overreaction to good news or not. So all that affects what's happening with rates, and there's been a fair amount of volatility with the 10-year, I mean, between 440 and the low 420s. So when it goes up, it costs us a little more if we're buying it on that day. We look at it, we look at it every day. Derek is sitting right here, his team at M/I Financial is pretty intensely focused on this every single day.

That's very helpful. I think that's pretty clear. I appreciate that extra color there. Secondly, I'm kind of curious thinking through your -- just the way the business is set up right now, you're throwing off quite a bit of positive cash flow. You've dialed back the land spend, your land position seems to be in a really good position already.

So I'm just wondering if you think through the possibility of the -- you've been very programmatic about the share repurchase schedule, but you're still building up quite a bit of cash. I'm just wondering if you think that there's a possibility that you'd kind of increase the kind of the schedule of the buybacks that you're penciling in for the remainder of the year and just at some point in the future.

We talk about it with our Board, maybe not every Board meeting, but at least every other. We have a meeting coming up in 2 weeks. We'll probably discuss it at that meeting. I don't really see any change, but it's possible, I guess. I don't know. I think we're going to stay sort of where we are.

I don't know if you want to add to that.

No, I agree. Also, we're not really anticipating the cash to build up that much more. We are a little lower now than we thought we would be internally. I would have a few more spec dollars out there than I have, do a little better job managing that. I did mention we're going to be opening quite a bit more as far as new stores and so forth. So I would still expect to have a pretty strong cash position, would not expect it to be up very much more. And again, spending at the rate of $200 million a year to buy stock back, which we've done for the last few quarters, $50 a quarter, we still think it's pretty good. We bought back almost 20% of the stock the last couple of years. But that's something we'll continue to look at.

Congrats. Appreciate the color.

There are no further questions at this time. Turning over back to Mr. Creek.

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

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

Good morning, ladies and gentlemen, and welcome to the M/I Homes Fourth Quarter and Year-End Earnings Conference Call.

[Operator Instructions] This call is being recorded on Wednesday, January 28, 2026.

I would now like to turn the conference over to Phil Creek. Please go ahead.

Thank you, and thank you for joining us today. On the call with me is Bob Schottenstein, our CEO and President; and Derek Klutch, 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 the 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, and good morning, and thank you for joining us today. As I begin, I'd like to take a brief moment to acknowledge an important milestone for M/I Homes. 2026 marks our 50th year in business. Over the past 5 decades, our company has grown to become one of the nation's largest and most respected homebuilders.

Looking back, we've been through a lot, but we've experienced disciplined growth and certainly our fair share of success is navigating through multiple housing cycles. Through it all, we have maintained unwavering focus on quality, customer service and operating at a high standard. As we look ahead to celebrating this milestone, we're proud to report that we are the best financial condition in our history, have a group of leadership teams that are as strong as we've ever had and that we are well positioned in our 17 markets.

With that, we'll turn to our 2025 performance. Our full year 2025 results reflect the economic conditions that we and frankly, our entire industry experienced throughout the year. Despite choppy demand, affordability challenges, economic uncertainty and other macroeconomic pressures, our performance remained very solid.

Though new contracts were down slightly for the full year, we were pleased that our monthly new contracts during the fourth quarter showed a 9% year-over-year increase and that we successfully increased our 2025 average community count by 6% versus our guide of about 5%. In 2025, we delivered 8,921 homes, recorded revenue of $4.4 billion and excluding charges of $59 million related to inventory and warranty items we generated pretax income of nearly $590 million, which was down 20% compared to last year's record $734 million.

Our pretax income percentage was a very solid 13% before the charges and 12% after all charges. Our Financial Services segment had a record capture rate of 93%, record volume levels and a very strong year, achieving pretax income for the year of $56 million. Our full year gross margins, excluding the above-mentioned inventory and warranty charges were 24.4%, 220 basis points lower than 2024 and down primarily due to higher incentives and higher lot costs versus the same period a year ago.

As you all know, our primary incentives were and continue to be mortgage rate buydowns and we will continue to use these incentives as necessary on a community-by-community basis. Our net income was $403 million or $14.74 per share with a very strong return on equity of 13.1%. Our shareholders' equity increased 8% year-over-year and reached an all-time record of $3.2 billion with a record book value per share of $123. The quality of our buyers in terms of creditworthiness continues to be strong with average credit scores of 747 and average down payments of almost 17% or just over $90,000 per home.

Our Smart Series, which is our most affordably priced product continues to have a very positive and meaningful impact not just on our sales, but our overall performance. Smart Series sales comprised 49% of total company sales in the fourth quarter compared to 52% a year ago. And as I previously noted, we ended the year with community count growth with 232 active communities, which was an increase of 5% compared to the end of '24 and on average, an increase of 6%. In terms of our various markets, our division income contributions in 2025 were led by Columbus, Dallas, Chicago, Orlando and Minneapolis. Our new contracts for the fourth quarter in our Southern region increased by 13% year-over-year and by 4% in the northern region.

For the year, new contracts decreased 1% in the Southern region and 9% in our northern region. Deliveries increased 1% over last year's fourth quarter in the Southern region, and represent 57% of the company-wide total. The Northern region contributed 981 deliveries, which was a decrease of 8% over last year's fourth quarter. For the year, Homes delivered slightly increased in the Southern region, but decreased slightly in the Northern region.

Our owned and controlled lot position in the Southern region decreased by 11% compared to a year ago, increased by 9% compared to a year ago in the Northern region. We have a tremendous land position. Company-wide, we own approximately 26,000 lots, which is slightly less than a 3-year supply. Of this total, 30% of our owned lots are in the Northern region with the balance of 70% in the Southern region. On top of the lots that we own, we control via option contracts an additional 24,000 lots.

So in total, we own and control approximately 50,000 single-family lots, which is down 2,000 lots from a year ago, and this equates to roughly a 5- to 6-year supply. Most importantly, 49% of our lots are controlled pursuant to option contracts, which gives us continued flexibility and important flexibility to react to changes in demand or individual market conditions. With respect to our balance sheet, we ended the year in excellent condition with cash of $689 million and 0 borrowings under our $900 million unsecured revolving facility. This resulted in a very strong debt-to-capital ratio of 18% and a net debt-to-cap ratio of 0.

Before I conclude, let me again state that we are in the best financial condition in our 50-year history. Despite the current challenging conditions, we feel very good about our business remain very confident in the long-term fundamentals of our industry and are well positioned as we begin 2026.

And I'll now turn it over to Phil to provide more specifics on our results.

Thanks, Bob. Our new contracts, were up 18% in October, a 9% -- excuse me, up 6% in November and up 4% in December for a 9% improvement in the quarter compared to last year's fourth quarter. .

Sales pace was 2.8% in the fourth quarter compared to 2.7 in 2024's fourth quarter, and our cancellation rate for the fourth quarter was 10%. As to our buyer profile, 48% of our fourth quarter sales were to first-time buyers compared to 50% a year ago. In addition, 79% of our fourth quarter sales were inventory homes compared to 67% in last year's fourth quarter.

Our community count was 232 at the end of 2025 compared to 220 at the end of last year. During the quarter, we opened 17 new communities while closing 18. And for the year, we opened 81 new communities. We currently estimate that our average 2026 community count will be about 5% higher than 2025. We delivered 2,301 homes in the fourth quarter and about 40% of our quarter deliveries came from inventory homes that were both sold and delivered within the quarter. As of December 31, we had 4,500 homes in the field versus 4,700 homes in the field a year ago. Revenue decreased 5% in the fourth quarter of 2025 to $1.1 billion. And our average closing price for the fourth quarter was $484,000, a 1% decrease when compared to last year's fourth quarter average closed price of $490,000.

Our gross margin was 18.1% for the quarter, including $51 million of charges which consisted of $40 million of inventory charges and $11 million of warranty charges. Excluding these charges, our gross margin was 22.6%. The breakdown of the inventory charges is $30 million of impairments and $10 million of lock deposit due diligent costs written off. The majority of impairments in the quarter were in entry-level communities with average selling prices below 375,000, and the warranty charges were due to 2 communities in our Florida market.

For the full year, our gross margins were 23.0%, excluding our $59 million of charges, our full year gross margin was 24.4%. And our fourth quarter SG&A expense is flat compared to a year ago and were 11.6% of revenue compared to 11.0% last year. Interest income, net of interest expense for the quarter was $6 million. Our interest incurred was $9.5 million. We had solid returns given the challenges facing our industry. Our pretax income was 12% for the year, and our return on equity was 13%.

During the fourth quarter, we generated $129 million of EBITDA. And for the full year, we generated $608 million of EBITDA. Our effective tax rate was 21% in the fourth quarter compared to 22% in last year's fourth quarter, and our annual effective rate for this year was 23.5%. We expect 2026 effective tax rate to be around 23.5 billion%. Our earnings per diluted share for the quarter decreased $2.39 per share from $4.71 per share in last year's fourth quarter and decreased 25% for the year to $14.74 per share from $19.71 per share last year. During the fourth quarter, we spent $50 million repurchasing our shares. And for the year, we spent $200 million.

We currently have $220 million available under our repurchase authority. And in the last 3 years, we have purchased 13% of our outstanding shares.

Now Derek Klutch will address our mortgage company results.

Thanks, Bill. In the fourth quarter, our mortgage and title operations achieved pretax income of $8.5 million, down $1.6 million from 2024, and revenue of $27.8 million, down 20% from last year, primarily as a result of lower margins on loans closed and sold and partially offset by higher average loan amounts and more loans closed. .

For the year, pretax income was $56 million and revenue was $126 million. The loan-to-value on our first mortgages for the quarter was 83% in 2025 compared to 82% in 2024's fourth quarter. 65% of the loans closed in the quarter were conventional and 35% were FHA or VA compared to 59% and 41%, respectively for 2024 same period.

Our average mortgage amount increased to $414,000 in 2025's fourth quarter compared to $409,000 in 2024. Loans originated in the quarter increased 1% from 1,862 to 1,874 and the volume of loans sold decreased by 1%. Our mortgage operation captured 94% of our business in the quarter, an increase from 91% in 2024's fourth quarter.

Now I'll turn the call back over to Phil.

Thanks, Derek. As far as the balance sheet, we ended the fourth quarter with a cash balance of $689 million and no borrowings under our unsecured credit facility. We continue to have one of the lowest debt levels of the public homebuilders and are well positioned with our maturities.

Our bank line matures in 2030 and our public debt matures in 2028 and 2030. Total homebuilding inventory at year-end was $3.4 billion, an increase of 9% from prior year levels. And during 2025, we spent $524 million on land purchases and $646 million on land development for a total spend of $1.2 billion. This was up from $1.1 billion in 2024. And at December 31, 2025, we had $900 million of raw land and land under development and $1.1 billion of finished unsold lots.

We own 10,500 unsold finished lots. And at the end of the year, we had 1,030 completed inventory homes, about 4 per community and 2,779 total inventory homes. And of the total inventory of 1,116 are in the Northern region and 1,663 in the Southern region. And at December 31, '24, we had 706 completed inventory homes and 2,502 total inventory homes. This completes our presentation.

We'll now open the call for any questions or comments.

[Operator Instructions]

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

Positive order growth, pretty impressive. And can you address the 13% growth you had in the South. Can you bifurcate that into Texas and Florida? Because I think Texas last time -- you talked about Texas is a little bit more of the volume, and we've been seeing that Florida is actually doing a little better than Texas. Could you address the split in that -- those market in that region?

In general, we had pretty solid sales everywhere. Our Carolina markets, Charlotte and Raleigh have done very well. In Florida, our Orlando market has actually held up pretty well, and Tampa also has improved as we've gone through the quarter. When you look at Texas, Dallas has stayed pretty solid for us along with Houston. Weaker markets have been Austin and San Antonio. So it's been spread around a little bit. But like you say, we were very pleased that our Southern region was up 13%, and our northern region was also up 4%.

The only other thing I'll mention, Ken, it's a good call out. Just to build on what Phil said is as we're getting now some traction in our newer markets in the Southern region, specifically Nashville and Fort Myers Naples, that will slightly skew upwards some of the percentages. But we felt very good about our fourth quarter sales. And I would simply add that as we begin 2026, we certainly have seen, and I think some of it's clearly seasonal, we're beginning the selling season right now as opposed to leaving the slowest time of the year in the fourth quarter. We've certainly seen an important improvement in traffic. .

I appreciate those comments. It's -- and they are reported too today, and it's -- our margins are under pressure, the demand seems to be there. Could you comment -- given the intra-quarter orders and closings, could you comment on the margin differential between your intra-quarter closings and your backlog or spread, if you will, as well as are the majority of those intra-quarter closings, I assume they're coming from the lower-priced Smart Series. If you could address those 2 questions.

Well, I'm not sure I completely understood the question, and you may have to ask again.

Okay, sorry. I'll make it clear. Orders and closings per unit that were intra-quarter, so what I call spec, how are those margins compared to the homes that came out of backlog? And I'm assuming most of those intra-quarter orders which were closing for the Smart Series.

Well, yes and no. The Smart Series point. The one thing I'll say is, over the last 12 to 24 months, our business has changed quite noticeably in terms of the significant contribution of spec sales month in, month out. About 10 to 3/4 of our sales are now coming from specs. .

And if you go back 5 years ago, it would have been less than 50%, in some cases, less than 40%. So that's been a pretty significant change. And is likely here to stay as long as we're in this situation where we're needing to use rate buy downs to promote sales because, as you well know, the ability to provide a favorable rate buy-down at any kind of a reasonable or at least acceptable cost is one of the conditions is that you can get the home closed within 60 to 90 days of the purchase of the buy-down money, which means it's only going to really work for specs. So having said all that, the majority of 60% to 75% of the closings quarter-to-quarter-to-quarter, all coming from spec sales. Phil, I don't know if you want to add anything to that.

Yes. I mean, our closing GPs in the fourth quarter were 22.6% for getting the charges. We were pretty pleased with that. Are there continued pressures? Yes, we do feel good that our construction cost last year came down about 2%. We were also pleased last year that our cycle time grew by about 5%. So we're making some progress on some of those key areas. Spec margins in general are lower than to-be-built homes. But the last couple of months, we have seen a slight pickup in our to-be-built business. But we just continue focusing every day on everything we can do to hold those sales prices stable or increase them and also keep margins as high as we can.

The next question comes from Alan Ratner at Zelman. .

It's very impressive, impressive and I'm sure we've got 50 more out ahead of us. So looking forward to it. My first question is on the order strength in the quarter. I was looking and your fourth quarter, obviously up year-over-year, but your fourth quarter orders were actually fractionally higher on a sequential basis as well, which, as far as I can tell, that's the first time that's happened in 2001. So I was hoping you could just talk a little bit about kind of your incentive and pricing strategy through the quarter. Would you say that order strength, at least kind of seasonally is a reflection of improving demand? Or was it more of a concerted effort by you guys to kind of clear through some inventory ahead of year-end, maybe with some higher incentives.

Well, that's a great question. It's actually probably one of the most important questions that as we look week-to-week in terms of our sales activity, I feel like it's little bit of both. I think we wanted to push to get as many completed specs of the -- out to the buyers as we could. I feel like demand is slightly picking up. And I felt like not every market, but in many of our markets, we were we were somewhat pleased with the level of traffic through the fourth quarter.

And that is continuing. I think it's too early to make a call. But look, we've been winning for the last number of years about all the pent-up demand and housing is underperforming and on and on and on and on, and more articles have been written about that almost than anything other than affordability. But it feels like we may be starting to see a slight improvement in demand. And I also think, and we'll know when we know we expected our margins to drop at least 200 basis points last year.

And of course, they did that and then some. And the margins are likely to remain under pressure, but it's not clear to me at this point that the pressure in '26 will be as much as it was in '25. So hopefully, the things are starting to level off a bit. Again, we'll know when we know. But all things considered, pre charges, we made almost $590 million last year, brought 13% to the bottom line by historical standards, that's pretty good performance. And just putting things in context, we've all seen a whole lot worse. And I think that I'm optimistic about the first 4 or 5 months of the year in terms of demand in the selling season, so we'll see.

Alan, one thing I would add is that we talked about the impairments came primarily from entry-level communities with an ASP under $375 million. It was led by our more challenging markets in Austin and San Antonio. So in general, we've seen a little more pressure on prices and margins on the real entry level, lower price for us, hope that it's going to get a little bit better. We tend to buy at a little higher price point, but that's kind of where things are. .

Got it. No, I appreciate all that detail. And Phil, you kind of touched on the second question I had, which was on those impairments. I guess the first one is a little bit of an accounting nuance. But I'm just curious, if I look at historically, when you've taken charges, they're almost entirely in your fourth quarters. I mean you maybe have some minimal charges thorugh the year, but it looks like fourth quarter is kind of where you generally take larger charges. So I'm curious if there's any accounting reason why that is, at least compared to other builders. And b, I don't know if you disclosed like a watch list of communities that had maybe potential indicators of impairment. But is there any indication that impairment should continue here over the next handful of quarters just based on where some of your margins are trending in your lower price point communities.

Yes, Alan, I appreciate that, and I'll try to get all those points. But to us, it's a business issue. I mean if you look at our business goals, we're in the subdivision business. That's what really matters to us is how we operate the business. And if we're not getting -- we try to get a pace of 3 plus, we try to get margins at 22 plus. And we try to make sure we're focusing all the items, product, presentation salespeople, make sure those levers are working at all times.

But we're not getting acceptable pace over a certain period of time. We make the business decision oftentimes to go to price. Of course, the way the accounting rules are basically is that once you get down to about a 10% GP, you kind of get to the point where carry costs, disposal costs exceed that. So the accounting rules kind of force you to do an impairment. But again, to us, it's a business decision. We do look harder at things towards the end of the year for sure. So that's why the majority of those charges in the past have been that way.

Although this year, we did a small impairment. So I think it was in the third quarter. But if you look at us today, we own about 25,000 on so lots. We always have a couple of problem subdivisions. Our impairment covered about 1,000 lots. So about 1,000 of the 25 lots. And again, it was in the most affordable stuff. We could have continued grounding through these communities. It may be 1, 1.5, 2 months, maybe at 10%, 12% margins. But our view is when you look at the landscape of the business and the difficulty, especially at those lower price points, we decided to go to that last lever of dropping price that triggered those impairments. But again, we think that's a really good business decision. We expect that pace to pick up. We expect the margin to get back to closer to normal levels, and that's why we did it.

The other thing I'll say, because I've been to the movie that was a long time ago, but back during the Great Recession, when every quarter, you were sort of holding your breath as the builders reported because how many more impairments are coming. And we also felt like there was more coming. This is very different. .

I'm not going to say there's no more coming because no one knows that. But what I will say is, as we got towards the end of last year, it was sort of -- let's start 2026 with all cylinders as strong as they can possibly be, whatever thing we think might be a problem, let's deal with it now and let's into 2026 with as many items controlled and behind us as possible.

And Alan. I appreciate that. $10 million was a combination of lot deposit write-offs, prepaid like due diligence write-offs on deals. We're not pursuing anymore because we think to do those deals, it would take a pretty significant cost reduction or other changes in terms. So we walked away from those deals. But again, on average, when you take a $30 million charge on 1,000 lots, if you're looking at $30,000 per lot, which is pretty significant. And hopefully, that's going to increase our pace in margins as we go into this year. .

The next question comes from Buck Horne at Raymond James.

Congrats on navigating a challenging environment and appreciate those -- the color on all the charges as well. I was also -- I was kind of cure about the acceleration in land purchase activity and some of the lot development spend in the fourth quarter. It was up both sequentially and year-over-year. I guess first kind of wondering if any particular markets or regions are getting the bulk of that new spend that you're targeting and is -- should we read into that acceleration if there's -- is that an indication of your confidence levels of kind of the demand that's out there and your growth trajectory? Or how should we interpret that pickup in the land spend?

No, nothing really special. Again, some of our markets are impacted by weather when we get black topping done and those type of things. I mean, we own about 25,000 lots, as Bob said. We try to have about a 1-year supply of finished lots. In that way, we don't go dark, et cetera. And we ended the year with a little over 10,000 finish lots. And again, with our current run rate at 9,000, we feel good about that. So no, nothing really special. We're continuing to do a lot of land development. We self-develop about 80% of our own land. But as far as any strategy or direction, that's just kind of the way the dollars were. We did spend a little bit more money last year toward the end, but just the way it kind of fell.

Okay. That's helpful. I was curious about your Florida trends in particular. I was just wondering because we've seen some signs that resale inventory to start the year in Florida here. It seems to have flipped negative year-over-year. I think you mentioned that Tampa started to improve a little bit. Orlando seems to be steady. Are you sensing that we may have I don't know -- is there any signs of improving traffic demand? Any signs that the stabilization of the resale inventory is helping?

When we look at the 4 Florida markets that we operate in, Orlando, Tampa, Sarasota, Fort Myers Naples. Fort Myers Naples is really new for us. We're very bullish about it. And there, we had significant growth because we went from almost 0 to over 100 and some units last year. but -- and we're expecting pretty meaningful growth there over the next several years.

As far as the other 3 where we've been a while, Orlando clearly held up the best. And over the last I would say, 30 to 120, 150 days demand in Orlando has been stronger than Tampa and Sarasota, Tampa was the toughest market for a while, had probably, for whatever reason, the hardest hit for us is Florida, clearly. Tampa business has picked up very importantly. It's not as strong as Orlando at this point, but we're encouraged by what we're seeing. That's for sure. And Sarasota is just sort of so.

I think that market is -- it's a very good market, but it's sort of trending along and maybe C+, B-, that kind of thing. So look, we're very interested in Florida, very committed to Florida. It's a huge part of our business. Candidly, we have some of the best leadership teams in our company in Florida. And it's -- so we've been there a long time. And I mean, as was noted, we've been in business 50 years, the first market outside of Columbus, Ohio that we expanded to was Tampa. And the second one after that was Orlando. So we've been in Florida for a long time since 1981 in Tampa and 1985 in Orlando, and we're not -- we're -- we've had a very strong leadership position in those markets. We'll continue to as well as the operation in Sarasota and Fort Myers Naples.

One last one if I can sneak one in. I was curious about just how you're structuring the mortgage rate buydowns right now in terms of what type of program or structure seems to be resonating and getting consumers over the hump. You're kind of a sweet spot target mortgage rate that seems to work best with those buy-downs.

This is Derek. We've been going with a 4, 7/8, 30-year fixed. And we think getting a sub-5 is the key, and that's what really seems to attract the buyers. And on top of that, in some divisions, we offer temporary buydowns. So we get buyers with the first year payment in the 2.875 range. We've run that for quite a while, and that seems to be successful for us, just that sub-5% rate.

That's clearly been our most successful. Recently, we've been tinkering with the 71 arm that other builders have been using a lot, it's -- everybody has their own experiences, to Derek's point, what seems to work best for us is the very straightforward 30-year fix 4 7/8 FHA, VA or conventional. And that's -- in many instances, it's supplemented buydown that Derek mentioned.

And 1 thing to address also is that our mortgage and title operations is very important to us. They only serve them M/I Home customers. We're able to deal individually with customers. And depending on if it's a first-time buyer, there may be a real big need for closing cost assistance. Some people out there that do want to do to-be-built homes that do want a longer-term rate program. So we're able to customize whatever we need to do with an individual customer as opposed to throwing all kind of money to every customer that may or may not need that. So being able to individually deal with customers, we think it's very important to our business.

The next question comes from Alex Barron at Housing Research Center.

I wasn't sure if I missed it. Did you guys give any guidance or outlook for margins for next quarter? Do you feel like go down sequentially? Or is these impairments you took this quarter are going to help stabilize margins?

Alex, you know us. We don't give guidance on things like that. We were pretty pleased with our margins in the fourth quarter. We did deal with problem, communities that thought we needed to with the impairments don't give any guidance. We are working hard on construction costs and cycle time and all those things. We are opening a number of new stores. Again, this year, we did give guidance. We expect the average community count to be up 5% this year. But no, we did not give any guidance as far as margins.

Okay. Did your incentive levels or -- go up in the quarter versus the previous quarter in your orders?

I mean our margins were down a little bit. So are we doing a little bit more on closings in the fourth quarter? Yes, we did. Again, that's reflected in our margins, trying to do the best sub, we can opening all these new stores. We opened 80 stores last year, and anticipate open more than that this year. So that's a big opportunity for us. But hopefully, spring selling season will be a little better than it has been.

Okay. And also, any shift in your strategy as far as what percentage of spec homes you guys are started versus going back towards build-to-order?

No. it will likely -- it's Bob Schottenstein, Alex. It will likely remain about what it's been, which is about, like I said earlier, 2/3 to 3/4 of our business, our spec sales. And I don't see things changing there or on the rate buydown side to incent sales. I don't see any of that changing anytime soon. Obviously, we're all reacting to -- a daily basis to what's happening in the market. As we did mention, we've been encouraged by early traffic improvements here that we've seen through the latter part of the fourth quarter and certainly as we begin 2026.

The next question comes from Jay McCanless at Citizens.

And just to kind of follow on what you were saying there, Bob, are you all seeing similar traffic pick up in both the North and the South? Or is it a little stronger in one region versus the other?

I think that it's not every single 1 of our 17 markets, but certainly most. And I would not say it's particularly regional. Now the last 5 days, things aren't very good anywhere because most people are frozen solid or they're snowed in, including here in Columbus, it's been pretty rough. But in general, we've seen traffic start to pick up. It always does this time of the year, it feels a little better than even a year ago, though to me. .

Okay. That's great. And then Phil, could you talk about in the fourth quarter, your ending gross margin in the backlog, how that compares to what you reported for closing 4Q?

Right now we're doing, as Bob said, 75%, 80% specs. In general, the margins in the backlog are higher than specs. Are the margins at year end, a little higher than you're in a year ago? The answer is yes, that's about 100 basis points difference. But hopefully, we're getting a little better we continue to focus on how we can improve the margins on the specs. So again, we're doing all we can. We did at 22.6% margins in the fourth quarter. So we're hoping margins held up pretty good. .

That's great. And then the next question I had, just thinking about the sales pace for these newer communities you're opening, are you all trying to push a similar sales pace as what you got in '25 or are you trying to be a little more cautious and not wanting to give away too much margin at the beginning of these communities?

Well, we always try to focus on getting that pace at 3 plus. Our store count is up about 5%. But again, you got to be a little more careful opening new stores as far as if you're super aggressive on price and margin, again, you can feel that benefit for a while. So there is a lot of opportunity with these new stores. Hopefully, we've got the right product and the right price to move through there. But we are focusing on trying to keep this pace. It hopefully around 3% or a little better.

Okay. That's great. And then the last one for me, and thank you for the detail on the specs. I guess how are you feeling about MHO's inventory right now and maybe some broader commentary on what you're seeing in the industry? Does it feel like some of the excess spec inventories being drawn down? Or how -- what are you hearing from the divisions on that?

I think we feel really good about where we are. Not to be silly. I mean, if we didn't, we change. But we go into this year, again, a lot of it's community-specific, but we want to be very aggressive in making certain that we have the product, standing product in the field, the inventory, if you will, so that we can take advantage of what should be hopefully, a decent selling environment here over the next 3 to 4 or 5 months. And so I think we feel our strategy is the right strategy. We don't feel we need to do any significant shifts and other than community by community specific things, in general, I think we're very well positioned. .

That's great. And just any industry commentary you've been hearing from the field?

Relating to what issue? .

Relating to inventory, back inventory specifically?

You mean, our people like deep discounting just to move specs or have discount slowed down or are more incentives being paid to third-party realtors or things like that. .

Yes, things like that, that would be great.

Yes. You hear a crazy story now and then about once every 2 days. So I don't think that's anything new. I mean people do what they need to do. Look, I think that knowing on a look back, knowing what 2025 was. If you just said to me, we're going to bring 12% to 13% to the bottom line for the full year. I'd say I'll take it. Well, that's what we did.

Jay, we pay a lot attend to our inventory levels. We do have about 1,000 finished specs, which is a little higher than last year's 800. We do have 5% more stores. We have a few less houses in the field today than we did a year ago. But again, we benefit by better cycle time. We're just trying to be very focused a lot of times, execution doesn't get discussed, but now execution really matters. We're trying to be careful not to put too much inventory in the field, too many finished specs.

Again, it depends on is it an attached townhouse community? Is it a higher priced community, is it a higher-priced community? Is a little bit different. But again, I mean, doing 70%, 75% specs, I mean we're relying on sales every week a month, and that's what we have to stay focused on. We were very pleased. If you look at it last year, we closed almost the same number of houses as we did the year before, which was our record 9,000 homes. And obviously, our hopes and plans or we hope to close a few more houses this year than last year, we have more stores. But again, we're staying focused. We try to run a conservative business. We're not trying to put inventory out there too far ahead of ourselves. But again, we feel pretty good about our results.

Absolutely. And one question I forgot. Could you talk -- or can you -- if you talked about it, maybe repeat the commentary on what the margin and new community profit margins on new communities look like?

As far as what the margins are on new communities we're opening versus older communities. Is that your question? .

Correct. Yes. That's it.

Again, that's really a hard question. Last year, we opened 80 stores. I would say, in general, they're pretty close. We have some of these stores that are doing really well and some that aren't doing so hot, it's an individual situation. But overall, we feel pretty good about the new stores we're opening.

We're trying to make sure we have the right product and the right price and all those things open the right way. But that's just a really hard question, Jay.

The next question is a follow-up from Ken Zener at Seaport Research Partners.

I wonder if you could comment on the flexibility of the business. So obviously, mortgage buydowns for, let's say, 2/3 of the communities that you have product. You're trying to protect the community, price point, et cetera. But for new communities, given that the communities opened last year and conversely are opening this year, how much of a change to the product type or how you open it up at wet price points? Can you talk to the dynamics that you employ when making those choices on new communities in terms of resetting the let's say, home size or the specs that you're building are? I don't want to use word despec, but they're more simpler in terms of price points. How much flexibility do you really have there when you're coming into opening a community 6 to the months out vis-a-vis the product construction cost type?

I think a lot more flexibility, I think that most people might realize. Look, so much of it is determined by zoning. And so you have to stay within the confines of the permissible zoning parameters. Having said that, usually, those parameters give you a fair amount of flexibility. The amount of internal debate, discussion, analysis, strategy, if you will, that goes into each community planning from the very earliest stages when we think there's a site and I'll use this as an example in Charlotte that we're looking to tie up from the moment that we think that site might be available, the debate occurs within the division.

Sometimes it's all the way up to corporate conversations. But what are we going to do with that? If we get that deal done and that becomes a new store for us, what is that store going to look like? What are we going to merchandise in that store? Who is the buyer? And there's -- that's a lot more art and science. I'm not thinking it's rocket like building a rocket ship to the moon, but it is a lot more art and science and you do have some flexibility.

And we're -- there is a fair amount of tinkering that takes place we have projects, many of them that will be coming on this year that when we first started planning them, we might have planned to do large homes and now we're looking to do smaller homes, that's a very simple example. But while we may be replanning in a way that the density stays neutral, but we've now -- we're now going to develop it with smaller-sized lots or perhaps the opposite, larger sized lots to take advantage of maybe lot premiums. So that's a huge part of what goes on. And of course, every new land deal in this company before we are in a position where we've made a firm commitment must get approved at the corporate level through our land committee process and the valuation process, which is a discussion involving the specific division and of course, a few of us here at corporate.

And even in that, after this thing has been batted back in at the division level, we'll quite often have questions about the product and the product line, what we're really trying to do here. And should we adjust this or that. And certainly, on larger deals where there's multiple product lines or they have a long tail, we may have 2 or 3 land committee calls along the way what are we thinking? How does it look now? That's reconvene in 90 days.

So there's a whole lot that goes into that. We're as good as our stores. We're a retailer. We're a very unusual retailer because we reinvent ourselves about every 3 years. The stores that we have out there today 3 years from now, 90% of them will be completely different and because we'll sell through and replace with new. And as Phil mentioned, we're poised to open a whole lot of new stores this year, and we'll be closing out of a number of them, too. So what those stores look like and what we choose to sell, hopefully, meeting the market where it is, who is the buyer, what are we targeting? That's a huge part of the business. huge part of the business. And we've made our fair share of mistakes. So hopefully, we've learned from some of them. And there's times when we've absolutely shifted to a strategy that has turned something that might have just been average into something really good.

And so we see something that works in 1 market, we -- that maybe it's a little bit off-the-wall thinking. We'll also try to apply to that in other markets if it makes sense to do so. So it's a very, very big part of the business. doesn't often get a lot of conversation. But it's a terrific question.

There are no further questions at this time. I'll 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.

Good morning, ladies and gentlemen, and welcome to the M/I Homes' Third Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on October 22, 2025.

I would now like to turn the conference over to Phil Creek. Please go ahead.

Thank you for joining us today. On the call with me is Bob Schottenstein, our CEO; and President -- and Derek Klutch, President of our Mortgage Company. First, to address regulation for our 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 the call over to Bob.

Thanks, Phil. Good morning, and I, too, want to thank you all for joining us today. Despite the continued challenging market conditions and choppy, uneven demand environment, we had a very solid third quarter. We generated $140 million of pretax income though down 26% from last year's record third quarter results. Our pretax income percentage was a very solid 12% of revenue with gross margins of 24% and resulted in a strong return on equity of 16%. Consistent with our first and second quarter commentary and also consistent with what our industry peers have reported, housing demand and overall market conditions remain somewhat challenging. In our view, housing conditions are just okay, certainly not great, but still just okay, probably about a C plus, and we continue to incentivize sales and drive traffic, primarily with mortgage rate buydowns.

The cost of such buydowns are the primary reason for the decline in our gross margins. We will continue to use such rate buydowns where necessary on a subdivision-by-subdivision basis in order to drive traffic and generate sales.

In terms of our third quarter performance, we closed a third quarter record 2,296 homes, a 1% increase compared to a year ago. Our third quarter total revenue decreased 1% to $1.1 billion. We sold 1,908 homes during the quarter, down 6% compared to 2024's third quarter of 2023 homes sold, and our monthly sales pace averaged 2.7 homes per community compared to a monthly pace of 3.2 homes in 2024.

Year-to-date, we have sold 6,278 homes, down 8% from a year ago. Encouragingly, we continue to see quality buyers in terms of creditworthiness with a strong average credit score of 745 and average down payments of around 16%. Our Smart Series, which is, as we've stated previously, our most affordable line of homes, continues to be an important contributor to sales performance.

During the third quarter, Smart Series sales comprised about 52% of total sales compared to just about 50% a year ago. We continue to make important progress in our cycle time. Our third quarter cycle time was about 10 days better than last year as well as about 10 days better than this year's first quarter.

We ended the quarter with 233 communities and remain on track to grow our community count, the balance of 2025 by about 5% from 2024.

As Derek Klutch will review in a few minutes, our mortgage and title operations had a very strong quarter, highlighted by capturing a record 93% of our business in the quarter.

Now I will provide some additional comments on our markets. Our division income contributions in the third quarter were led by Columbus, Chicago, Dallas, Minneapolis, Orlando and Cincinnati. New contracts for the third quarter in the Northern region decreased by 17% and new contracts in our Southern region increased by 3% compared to last year's third quarter. Our deliveries in the Southern region increased by 8%, and our deliveries in the Northern region decreased by 7% from a year ago. 59% of deliveries came out of the Southern region, 41% out of the Northern region. We feel very good about all 17 of our markets. That said, we are expecting particularly strong full year results in Columbus, Chicago, Dallas, Minneapolis, Cincinnati, Orlando and Charlotte.

We have a strong land position. Our owned and controlled lot position in the Southern region decreased by 6% compared to last year, and increased by 3% versus last year in the Northern region. 36% of our owned and controlled lots are in the North, the other 64% in the Southern region. Company-wide, we own approximately 24,400 lots, which is slightly less than a 3-year supply.

In addition, we control approximately 26,300 lots via option contracts resulting in a total of 50,700 owned and controlled lots equating to about a 5- to 6-year supply. With respect to our balance sheet, we once again ended the quarter in excellent shape. During the quarter, we extended our bank credit facility by 5 years to 2030 and increased the borrowing capacity under that line from $650 million to $900 million.

We ended the third quarter with an all-time record $3.1 billion of equity, equating to a book value per share of $120, up 15% from a year ago. We had 0 borrowings under the $900 million unsecured line, and over $700 million in cash, all resulting in a very strong debt-to-capital ratio of 18%, down from 20% last year, and a net debt-to-capital ratio of negative 1%.

As I conclude, let me just say we remain quite optimistic about our business and continue to believe that our industry will benefit from the undersupply of homes and growing household formations throughout our markets. Our backlog remains healthy, and with our strong balance sheet and strong liquidity, we have tremendous flexibility as conditions evolve. We are well positioned as we begin the fourth quarter of 2025.

With that, I'll turn it over to Phil.

Thanks, Bob. Our new contracts were down 6% when compared to last year. They were flat in July, up 4% in August and down 18% in September, and our cancellation rate for the third quarter was 12%. Last September sales were strong. It was our second highest September in our history. And during the third quarter, our sales were really pretty consistent. We sold 618 in July, we sold 660 in August and 630 in September. 50% of our third quarter sales were the first-time buyers and 75% were inventory homes.

Our community count was 233 at the end of the third quarter, compared to $2.17 a year ago, up 7%, with the Northern region up 9% and the Southern region up 6%. The breakdown by region is 96 in the Northern region and 137 in the Southern region.

During the quarter, we opened 14 new communities while closing 15. We currently estimate that our average 2025 community count will be about 5% higher than last year. We delivered a record 2,296 homes in our third quarter, delivering 89% of our backlog and about 35% of our third quarter deliveries came from inventory homes that were sold and delivered in the quarter.

At September 30, we had 5,000 homes in the field versus 5,100 homes in the field a year ago. Revenue decreased 1% in the third quarter, and our average closing price in the third quarter was $477,000, a 2% decrease when compared to last year's third quarter average closing price of $489,000.

Our third quarter gross margin was 23.9%, down 320 basis points year-over-year with 60 basis points of the decline due to $7.6 million of inventory charges. The breakdown of the inventory charges is $6 million of impairments and $1.6 million of lot deposit due diligence costs that were written off.

And our construction costs were down about 1% in the third quarter, compared to the second quarter. Our third quarter SG&A expenses were $11.9 million of revenue compared to $11.2 million a year ago. Our third quarter expenses increased 6% versus a year ago. Our increased costs were primarily due to higher community count and higher selling expenses. Interest income, net of interest expense for the quarter was $4.5 million. Our interest incurred was $8.7 million.

We had solid returns for the third quarter. Given the challenges facing our industry, our pretax income was 12% and our return on equity was 16%. During the quarter, we generated $157 million of EBITDA compared to $198 million in last year's third quarter, and our effective tax rate was 23.8% in the third quarter, compared to $22.9 million in last year's third quarter.

Our earnings per share -- earnings per diluted share for the quarter decreased to $3.92 per share from $5.10 last year, and our book value per share is now $120, a $16 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 $16.6 million, an increase of 28% from $12.9 million in 2024's third quarter. Revenue increased 16% from last year to a third quarter record $34.6 million due to higher margins on loans sold, a higher average loan amount and an increase in loans originated.

The average loan-to-value on our first mortgages for the third quarter was 84%, compared to 82% in 2024's third quarter. We continue to see an increase in the use of government financing. As 55% of the loans closed in the quarter were conventional and 45% FHA or VA, compared to 66% and 34%, respectively, for 2024's third quarter.

Our average mortgage amount increased to $406,000 compared to $403,000 last year. Loans originated increased to 1,848, and which was up 9% from last year, while the volume of loans sold increased by 19%.

Finally, as Bob mentioned, our mortgage operation captured 93% of our business in the third quarter, this was up from 89% last year.

Now I'll turn the call back over to Phil.

Thanks, Derek. Our financial position continues to be very strong, highlighted by Moody's recent upgrade of our credit rating and the extension of our unsecured credit facility to September 2030, which increased our borrowing capacity from $650 million to $900 million, and we ended the third quarter with no borrowings under this facility and had a cash balance of $734 million. We continue to have 1 of the lowest debt levels of the public homebuilders and are well positioned with our maturities. Our bank line matures in 2030, and our public debt matures in 2028 and 2030. Our unsold land investment at 9/30 is $1.8 billion compared to $1.6 billion a year ago. And at September 30, we had $931 million of raw land and land under development and $859 million of finished unsold lots.

During the third quarter, we spent $115 million on land purchases and $181 million on land development for a total of $297 million. And at the end of the quarter, we had 776 completed inventory homes and 3,001 total inventory homes.

And of the total inventory, 1,245 were in the Northern region and 1,756 are in the Southern region. At September 30, '24, we had 555 completed inventory homes and 2,375 total inventory homes. We spent $50 million in the third quarter, repurchasing our stock and have $100 million remaining under our current Board authorization.

And since the start of 2022, we have repurchased 15% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments.

[Operator Instructions] Your first question comes from Ken Zener with Seaport.

If we could talk about orders a little bit. You had, as we measure kind of normal seasonality, which is pretty impressive in the so-so market you reflect. Can you talk to that dynamic of you wanting to achieve, right, what we see as seasonality? I mean you might look at it differently. But -- and the use of incentives? And if you could quantify the incentives level in general, and the mix between price and mortgage buydown and closing costs, please?

Yes. Great question. Clearly, a somewhat challenging market, unpredictable, too. The -- from week to week, a fair amount of intra-market volatility within our divisions. 1 month, certain of our divisions might have stronger sales and then unexpectedly things slow down, then they pick back up. As I said, I think things are just okay.

That said, it's critically important for us to drive traffic and do everything we can to incent sales in this market. And I don't think we're alone in this, but we have concluded that there is no better way to do that than through the selective use of mortgage rate buydowns.

We have not offered any specifics on the exact amount that we're spending, it tends to change over time based upon what's happening in the market. You can go on our website, and you can see that both with respect to conventional as well as FHA, we're offering rates in the very high 4s. And that is -- we have found that to be a pretty good sweet spot to do what we are currently doing.

Absent the inventory charges that Phil mentioned that accounted for about 60 to 70 basis points of our gross margin decline, our margins are down about 250 basis points year-over-year. And I would just simply say that the majority of that is due to mortgage rate buydowns.

There is some subdivision-by-subdivision incentivization that might be going on here and there. But the significant majority of it is rate buydowns. And then, frankly, some of the other decline is just increased cost on the land side. We've had a lot of success I don't think we're alone on this, which is also encouraging. You don't want to be the only 1 doing something because it may not be sustainable, but we've had a lot of success on our sticks and bricks, our raw materials and costs with our subcontractors and suppliers relatively flat to down, which has been very encouraging, notwithstanding all the chatter about impact of tariffs.

We have seen no impact of tariffs to date. I think the jury is out on how things shake out as we move into next year, but thus far, we haven't seen any of that flow through to our results, but we're going to continue, as I said, Ken, to use rate buydowns as the primary driver for both traffic and sales, as long as it keeps working.

And with -- if rates were to drop, there's been a little bit of movement recently. It didn't seem to have that much of an impact on demand. That's a bit of a fit-and-start kind of a situation, but if rates begin to drop the cost of such buydowns, hopefully, will drop as well. And then more importantly, if we do see a drop in rates, that could help unlock the existing home market, which we're getting these results really without much help from the sale of existing homes. That could be a big tailwind for housing if and when that begins to unlock because even though inventory levels of existing homes in our markets are not anywhere near the all-time highs, they are up considerably year-over-year and over the past 2 years and past 3 years.

It's a long answer to your question. I hope it tells you most of what you asked.

Yes, and appreciate it. My second question, because you report the South as a segment versus the North. The South, obviously has Texas, Florida, which can be different -- which are different markets. Gross margins were about the same last quarter in those regions. EBIT a little different. But could you comment on kind of prior to the Q coming out, the gross margin trends we're seeing in those 2 segments? And if you -- any comments you could to illuminate the aggregation of Texas and Florida would be appreciated.

I'll say a couple of things about it. For us, Orlando on the East -- relative to East Coast is stronger than Tampa and Sarasota, Fort Myers, where we have a relatively new operation. So it's not really that meaningful in terms of results, but demand and margins for us are clearly holding up better in Orlando than they are in Tampa and Sarasota. I think Austin and Texas, that market was red hot a couple of years ago, and over the last 12 to 18 months, it's cooled considerably. It's probably struggling the most in Texas.

We have seen margins drop also in Houston and Dallas, but comparatively, I think they're still holding up quite well. We're expecting, as I said, a strong year in Dallas. Charlotte and Raleigh have both been pretty good. And as I also mentioned, we're expecting a strong year in Charlotte. So it's not to be snarky, but it's a bit of tale of 17 cities. They're all a little bit different. And we've long said that this business is a subdivision business. We got about 233 of them when we try to manage them that way, but within the cities, what I've just described is probably a pretty good snapshot from 10,000 feet.

If you look also, this is Phil, if you look at community count last year, our average community count was up about 7%, and this year, our estimate is we'll be up about 5% on average. We feel good about that. If you look inside those numbers, as I said, both regions do have community count growth. Our Florida community count has actually been down a little bit this year. Our Texas community count has been up a little bit, and as Bob said, in general, our Midwest and Carolina business as far as pricing and margins and so forth, it held up a little better than Texas and Florida. But overall, we feel really good about where we are.

Your next question comes from Alan Ratner with Zelman & Associates.

So Bob, a lot of chatter over the last few weeks about some tweets from our administration and the FHFA about the homebuilders business. And I'm just curious, have you had any discussions with the administration or have any thoughts on, I guess, what some of the headlines are out there?

We have not had any discussions at this point and nothing is currently planned for us. Obviously, we're aware of it. Look, I think the -- I don't know if I can comment much more, I read what you read. I think that the good news from my view, and this is both at the local and state level as well as federal, there's a lot of talk right now about what can be done to help unlock, if you will, housing, improve affordability. We're seeing it at a lot of different levels.

I was in an event last night, where that was the primary topic of discussion as it relates to markets in the Midwest, I'll be at an event in another week or 2 as it relates to just Ohio, where that is a primary topic. I think people understand how important housing is as a driver of the overall economy, and that housing, while it's certainly by no means dead, it's underperforming, and we need to be building more homes. And we make -- need to make sure we do the smartest and best things to help create that environment. I think we'll get there eventually, but if there could be some policies here or there at the local level, we certainly would welcome those. We have long said, and I think this view was widely shared, but we have long said that the greatest impediment in my -- in our judgment to affordability and to improve volume levels is local zoning regulations.

And some markets are more favorable than others, but that to me is, remains the biggest impediment the -- we're all sick of the nimby term, but the nimbyism and the anti-growth, again, some markets, the situation is more acute than in others. I think there's a reason why Texas has led the nation in housing production. I don't know if it's 15%, 18% of total new home production, but it's a big number.

And I think in general, while it's not easy there either, there's just been a much more favorable zoning climate that has contributed to more development, and frankly, more affordability. So that's what I thought.

And yes, that seems to be the general sentiment so far is that at least builders are happy to see it being talked about. So hopefully, there could be some real change implemented from whatever discussion.

Right. It's always bad when no 1 wants to talk to you. Be careful what you wish for. And as long as there's conversation, you've got a chance.

Exactly. All right. A couple of quick ones on just the margin, both gross and SG&A. So on gross margin, it looks like this quarter, obviously, things are still under a little bit of pressure, but it looks like things are stabilized a bit quarter-over-quarter. I know you don't guide, but maybe just if you could talk to the puts and takes going forward in terms of land costs flowing through. It sounds like construction costs are stable. Pricing and incentives, I mean, should we -- are we kind of getting a little bit closer to the bottom here on margin, do you think? Or is there more room for margins to drop over the next handful of quarters?

Well, I think we're a lot closer to the bottom than we were last quarter. How close are we? That remains to be seen. Look, going into this year, even though we didn't share this internally, we believe that our margins would be under pressure somewhere. This was internal budgeting between 200 and 300 basis points because we knew we were going to have to spend a lot of money on mortgage rate buydowns, as we've talked about this call, second quarter, first quarter. Absent the impairments, they're about 250 basis points down year-over-year.

Could they drop a little more? Perhaps. I think we're getting close to some point. And the other thing that's hard to gauge and no 1 knows the answer to this is even though we may continue to be spending money on rate buydowns, if the cost drops by 50 to 100 basis points, that's a big plus on the margin side. And Phil, I don't know if you have anything to add on that.

Yes. The pressures we have really, as we said in the third quarter, we saw 75% specs. The second quarter was like 73%. So it is up a little bit. And in general, our specs have a lower average sale price than are to be built, and they also have a lower margin. So the amount of specs continues to be a pressure. Also, Bob mentioned higher land cost. We do have higher land costs coming through than we did a year ago.

The good news is the last couple of quarters, land development costs which actually were increasing more than the raw land, land development costs seem to have stabilized. And obviously, we're being very careful as far as buying new land parcels since we do feel very strong about our land position and also the choppy market conditions.

So we're doing all we can. You're always market pricing. We always need a certain amount of volume to come through, but overall, we think our margins are holding up pretty well. But again, there do continue to be pressures.

And we have certain internal targets. We want to always have, hopefully, double-digit pretax income percentage. We were 12% for the quarter. Given the market, we feel really good about that. given our size, we feel particularly good about our return on equity. It's lower than it was a year ago, but it's still a very, I think, respectable 16%. We've got minimum targets on that, that we're hitting, and we're going to keep aiming to hit those targets.

Your next question comes from Buck Horne with Raymond James.

I wanted to go back to the regional split on the order growth trends between the North and the South. Just if I heard correctly, I believe you still had higher year-over-year community count in the North region, but orders dropped off 17%. I know there was a tough comp against last year, but just it sounded like markets like Columbus and Cincinnati and Chicago were doing better, but just wondering if you can add any color kind of that divergence in order trends?

I -- we're very -- I think, we're very pleased with how well our Midwest markets have held up. They may be off from where they were a year ago, but I think there -- we've a very strong operation in Columbus, Cincinnati, frankly, Indianapolis. I didn't call out Indianapolis, but we have a much-improved operation in Indianapolis over where we were several years ago, very bullish about that market as well. Chicago is having a very strong year for us as is Minneapolis.

And there's -- sometimes, there's a little noise in these numbers given when new communities open up, and you got to sort of look over a longer period of time, but we remain bullish about the Midwest, bullish about the Carolinas. I don't think Florida has a few struggles here and there, particularly on -- at least for us on the West Coast, and Texas is a little bit of a transition, but there's still tremendous economic vitality, generally speaking, throughout nearly every 1 of our markets.

We're a relative newcomer in Nashville. We've got high hopes for Nashville going forward, lots of job growth there, lots of projected household formations. Houston and Dallas continue to be very strong markets in terms of just total macroeconomic conditions, maybe off a little bit. I get that Austin is slowly, slowly coming back.

Generally, in migration, still in Austin, terrific place. Glad we're there. If we weren't, we'd open up there. So we feel very good about all of our markets. And I think the diversity, you never hit, you know this, you never hit on all cylinders, and if you do, it's lucky. There's always something somewhere. And I think it's important to have the geographic diversities, the geographic diversity that we have. And I think it's particularly helpful to us right now where there's a little bit of a slowdown in Florida and parts of Texas as well, but the Midwest is -- as a Midwestern, I'm glad to see the Midwest standing pretty tall these days.

Buck, this is Phil. When you actually look at the numbers, as I said, our third quarter sales overall, really were pretty consistent, 618 in July, 660 in August and 630 in September. The real -- last September, we sold like 775 homes last September, and the Midwest was really strong last September for different reasons. We do run periodic sales events. Last September was a start of a sales event. So that is really the reason that you're seeing the down sales quarter-to-quarter.

The Midwest sales, as Bob said, really were fairly decent, pretty consistent through the quarter. It's really just last September was a little unusual.

Got you. That's very helpful color. I appreciate that. Yes, thanks for all the details there, really good. Going to G&A and kind of selling costs, I think 1 of your competitors noted that just in this competitive environment, there's a lot of spec homes and a lot of builders are trying to clear before year-end. And there -- 1 of the tools to utilize is more co-brokers and utilizing more realtors to try to get those inventory homes cleared before year-end, are you guys pursuing a similar strategy? Should we think about that being an added cost into the fourth quarter in terms of just selling expenses?

Phil is going to give you the best and most detailed answer, but I just want to say a couple of things first. We've got over 200 more completed specs today than we did a year ago at this time, and it's probably a little more than we'd ideally like to have. We're very, very careful from a management standpoint on paying close attention to that broker co-op percentage.

I wish, Frank, we welcome brokers, we need brokers. Company-wide, we're in the low to -- we're in the mid-70s, I think, 75%, 76%, maybe 77%. I don't know the exact percentage, Phil does. I wish it were lower. We have a lot of programs that we think are effective in bringing that down without alienating an important part of our selling efforts, which is the third-party brokers. Phil, I don't know if you want to comment any further.

Yes. When you look at the SG&A, as I said, the actual expenses were up 6% versus a year ago. We have 7% more communities, and you do have cost for every store, maintaining those stores. We have 3% more people. Again, we have 7% more stores, those type of things. We also did have a slightly higher sales commission rate, internal and external, again, trying to drive traffic and sales. So that's how we kind of get to that 6% increase, Buck.

One thing we have not done, there might be 1 or 2 minor exceptions, we're not out there incentivizing traffic or sales by offering more money to the third-party brokers. Some of our peers have. We're not doing that. We don't feel we need to do it. And we also think that it's like a lot of things in life. Once you start, it's hard to stop.

Right. Yes. All right. That's really helpful. I appreciate that added color. My last one, if I can sneak it in, is just given the strength of the balance sheet here and the cash position and the increased financial flexibility you've got with the credit facility, is there anything that's necessarily holding you back from accelerating repurchases into year-end, working capital needs or otherwise? Or you just want to continue to be very programmatic and consistent on that.

Yes. I mean, I'll say one thing, and then I think Phil is going to add to this, which is -- which he should. Job 1 is to grow the company. Job -- and to do so with a very strong balance sheet. We thought we had a strong balance sheet back in 2004, '05 and '06 only to learn that we didn't. Our debt-to-cap was in the high 40s, low 50s, so were many of our peers. We're not going back to that movie. And we're going to maintain a very, very strong balance sheet with comparatively low debt levels as we are right now, that is our goal going forward, we also want to grow the company. But when we have this excess cash and for all these other reasons, we think we can also, at the same time, without compromising growth, selectively buy back shares. Phil, I don't know if you want to add anything.

Exactly. We continue every quarter with our Board to talk about stock repurchases and so forth. We have consistently, for the last few quarters, repurchased $50 million a quarter. As far as the bank line, the bank line was going to mature in December of '26. We really do not want to get within a 1-year window of that. We just thought for safety and flexibility, plus it now is a 5-year term. We thought it made sense to go from $650 million to $900 million. We're definitely kind of low leverage, conservative type people. We do like to keep that leverage low, especially during these times. I do have 3,000 specs compared to 2,300-or-so a year ago we think that makes a lot of sense in today's market, especially take advantage of these rate buydowns, which are a lot more effective in shorter periods of time. So we're just going to continue to adapt as best we can to market conditions, but keeping a strong balance sheet and strong liquidity is definitely job one.

[Operator Instructions] Your next question comes from Jay McCanless with Wedbush.

Just wanted to ask where your gross margins are right now on spec versus your build-to-order homes.

They're a little lower. It really depends on the community, every location, a little is different, but in general, they're just a little lower than to be built.

And then Bob, you were talking about some of your competitors increasing co-broker spend, I guess, in terms of some of the larger competitors, who said they might be pulling back a little bit. Are you seeing any evidence of that in the field? Or is everyone selling pretty hard to get lighter ahead of the spring season?

I don't think I made a comment about pulling back. What I said is that we have not elected to pay brokers more to drive traffic and incent sales. Our co-op rate has remained consistent throughout all of our divisions, probably over the last 5 years. We've tried to be very consistent on that. Do what we can to have the best relationships we can, but not interested in buying the business and fearful of how you go back to where you once were if you start that, as I made a comment. I don't know if -- and I'm not saying a lot are doing it, but I know there's a few examples out there of some that are. Whether they pulled back, I don't know. I don't have current information on that. What was the other part of your question?

Well, just or people -- we've heard that some of your competitors are slowing down starts, but at the same time, we're hearing a lot of conversation about aggressively selling into year-end. I mean, to me, it feels like this is just a normal year where the industry is a little heavy on inventory. People are going to have to sell aggressively in the year-end. Is that what you're seeing out in the field right now or people being a little more reasoned with some of the discounts and incentives they're trying to offer?

That's always a community-by-community discussion. I mean some builders, 100% specific, they're fairly aggressive, some are not. It just depends on the location, et cetera. And you just need to be aware of what's going on in the marketplace. Getting back to kind of our sales effort, we're trying to focus very much on internally to make sure we're getting all the leads that we can that we follow up on the leads, as best we can. We have more people focused on those leads. We have, in most of our communities, more than 1 salesperson. We try to be focused very much on controlling all the things we can control.

We're spending more money today on sales training and driving leads online than we ever -- than we have in a long, long time, and we're going to continue to. That's the blocking and tackling of our business. Don't often mention that on calls like this, but I'd rather spend money on that than on realtors. I'd rather spend money on that than on incentive. Now, we may to do both sometime, but it all starts with us. And it's easy to get complacent during hot markets. But now more than ever, focusing on us is just absolutely the most important thing we can do.

And we have an opportunity. I mean, last year, we opened about 75 stores. This year, we're going to open more than 75 stores. So again, different location, different product, different price point in many situations, those are things we control. So those are the things we focus on every day. And yes, we do have higher spec limits, but again, we don't accept going in that specs have to be a lower margin. Hopefully, we're putting the best products on the best lots and that we're getting paid for that because that's the way the business is right now.

And I want to give a very specific example. I bragged about the fact that our mortgage and title operations had a tremendous quarter because they did. And I mentioned that we had a record capture rate of 93%. I think a year ago, it was like 84% or something like 89%. On the one hand, you could say, well, it should be higher, because you're so aggressively using mortgage rate buydowns and that is true. It should be higher. And I think it's even higher than it would be because of the training and the efforts that we're putting on the side of making certain that at each branch, each mortgage branch that we're doing the best we can to help people figure out the financing that's best for them in this somewhat challenging market.

And we could easily be happy with a capture rate of 85% or 88%, it would probably be at or near best in class. But with this higher capture rate, not only does that contribute to profitability, but we think it's contributing to sales performance.

And every buyer is different. Some buyers, especially more affordable homes, they may very well need help in closing costs. Some builders -- some buyers do need help. They want a 30-year fixed, lowest rate possible. Some buyers are okay with arms, some are okay with buydowns. So again, it just depends on what the customer needs. We're not just throwing the most money at every deal we have.

Understood. I guess the last one for me, with the balance sheet as strong as it is right now, is there any thought to doing some M&A, especially in the Midwest, down into the Carolinas, where you're already seeing pretty strong performance.

There's nothing on the horizon. If something happened to show up in one of our existing markets or perhaps in a market that we're not in that we thought made a lot of sense. I think, we take a very serious look at it. I mean, in the last 6 months, we've probably looked at a couple of deals, but right now, our job is to make sure we keep our balance sheet really strong to your point and to grow in our existing markets. Every one of our existing markets has growth goals. We've said this before, and I'll say it again right now, our run rate today is around 9,000 units.

We believe in the 17 markets that we're in that we can grow 13,000, 14,000 units without opening up in any new markets, just with the headroom that we have within our existing geographic footprint. That -- if we could grow that way, that would be the one that would be the most desirable. On the other hand, if something showed up, and it made sense, we'd analyze it like any other land deal or opportunity, but there's nothing planned at this point.

Okay. And then one more, just to kind of follow on that. Any inclination to talk about '26 community count, especially with the amount of lots you guys have built up, it feels like that can grow count and possibly unit volumes in '26. Any thoughts on that?

You mean you're asking for guidance on projected community count growth for 2026?

I would never ask you for guidance, Bob. I'm just asking for how you're feeling about potential growth for next year?

I think there will be community count growth next year.

Yes. I mean we own 24,000 lots. And...

We expect to have community count next year.

Our target is always to grow community count in that 5% to 10% range a year. Like I said, last year, it was 7%, this year is probably going to be about 5%. Even though we've slowed land purchases down the last couple of quarters, we're still in great shape to continue growth.

There are no further questions at this time. I will now turn the call over to Phil for closing remarks.

Thank you very much 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 ask that you please disconnect your lines.

Good morning, ladies and gentlemen, and welcome to the M/I Homes Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday July 23, 2025. I would now like to turn the conference over to Phil Creek. Please go ahead.

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 has contributed to uncertainty and impacted consumer confidence. Throughout this year, we have strategically and effectively used mortgage rate buydowns to drive traffic and incent 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 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.

And moreover, we were pleased to see a sequential improvement in new contracts from May to June. We have repeatedly said that 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 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 out of the Southern region, the other 41% out of 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, the other 69% 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 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, 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 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 of the 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 second quarter, we spent $102 million on land purchases and $139 million on land development for a total of $241 million.

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. 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.

[Operator Instructions] 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 try to do that. I think that -- there's just a lot of volatility week-to-week within -- inside the month. I think I saw another builder make a comment that one week is good and the next week is actually not so good and it's -- it almost looks like a heart rate monitor. And that's what we've experienced. Having said that, I think in balance, our Midwest markets have outperformed the Carolinas slightly, although I think the Carolinas are still quite good. We're sort of still just getting started in Nashville. So I'm not going to make any comments about that because I don't feel that they're meaningful enough in terms of our performance.

Florida is a bit of a mixed bag. Orlando for us, has held up significantly better than Tampa. Sarasota and Tampa are both a little soft, although I think as the quarter progressed conditions in Tampa got a little bit better, and we were very pleased to see that. We've had a lot of delays in bringing communities online in Sarasota and those delays have been more of an impact, I think, on our performance in that particular market than maybe the macro environment. And then Fort Myers and Naples are off to a really good start, but it's still just in its very early stages.

Texas, Dallas is clearly softer than it was a year ago when it was one of the strongest, if not the strongest housing markets in the country. So Dallas has softened a bit. It's by no means horrible, but it's not nearly what it once was. Houston is a little softer, too, maybe not quite as soft as Dallas. And I think Austin is crawling its way back. San Antonio is sort of somewhere in the middle there with very, very sensitive to interest rates in terms of the buyer profile there.

So in balance, I'd say across all 17 of our markets, I'm glad we're in every single one of them. Columbus, Indianapolis, Chicago, Minneapolis, I think, are performing at a pretty good level right now. So is Charlotte, Raleigh, we're in a bit of a transition with communities coming on, very bullish about all these places. Glad if we weren't in these markets, we would go to them. And I think Florida is in a bit of a reset on particularly the West Coast from our point of view.

But I'm really bullish about Florida. I'm not ready to move there personally, but I'm very bullish because I think a whole lot of people are. And I think -- I don't think Florida is going anywhere. I know the weather and hurricanes and those sort of things cause issues from time to time. But -- and I remain very bullish about Texas, too. I think there -- some of the margins that we were posting and I suspect others were as well in Dallas and Houston, not sure how sustainable they were long-term, but they're still excellent, excellent housing markets. What, 15% of the new homes sold in the United States, I think, are sold in the state of Texas. I suspect that will continue.

So we love where we are. We think we've got a lot of opportunity I'm glad that we're not just one place or the other. We still have no interest in going any further west than we are. You didn't ask that, but I'll offer that up because we think we can grow a whole lot within the markets that we're in. And we have a leadership position in over half of our markets. By that, I mean we're either the first, second, third or fourth largest builder.

So lots of good things. Clearly, a challenging market, as you know, you know as well as anyone, but it's not horrible. I think conditions are about a C to C plus, and they've been that way really for quite some time. But those of us that have been around and M/I Homes will be celebrating its 50th year next year. We know what Ds and Fs look like, and we're by no means close to that. So I mean, the fact that we can post 14% income in this environment, I think, is extraordinary. I think any double-digit pretax.

I remember when [ Ivy ] years ago thought any builder that can get double-digit pretax income was hitting on all cylinders. The fact that we can do it right now in 2025, I think is -- we're very proud of that. We've improved our cycle time. Our customer service and home readiness scores are the highest in company history, and they were always high. We hold ourselves to a very high standard when it comes to that. And those are all third-party tabulated scores.

So as we look at the business and think about where we are we love our land position. I saw a report that you put out that thought we had too many tertiary communities. I'm not sure I know which ones you're talking about, I'm winking a little as I'm saying that to you. I think our land position is exceptionally well located really excited about that. And we have a lot of communities notwithstanding the current conditions that are performing at a very high level.

Well, I appreciate that big run down. 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?

I didn't pick up the first -- the last part of that question, what are the what that we're facing?

The headwinds to margin. So like going forward, what could pressure margin lower? And then what, if anything, could be a tailwind to improve margins?

Yes. And what a great question. I don't know that anybody really knows the answer to that. I think margins are starting to level off for us. They may get a little bit lower. I don't see another 100, 200, 300 basis point drop could happen. I think higher rates are going to be here for a little while. So we're going to continue to cut into margins by buying down mortgages. But I think that we were in the upper 20s, now we're in the mid-20s.

I don't think we're going to see them get a whole lot lower. I don't -- they may get down to 24, 23 or something like that. But by the same token, they may level off where they are now. I sort of feel like we've sort of found a space, a place. I don't see rates getting higher over the next number of quarters anytime soon. And in fact, I think at some point, we're likely to see them start to drop. That will help margins a lot. But there's -- I think there's some concern about impact of tariffs. That's a hard one to get your head around.

I think we thought it would be worse than it is. So far, there's been little, if any, impact. We get about 20% to 30% of our lumber from Canada sort of depends, and it's not the full package. So how that all plays out, I don't think it's a disaster. It will be what it will be, and we'll figure it out. We'll navigate through it. But I think we're really close to about where we're likely to be here over the next number of quarters.

Great. That's good to hear, encouraging. And if I could just sneak in 1 last one. Just on the order -- the comps by month, thought it was interesting that your orders were down 12% in April and May and actually up 1% in June. I know there's a lot that can go into that with comps and everything. So just curious if you could expand on that for a minute. Did you guys do anything...

It was interesting. There was a noticeable uptick in traffic in June, but it didn't last the whole month. but there was. And there was that period where we all sort of thought rates are 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, everybody. The margin stability you're talking about the interest rates, not -- I don't think I'd be disagreeing with you. But if you could operationally comment on the South, which for you guys include Texas, Florida, a little more Texas than Florida, I think you said before. But the segment margins were -- gross margins were 24% in 1Q. Can you kind of -- and those have fallen sequentially from 4Q, but can you kind of talk about the spread there between the Florida and Texas margins? Give us a little better sense of the business composition.

Well, just a little. Look, a year ago, our margins in Texas were -- let's leave Austin out because it was in a bit of a reset and has been for over a year. But certainly, Dallas and Houston, where we have big operations, they were some of the best margins in the company, better than Florida. They're coming down slightly now. But quite honestly, they're still very good. Otherwise, we wouldn't on average be running nearly 25%.

Right now, across the board, margins in Texas are a little better than Florida.

And one of the things that I've been focusing on, which surprises me is do you have a 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 take a crack at that. I'm not sure that I that I'm looking at the same number that you are. But as it relates to the large public builders, all of us are producing a lot more spec homes, which go into that inventory number than we were 2 years ago and maybe even we were a year ago. So that's certainly in there. But because of the rate environment we're in, it's the decision to do more spec homes, at least for us, has been critically important to our performance because the rate buydowns, which are so important in order to get people to buy a home and to get to the closing table, it's very difficult to produce, if not ridiculously expensive, a very long-term rate lock.

So the most attractive rate buydowns, the ones that most buyers are taking are available on homes that can close within 60 days. So if we don't have the inventory, we don't have that to offer. On the other hand, the listings, which are up in almost every market that we're in, in some cases, considerably, that includes existing homes, too. And the one tremendous advantage financially that we have and the other builders, new homebuilders have over existing homes, is our ability to offer rate buydowns, which the average seller of an existing home is somewhat powerless to do.

They could do it, but it's not -- it's just not as -- they don't have the agility or the internal operation to be able to generate that as quickly as we do. So I don't know if that really answers 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 -- was that due to a more heavy decision on incentives? Or was that more of an organically driven demand lift?

I think the latter. I don't -- look, for all intent, we're not really doing much with incentives, if at all, other than rate buydowns. That's our primarily incentive. And there have been periods week-to-week or every several weeks where the cost to buy the rate down to what we think -- where we think we need to be on both the government and conventional side where it costs a little more, it costs a little less. That may be 100 basis points or 50 plus or minus from time to time.

But we didn't -- we -- some builders are maybe more aggressive with their incentives other than rate buydowns, I think most haven't been, which has been good to see, at least from my point of view. There's always someone that may be doing something that maybe we don't think it makes that much sense because you can only sell the house one time and lots are precious commodity if they're well located. But I don't know if you have anything to add.

It's very hard to project what margins are. One of the things I mentioned was that in the second quarter, we had about 36% of our closings that were spec sales that were sold and closed in the quarter. We also have opened in the first half, 50 new stores. So that impacts what we're doing. You only get a chance to open one time the right way and try to be very careful as far as pricing and incentives, especially with new communities.

In general, our more expensive houses, higher priced, tend to hold up a little better these days as far as price and margin. Specs, there's an art to selling specs. Today, we're selling about 70% specs. And although in general, specs are at lower margins than to be built, again, there is an art to what house you're specing on which lot -- and how do you manage the incentive on specs. As Bob said, a big part of that is there's a lot more efficiency in buying down rates in a shorter period of time.

So it's just very hard to predict what margins are -- but overall, we feel really pretty good about where we are.

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 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 to have turned the corner as well.

Yes. I mean I -- look, I don't know that I'd say it's completely turned the corner, but I think the steering wheel is heading in the right direction.

Good news. Appreciate the color.

The next question comes from Jay McCanless at Wedbush.

Bob, I think -- good to talk to you. So I think, Bob, you talked about it in one of -- in answering Alan's question, 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 I 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 kind of wood to come out of Canada but...

And also certain pieces and parts can be substituted in different ways. So we have not seen anything yet that makes us think there's going to be a significant increase. Overall, our construction cost the last couple of quarters have pretty much been flat. And also even though land costs in general have continued to go up, land development cost has really kind of leveled off some -- so from what we're seeing, we're not anticipating any type of significant increase in the second half of this year. And if anything does start changing like that, we think there's a couple of levers we can pull.

Okay. That's good to know. Because I just -- kind of the second part of that question is what you talked about, Bob, was margins trying to level out. And we've been worried that if lumber prices move up along with what sounds like a more aggressive promotional environment at least for the next few months, that builder gross margin should -- could come under pressure. So just trying to get a sense of where that's going.

The second question I had is if you look at the North and Pulte called it out yesterday, you guys called out the Northern market is doing better. Is there any thought to maybe starting to expand again up north, whether through M&A or through adding some communities? How are you guys thinking about that, especially with some of the affordability -- really good affordability in some of those northern markets.

Well, we're glad that we're in really 3 distinct geographies maybe 4 if you count Carolinas and Nashville is sort of somewhere mid. But Midwest, Florida, Texas. I'm like very bullish about all. Right now, I think the Midwest is holding up a little better candidly. We've got a very big operation in Columbus and in Chicago and in Minneapolis and a rapidly growing -- been there a long time, but a rapidly growing operation as well in Indianapolis.

Our Cincinnati operation is probably as strong as it's ever been, and we've been there since 1990. We have a lot invested in our Midwest markets. And we're prepared to invest more. Every single one of those markets has a plan to grow over the next 1, 2, 3, 4 years. And we don't think it's irrational. We think it's doable. At varying degrees, every one of the cities has projected household formation growth and right now, I think no different than the rest of the country, a shortage of homes and a lot of buyers on the sidelines.

So I don't want to overstate our perceived bullishness, but we just think it's a really good area. And we're going to -- we do a lot of volume in the aggregate in the Midwest and we expect that volume to grow.

If you look at it, Jay, overall, on 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 cautiously grow the business. We think we have the leadership teams, and we think we're pretty good at land and product and those type 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 a 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 it's 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 type 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.