On October 30, 2024, M/I Homes, Inc. (NYSE: NYSE:MHO) announced a successful third quarter with record numbers in home deliveries, revenue, and income, despite facing macroeconomic headwinds and natural disasters. The company's CEO, Bob Schottenstein, reported an 8% increase in homes closed year-over-year, leading to a total of 2,271 homes for the quarter.
This growth contributed to a 9% increase in total year-to-date closures and a 9% rise in Q3 revenue to $1.1 billion, with year-to-date revenue reaching approximately $3.3 billion. Pre-tax income for the quarter also rose by 6% to $188.7 million with a gross margin of 27.1%.
Key Takeaways
- M/I Homes closed a record 2,271 homes in Q3, an 8% increase year-over-year.
- Q3 revenue reached $1.1 billion, a 9% increase, with year-to-date revenue at $3.3 billion.
- Pre-tax income for the quarter was $188.7 million, a 6% increase, and the gross margin stood at 27.1%.
- The company maintained a strong financial position with $2.8 billion in equity and a cash balance of $720 million.
- The mortgage segment saw a 31% increase in pre-tax income to $12.9 million and a 27% revenue increase to $30 million.
- Stock repurchases amounted to $50 million, with $157 million remaining under current authorization.
Company Outlook
- M/I Homes plans to open new communities and expects a 5% increase in average community count for 2024.
- CEO anticipates continued growth and strong performance in 2025 and beyond.
- The company is expanding its Smart Series offerings and attached townhomes, now 20% of the business.
Bearish Highlights
- Potential upward pressure on insurance costs post-hurricane.
- Downward pressure on margins expected due to increased incentives and rate buy-downs.
Bullish Highlights
- Strong financial position with zero borrowings under its credit facility and a debt-to-capital ratio of 20%.
- Optimism for the spring selling season despite market volatility and affordability challenges.
- Florida and Texas remain significant markets, with expansion plans in Fort Myers and Naples.
Misses
- Corporate G&A expenses rose to $68 million due to increased staffing and marketing efforts.
Q&A Highlights
- About one-third of buyers received mortgage incentives through rate buydowns.
- Recent uptick in traffic levels suggests a slight improvement in demand.
- No current plans to introduce a dividend, with a focus on share repurchases and pricing strategies.
M/I Homes showcased resilience in the face of fluctuating interest rates and the impact of Hurricanes Helene and Milton, especially in Florida operations. The company's land investments increased to $1.6 billion, and it ended the quarter with significant holdings in raw land and finished lots, indicating a robust pipeline for future development. The average closing price for homes in Q3 was $489,000, reflecting a 2% increase from the previous year.
In response to recent hurricanes, the company expects insurance rates to rise, but damage to new homes was minimal. Despite the slow fourth quarter, traffic levels have shown improvement, signaling potential demand. The CEO also noted October's performance exceeded expectations, and the company remains focused on its pricing strategies amid varying community demands.
M/I Homes' confidence in the housing market is bolstered by solid household formations and targeted incentives, with a balanced product mix catering to both entry-level and move-up homebuyers. The company's strategic share repurchase activity reflects a commitment to shareholder value, with no immediate plans to pay dividends. Looking forward, M/I Homes remains committed to reassessing its strategies in future quarters, maintaining a positive outlook for growth in the housing market.
InvestingPro Insights
M/I Homes' strong third-quarter performance is reflected in its financial metrics and market position. According to InvestingPro data, the company's market capitalization stands at $4.24 billion, underlining its significant presence in the homebuilding sector. The company's price-to-earnings (P/E) ratio of 8.17 suggests that it's trading at a relatively low earnings multiple, which aligns with one of the InvestingPro Tips highlighting this aspect.
The company's robust financial health is evident in its revenue of $4.18 billion over the last twelve months as of Q2 2024. This figure supports the CEO's report of increased home deliveries and revenue growth. Moreover, M/I Homes boasts an impressive gross profit margin of 26.51% for the same period, which is consistent with the reported 27.1% gross margin in the latest quarter.
InvestingPro Tips also point out that M/I Homes has been highly profitable over the last twelve months and operates with a moderate level of debt. This corroborates the company's strong financial position mentioned in the earnings report, including the $2.8 billion in equity and $720 million cash balance.
The stock's performance has been noteworthy, with InvestingPro data showing a substantial 88.47% price total return over the past year. This impressive return aligns with the InvestingPro Tip highlighting the company's high return over the last year, reflecting investor confidence in M/I Homes' business model and growth prospects.
For investors seeking more comprehensive insights, InvestingPro offers additional tips and metrics beyond those mentioned here. In fact, there are 11 more InvestingPro Tips available for M/I Homes, providing a deeper understanding of the company's financial health and market position.
Full transcript - M/i Homes (MHO) Q3 2024:
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes Third Quarter Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, October 30, 2024. I would now like to turn the conference over to Mr. Phil Creek. Please go ahead.
Phil Creek: 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 fair disclosure, we encourage you to ask any questions regarding issues that you consider material during this call, because we are prohibited from discussing significant non-public items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today’s press release also applies to any comments made during this call. Also, be advised that the company undertakes no obligation to update any forward-looking statements made during this call. With that, I’ll turn the call over to Bob.
Bob Schottenstein: Thanks Phil. Good morning and thank you for joining us today. We had a very strong third quarter highlighted by record homes delivered, record revenue and record income. We are particularly pleased with our results given the various macroeconomic headwinds and other challenges our industry faced during the third quarter. A variety of outside factors impacted traffic and demand and led to generally choppy selling conditions throughout the quarter. We saw a lot of movement in interest rates, initially trending down in anticipation of the Fed 50 basis point rate cut and then for some somewhat unexpectedly going up with mortgage rates hovering in the mid 6% range before rising to just above 7%. And with Florida representing about 20% of our overall business, we were clearly impacted in the latter part of the quarter in our four Florida markets by both Hurricane Helene and Hurricane Milton. Fortunately for us, our homes held up very well, very little to no damage in any of our communities or certainly nothing significant, but clearly an impact on our operations, the ability to open our sales offices and the impact it had on traffic and demand during the latter part of the quarter. And then finally, the upcoming presidential election has also had some impact on consumer behavior. We all look forward to that being behind us. Despite all of this, our results stand strong as we executed at a very high level throughout the quarter. We closed a record 2,271 homes in the quarter, which is 8% better than a year ago. Year-to-date we have closed 6,653 homes, a 9% increase over 2023. Third quarter revenue reached a record $1.1 billion, 9% better than last year, and year-to-date our revenues equal roughly $3.3 billion, an 8% increase over 2023. We sold 2023 homes during the quarter, slightly better than last year’s third quarter of 2021 homes sold. Year-to-date we have sold 6,825 homes, 7% better than 2023. Quality of our buyers continues to be very good with average credit scores of around 750 and average down payments slightly above 18%, equaling about a $90,000 down payment per buyer on average. We are really pleased with our income and returns. Pre-tax income for the quarter increased 6% to a record $188.7 million. Year-to-date our pre-tax income equals $563 million, 20% higher than 2023. Gross margins for the quarter were a third quarter record of 27.1%, 20 basis points better than last year and our pre-tax income percentage for the quarter was a very solid 16.5%. Our strong results generated a 20% return on equity with our book value per share now at a record $105, up 20% from a year ago. We continue to promote sales in a very targeted and strategic way using mortgage rate buy downs. About one third of our buyers during the quarter used our rate buy down program and about half of our buyers, during the quarter, purchased our most affordable line of homes, which we call our Smart Series with the balance of our buyers about 50% purchasing our more expensive move-up product. We feel very good about the breadth of our product offering and product mix across our 17 markets. As we enter the fourth quarter, we remain on track to open a number of new communities and we are very excited about the many new communities we will be opening in 2025. Our average community count for 2024 will be about 5% higher than 2023. And we expect to further grow our community count in 2025. Our division income contributions in the third quarter were led by Dallas, Columbus, Tampa, Orlando, Chicago and Raleigh. New contracts for the third quarter in our northern region increased by 1%. New contracts in the southern region were flat comparatively to prior year’s third quarter. Our deliveries in the southern region decreased by 7% from a year ago while our deliveries in the northern region increased by 37% from last year. 55% of our deliveries came out of the southern region and the balance of 45% came out of the northern region. Our owned and controlled lot position in the southern region increased by 20%, compared to a year ago and increased by 11% in the northern region compared to last year. 33% of our owned and controlled lots are in the northern region, the other 67% in the southern region. We have an exceptional land position, very strong company wide. We own approximately 24,000 lots which is about a 2.7-year supply. In addition, we control an additional 52,000 lots. With respect to our balance sheet, we ended the third quarter with an all-time record $2.8 billion of equity, a cash balance of $720 million and zero borrowings under our $650 million unsecured revolving credit facility. This resulted in a debt to capital ratio of 20% down from 22% a year ago and a net debt to capital ratio of negative 1%. As I conclude, let me just state that our balance sheet is in excellent shape and that we are in the best financial condition in our history. We feel really good about our business and our prospects for continued growth and success as we look to 2025 and beyond. M/I Homes is very well positioned to have another year of strong results in 2024. With that, I will turn it over to Phil.
Phil Creek: Thanks Bob. As far as financial results, our new contracts were flat with last year. They were down 5% in July, up 2% in August and up 3% in September. And our cancellation rate for the quarter was 10%. 50% of our third quarter sales were to first-time buyers and 60% were inventory homes. Our community count was 217 at the end of the quarter compared to 204 a year ago. The breakdown by region is 88 in the northern region and 129 in the southern region. During the quarter we opened 19 new communities, while closing 13. And we currently estimate that our average 2024 community count will be about 5% higher than last year. We delivered 2,271 homes in the third quarter, delivering 66% of our backlog. And at September 30 we had 5,100 homes in the field versus 4,600 homes in the field a year ago, up 9%. Revenue increased 9% in the third quarter and our average closing price for the third quarter was $489,000, a 2% increase compared to last year’s third quarter average closing price of $481,000. Our third quarter gross margin was a third quarter record 27.1%, up 20 basis points year-to-year. Compared to this year’s second quarter our construction costs were flat and our cycle time improved slightly. Our third quarter SG&A expenses were $11.2 million of revenue compared to $10.5 million a year ago. Our increased costs were due to our increased community count, additional headcount, and higher selling expenses. And our interest income net of interest expense for the quarter was $6.7 million. Our interest incurred was $8.8 million. We are very pleased with our returns for the quarter. Our pre-tax income was 17% and our return on equity was 20%. During the quarter, we generated $198 million of EBITDA, compared to $185 million in last year’s third quarter and our effective tax rate was 23% in the third quarter, the same as last year’s third quarter. Our earnings per diluted share for the quarter increased to our third quarter record $5.10 per share from $4.82 per share last year, up 6% and our book value per share is now $105, a $17 per share increase from a year ago. Now Derek Klutch will address our mortgage company results.
Derek Klutch: Thanks Phil. Our mortgage and title operations achieved pre-tax income of $12.9 million, an increase of 31% from $9.9 million in 2023’s third quarter. Revenue increased 27% from last year to a third quarter record of $30 million due to higher margins on loans sold, an increase in loans originated and a higher average loan amount. The average loan to value on our first mortgages for the third quarter was 82%, same as last year. We continue to see an increase in the use of government financing as 66% of the loans closed in the quarter were conventional and 34% FHA or VA, compared to 72% and 28% respectively for 2023’s third quarter. Our average mortgage amount increased to $403,000 in 2024’s third quarter, compared to $394,000 last year. Loans originated increased to 1,695 loans which was up 15% from last year, while the volume of loans sold increased by 20%. Our borrower profile remains solid with an average down payment of over 18% and an average credit score of 750 compared to 748 in 2023’s third quarter. Finally, our mortgage operation captured 89% of our business in the third quarter and this was up from 86% last year. Now I’ll turn the call back over to Phil.
Phil Creek: Thanks Derek. As for the balance sheet, we ended the third quarter with a cash balance of $720 million and no borrowings under our unsecured revolving credit facility. We have one of the lowest debt levels of the public home builders and are well positioned with our maturities. Our bank line matures in late 2026 and our public debt matures in 2028 and 2030 and has interest rates below 5%. Our unsold land investment at quarter-end is $1.6 billion, compared to $1.3 billion a year ago. And at quarter-end, we had $813 million of raw land and land under development and $745 million of finished unsold lots. During 2024’s third quarter, we spent $139 million on land purchases and $181 million on land development for a total of $319 million. And at quarter-end, we owned 24,000 lots and controlled 52,000 lots. At the end of the quarter, we had 555 completed inventory homes and 2,375 total inventory homes. And of the total inventory, 890 are in the northern region and 1,485 are in the southern region. At 9/30/23 we had 414 completed inventory homes and 2,021 total inventory homes. We spent $50 million in the third quarter repurchasing our stock and have $157 million remaining under our current board authorization. Since the start of 2022, we have repurchased 13% of our outstanding shares. This completes our presentation. We’ll now open the call for any questions or comments.
Operator: Thank you, ladies and gentlemen. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Alan Ratner with Zelman. Your line is now open.
Alan Ratner: Hey, guys, good morning. Nice quarter. Congrats on the strong results.
Bob Schottenstein: Thanks, Alan.
Alan Ratner: And Bob, I’d love to just pick your brain a little bit on what you’re seeing across price points in your footprint. I know so much of your growth over the last few years has come via the Smart Series and the entry level and the strong demand there. It seems like the commentary from other builders recently has been that the choppiness we’ve seen of late is maybe more so at the entry level given kind of the volatility in rates, affordability constraints, et cetera. And I know you guys are diversified across multiple price points. So I’m just Curious if you’re seeing notable differences there and whether as you think about the upcoming spring selling season, if you’re thinking about positioning your company towards growth and outsized growth in one price point versus another.
Bob Schottenstein: Great question. I think that I agree with a lot of what you said. I think that the affordability issues are real. I think that I’m really pleased that we have such a strong product offering that extends beyond our, what we call our Smart Series, look our sales were basically flat. We sold one or two more homes in the third quarter than we did a year ago. Half of them were Smart Series, half were move-up. So I’m glad we have both. I think that the first time buyer and the more affordably priced product will continue to be – there may be some intricate quarter or throughout the year choppiness, but I think it’s going to continue to be a big part of our business, hovering around this 50% range, might it get a little larger, yes, sure. We’re doing a lot more attached townhomes which is meeting the buyer at a more affordable price point. We’re doing a lot more of that than we used to. It’s approaching about 20% of our business, some markets even higher. But we – I mean, long-term, I could not be more bullish about the industry. I think it’s really smart for us to have the full array of product offering. We don’t have any strategic shift planned. We like where we are, we like our position, really excited about our land position. We’ve grown community count this year. We expect to grow community count next year and beyond. We’re looking to continue to grow the business as we’ve said throughout every single call over the last number of years. There’s a lot of stuff going on right now. There’s a lot of noise. I think that’s been the common theme of every builder call and it’s because it’s the way it is. But conditions are not bad. Record returns, record profit, decent sales, strong closings, recently we’ve seen a pickup in traffic. It’s just very hard to draw any clear conclusion as to where we are at a moment in time. I think all of us are looking forward to getting this election behind us. It’s been quite challenging for a lot of pieces and parts of our economy and I think it is impacting consumer behavior. The impact that the hurricanes had in for our operations, and as I said, Florida is about 20% plus or minus of our total business. And we are – we have very, very strong operations in Tampa, Orlando and Sarasota and we’re just getting started and have really high hopes for our Fort Myers and Naples operation. From a damage standpoint, we were very fortunate. Our houses held up exceptionally well. And while we did have some damages, some damage to our communities, it was not material and thank God, there was no loss of life or anything like that. But we were basically closed in Tampa and Orlando for almost two weeks and not many people were out shopping and that had an impact on how strongly we closed the month out from a sales and closing standpoint. We dropped about 20 closings in Florida that would have closed in the third quarter. Those deals did not cancel. They’re closing this month. But, so long answer to a complicated question, I’m really optimistic about the spring selling season. We’ll know it when it comes. We’re prepared for it. We expect to grow the business next year. We expect the Smart Series to continue to be strong, but we have a lot of move-up communities coming on next year too. We’re not – I don’t think we’re heavily weighted on any one end of the product spectrum. I just – I feel really good about the way the mix is lined up and I think it’s helping us from a sales standpoint right now. I think comparatively speaking, our sales look quite good compared to our peers. And without the move-up product, I don’t think they would have looked as good just in the recent quarter. So I think the underlying premise of your question is correct. But I think we have a chance to finish out the year in really good shape. Last year, the fourth quarter sales were – we sort of limped to the finish line. I think a lot of our peers limped with us. And I think we have a little bit more momentum right now than we did a year ago right now. And look, we were promoting with three and seven, eights for FHA mortgage and four, seven, eights conventional. About a third of our buyers took that product during the third quarter. We’re now promoting with rates in the upper fours on the FHA side and upper fives on the conventional side with the opportunity for buy downs, two, one buy downs and so forth. And we’re going to continue to do that as necessary. It’s very targeted. I think we’re very strategic about it. And – but it is clearly driving traffic right now across the industry and that looks like it’s going to continue for the foreseeable future.
Alan Ratner: Thank you for that very comprehensive answer, Bob. I appreciate all the thoughts and I agree that the diversification price point gives you a lot of optionality to kind of flex wherever the market goes. I have a follow-up on kind of the last point you brought up on the rate buy downs that’s kind of where I was going to go next. And I know you don’t guide for gross margin, but your margins have been very solid and stable really for the last year, year and a half, kind of in this 25% plus range. And it seems like incentives are picking up across the industry, rate buydowns are perhaps becoming a little bit more expensive in the near-term just given the volatility in rates. So given the magnitude of rate buydowns you’re offering, should we expect a little bit of pressure to your margin over the next quarter or two? Or would you say what you’re offering right now is kind of pretty consistent with what you’ve been offering for the last several quarters?
Phil Creek: That’s a really hard question to answer, but I do think I want to be really careful with how I say this, because you’re somewhat rewarded on the way up and then you’re harshly penalized on the way down. I guess, that’s the way life is. Our 27% gross margins and 17% pre-tax margin sustainable long-term, I don’t think so. But does that mean we’re going back to 20% and 8% pre-tax margins? No, I don’t think that either. I think there could be some slight downward pressure. How much remains to be seen? We have a number of communities throughout our footprint that are running 30% plus gross margins right now even with the rate buy down. So a lot of it’s going to be mix dependent. We don’t – we price on a per community basis within every market that we’re in. We’re very focused on that. We have communities that are in the low-20s right now, because that’s what it takes to sell houses. But we have a lot more that are in the upper-20s and as I said, a number in the low-30s. We’ll just have to see, I mean, I think there could be some slight downward pressure, but I expect us to continue to produce very strong returns and we’re going to do what we can. You can only sell a home once and I mean, none of us want to fall on the sword for margins because you got to sell homes. But I think that our margins will continue to stand comparatively tall in comparison to our peers, because they have and I think they’ll continue to. We talk a lot about that with our leaders, our division leaders and so forth. In fact, it’s one of the most talked about topics. But we’re going to see, I mean, no one really knows what’s going to happen with rates. If rates do start to come down even a little bit and there’s less need for buy downs that will provide margin lift or at least avoid margin decline. So we’ll just – it’s a very hard question, but the builders have been posting pretty strong margins for quite some time and we’re likely to see some decline. I read Horton’s commentary. I think they’re expecting it. We’ll see. I mean, we may see a little decline. I don’t think it’s going to be significant.
Alan Ratner: Great. I appreciate that, Bob, and it wouldn’t be any fun if I asked the easy question. So thanks for the thoughts. Good luck at the year end.
Bob Schottenstein: I expect nothing less from a Michigan man.
Alan Ratner: And I was just about to wish you good luck this weekend. So good luck at Penn State.
Bob Schottenstein: Thanks, buddy.
Operator: Your next question comes from Kenneth Zener with Seaport Research. Your line is now open.
Kenneth Zener: Good morning, everybody.
Bob Schottenstein: Good morning.
Kenneth Zener: I wonder if you could talk to the percent of closings that were intra quarter orders. I think you might have said 60%, but I wasn’t sure. Just as kind of a housekeeping. And then if you could comment on the margin spread you’re seeing between those intra quarter closings in your backlog or if you prefer commentary around the Smart Series versus your move-up? And then related to that, why do you think your margins stand taller than peers given that you have the operational data? Thank you.
Derek Klutch: Yes. As far as the first comment you made, about 40% of our closings basically came from spec houses that sold and closed during the quarter. It’s kind of been that way the last couple of quarters. We do feel really good about our spec levels. In general, our spec levels are a little higher in communities that have attached townhouses and the more affordable Smart Series, as far as a gross profit comparison really hasn’t a whole lot different. Again, as Bob said, it just kind of depends on the communities. Our Smart Series versus our move-up product, we feel very good about the margins on all those product lines.
Bob Schottenstein: And the other thing I’d say is it sounds a little cliche. I think we have really well located communities, cities, the divisions within our company that are posting the highest margins are some of the most competitive housing markets in the country like Dallas, Raleigh, Charlotte, Columbus, Chicago and I think we’ve just got some really well located communities that are generating very, very strong returns for us. Orlando is another one and we hope we can continue it. That’s what we try to do. That’s – you talk about main things in business and it all comes down to execution. But premier locations is a main thing concept within our business and we’re constantly trying to find ways to get those premier locations and not just open up another community.
Kenneth Zener: Well, it’s clear that discipline is it’s in the numbers. My second question, really appreciate your comments around Florida at 20%. Can you comment on Texas share just to give us a little – flush that out a little bit? And broadly, do you think the mortgage incentives are pulling forward demand with most new home buyers markets you serve having buy downs prevalent? I’m just – I’m curious as to your thought, whether that’s actually pulling forward demand at all given the incentive structure. Thank you very much. Appreciate your time.
Bob Schottenstein: Yes, I don’t have the exact share number – the exact percentage of our business that Texas is right in front of me, but Florida has been about 20% of our business, plus or minus Texas is a little higher than that. And Florida and Texas are huge parts of our business and will continue to be as we look forward, particularly when you consider we’re really just getting started. It’s a brand new operation for us in Fort Myers and Naples. And what was the second part of the question?
Derek Klutch: As far as pulling forward demand and those type of things? Our view is if you look at household formations and even though some of the housing inventory levels have increased again, you really have to look at where that inventory is located and the price point and the aging of it. We think the industry is positioned very well and there is a lot of demand out there. Interest rates and payments always matter and you know, you do what you need to do at certain times to help your sales and help your business. As Bob mentioned, our interest rate buydowns are very focused on a subdivision and inventory level situation. So we still feel good about the macroeconomic and the outlook for our industry. It’s just right now with all that’s going on in the marketplace buydowns are kind of the flavor of the time right now.
Kenneth Zener: Thank you very much.
Bob Schottenstein: Thanks.
Operator: Your next question comes from Alex Barron with Housing Research Center. Your line is now open.
Alex Barron: Yes, thanks gentlemen. And great job on the quarter.
Bob Schottenstein: Thanks.
Alex Barron: I guess my general questions were, what would you say is the average mortgage rate that people in backlog are going into the quarter with right now, given the incentives you guys have been offering?
Bob Schottenstein: I mean that’s a really hard specific type number. We talked about a third of the customers are getting assistance with those bought down rates. It really depends on the community. I mean, some buyers need some help in closing cost. So every buyer is a little bit different. And again, we target that based on what we need to on a community basis. But as far as an overall rate type thing, that would be a real hard number to come up with. Plus, I’m not sure it’s all that meaningful to start with.
Phil Creek: Keep in mind, Alex, and I think this is pretty much true across the industry that while the mortgage rate buydowns have been a very powerful, very powerful tool in helping to generate sales, they’re only good for loans or homes, I should say, that can close generally within about 60 days. So these are not 180 day rate locks, if you will. So the buyers that take advantage of these, about a third in our case. In every instance, it’s for a home that’s either been in construction and now getting ready to close or a spec that’s closable within 60 days. So that makes it harder to, because you have a lot of unlocked, if you will, loans in the backlog. Otherwise it makes it very, very hard to come up with an average.
Alex Barron: Got it. What about maybe an average of what the incentives you guys are offering at this point as a percentage of the price? How much would that be?
Bob Schottenstein: Again, Alex, that’s a real difficult number at the end of the day. It flushes through what the gross margin is. And you look at our margins in that 27% range the last few quarters, we’re really pleased with that. Again, depending on the subdivision, we price in a certain amount for financing, closing costs, et cetera. And we try to be very targeted as far as what does that customer actually need. And our mortgage operation, as Derek says, has about a 90% capture rate. So our mortgage company can work very closely, our loan officers, with those buyers to customize something for them to get what they need to close. And every customer tends to be a little bit different. So you incent whatever you need to. There’s always incentives going on. But bottom line, we feel very good about our margins and our returns.
Alex Barron: Yes, no, no doubt they’ve been, they’ve been great. What about on the corporate G&A Phil, that that was $68 million this quarter, kind of a step up versus the last two quarters, is that one time nature to those numbers or is that kind of like the new run rate?
Phil Creek: As I said, our SG&A numbers are up for a couple of different reasons. We do have about 10% more people companywide affecting all the divisions and so forth. We do have about 6%, 7% more stores. We are doing more things at a corporate marketing level as far as to help us sell houses. Also our incentive compensation is up due to our improved returns. So it’s a number of things in there. And as Bob said, we also plan on continuing our growth. So it’s hard to project out what those numbers are. And again, we don’t get into those type of things, but we feel like we’re continuing to position the company very well for continued growth.
Alex Barron: Got it. Okay. I’ll get back in the queue. Thank you.
Bob Schottenstein: Thanks.
Operator: Your next question comes from Buck Horne with Raymond James. Your line is now open.
Buck Horne: I wanted to go back to Florida just for a second and the hurricane impacts. First of all, very good news to hear that things held up really well and no serious damages. But should we think about any lingering impacts from. I mean maybe Milton more so in October, just lingering impacts on, order activity or closings in the fourth quarter just due to the lost selling days and or lost construction time?
Bob Schottenstein: I think from a delivery – it’s a good question, Buck. I think from a delivery standpoint, I don’t think so. I think that that’s behind us. In terms of demand, I don’t think much impact in Orlando in the fourth quarter. We’re so – we have such a small operation in Fort Myers, Naples, it wouldn’t be material anyway. That’s a relatively brand new market for us. The question is really Tampa and Sarasota and frankly Sarasota was probably hit the hardest of any of the four Florida markets by Milton. Could be slight – I’m not going to say it won’t be anything. I think the psyche [ph] of folks living in those two cities, every day they’re reminded of what happened. I mean, street after street after street, in particularly older communities where there’s still stuff that’s not yet cleaned up could remain that way for a number of months. But I will say this. I think that the fact that new home construction throughout, and this is true of every builder I know of that does business in Florida, new home construction really held up well and proved its value and thank goodness for that. And I think that, we, Tampa has been one of our best markets for as long as we’ve been there, going all the way back to the early 1980s. And we’re very bullish about Tampa long term, really even though we’ve only been open in Sarasota for about four or five years, it’s become a significant contributor for the company and we’re really bullish about it long term. There could be a little noise here in the fourth quarter, but I don’t think it’ll be material.
Phil Creek: Buck, one of the things you’re always concerned about is power. In that there was pretty big hits to the power system. So company-wide we develop about 80% of our own land. So making sure you continue to get power hookups not just for new houses coming short term, but transformers and those type of things in those communities. So you’re always concerned a little bit about that. But again, we try to stay on top of those things as best we can.
Buck Horne: That’s great color guys. And yes, we certainly appreciate your support for staying with Tampa and Sarasota long term and we see those. I think you’re exactly right in terms of the psyche impact and the cleanup efforts. Real quick, follow – well, a follow-up on that is insurance. Have you seen any impact from insurance carriers or is there any changes in terms of the cost of getting property insurance post hurricane for your buyers or how the retail markets are indicating or acting?
Bob Schottenstein: Yes. Another really good question. I think it’s too soon to know, but I doubt if it’s going down. It’s going to become more expensive. It just has to, right? I would not want to be in that business, but I guess indirectly we’re somewhat dependent upon that business. So that’ll be something that we closely watch. I don’t have any insight into that at this point. I’ve chatted about that with other leaders in our industry and I don’t think anybody quite knows yet other than it’s likely to go up.
Buck Horne: Got you. And one last question, if I can dig in.
Bob Schottenstein: Question is whether the insurance industry will give appropriate credit to the strength of new home construction because the damage to new homes was extraordinarily low. When you take into account the severity of the storm and the unprecedented nature of it, that I don’t think we know the answer to.
Buck Horne: Yes, that makes a lot of sense. And just real quick, you mentioned traffic levels seem to show a recent uptick here. I was just wondering if you could elaborate that and just what kind of indications you’re seeing in terms of pent up demand out there?
Bob Schottenstein: I don’t think I can elaborate anymore because I don’t know how much pent-up demand there is. This is the slowest time of the year. The fourth quarter, year in, year out, even when things aren’t encumbered with all this election stuff and everything else, the fourth quarter is the slowest quarter of the year, the last three months of the year. And so this is generally not a time for robust demand and robust sales. Having said that, we’ve seen traffic begin to pick up here in the last two to three weeks, which is encouraging given the time of year it is. And we’re – it’s, I don’t think we’re alone in this last year’s fourth quarter sales. As I said before, I think most of us in the industry limped to the finish line. I think we have a chance to not quite limp so much this year. I think it will be better.
Buck Horne: Thanks for the color guys. Good luck.
Bob Schottenstein: Thanks Buck.
Operator: [Operator Instructions] Your next question comes from Jay McCanless with Wedbush. Your line is now open.
Jay McCanless: Hey, good morning, everyone.
Bob Schottenstein: Hi, Jay.
Jay McCanless: I guess Phil, if we – hey, good morning. We could dig in a little more into what actually happened with the sales mix this quarter to hit that really solid gross margin?
Phil Creek: As far as what happened each month of the quarter as we went through?
Jay McCanless: Well, was it – was it a heavier mix it’s certain...
Phil Creek: Our sales panels little bit [ph] and they improved as the quarter went on Jay.
Jay McCanless: Okay. And I guess it kind of falls into my next question. What with rates going up but now you’re saying traffic’s looking better? Bob, I guess how has October played out, especially given some of the higher rates that we’ve seen?
Bob Schottenstein: Well, we normally don’t talk about the current month, but I think October is playing out better than expected. Let me just say that.
Phil Creek: Jay, we’ve also, we’ve been pleased. They’ve actually performed better than we thought. Our new stores that have been opening and that’s a – that’s a really big number. Of course last year we opened like 75 new stores. We grew average community count last year, 7% or 8%, and this year we’re going to be in that ballpark again. So the performance of your new stores really, really matter. Also, as Bob mentioned, I mean, we have been opening half or whatever of move up type operations. We really like product and price diversification and especially some of those move up communities we’ve opened have done very, very well. So again that’s helped us also.
Jay McCanless: That’s great, Phil. And then one other thing, just, you know, I know everybody’s been talking about the election, but what we’ve heard from some of your other public competitors in the new housing space is that some people are actually waiting to see if this credit develops or materializes. That I know the democrats have talked about. I’m not sure where the republicans are on this issue. But is that something that you’re hearing in the field, that people are kind of waiting to see whether credit materializes or not before they go forward with their purchase?
Phil Creek: I think I’ve heard everything about that. I don’t mean to be snarky. I haven’t heard anything about that. Is it cause for pause? I just think, we’re worn out.
Jay McCanless: More of a confidence issue than anything else?
Bob Schottenstein: Yes, yes. I’m knowing, what we know today, I’m pleased with where, traffic and demand looks like it is for us right now.
Jay McCanless: Okay. That sounds great. Oh, and then last one, could you talk about pricing especially? Sounds like move up. You guys are getting pricing, but maybe what percentage of your communities were able to raise price during the quarter?
Phil Creek: No, we didn’t talk about that. But, overall demand’s okay. If you look at our average sale price and backlog the last few quarters, it has continued to go up. Do we have a higher mix of move up type communities? Maybe a little bit. But again, it comes down so much to location, product, price point, every community is a little bit different. We talked about being very targeted in incentives, but we’re really pretty pleased, with our price point and margins. And you know how it is Jay, when you have $3 billion, $4 billion, $5 billion of revenue, 10 basis points, 25 basis points matter so much. So we focus on that pricing every day.
Jay McCanless: Understood. Okay, great. Thanks, guys. Appreciate the time.
Phil Creek: Thank you.
Operator: Your next question comes from Alex Barron with Housing Research Center. Your line is now open.
Alex Barron: Yes, thanks for the follow up. Yes, I was looking at your share repurchase activity and it’s obviously been picking up quarter in the last few quarters. Just wanted to see if you guys could share with us your general thought process as you approach share buybacks going forward and also whether there’s been any discussion or thoughts around introducing a dividend.
Bob Schottenstein: Your question is about share repurchase?
Alex Barron: Yes.
Phil Creek: We’ve had $50 million a quarter of repurchases the last couple of quarters. You know, we look at that every quarter as far as what our business needs are. We do like our leverage where it is right now in the 20% range. So we will continue to look at that. We talked about our low debt levels and so forth, but we like what we’re doing. We talked about we bought back over 10% of the stock in the last couple years and that’s something we’ll just, continuing look at and depending on our business and so forth discontinued. We’re pleased with what we’re doing.
Bob Schottenstein: The other part of your question is about our thoughts about a dividend. There’s no plans for anything like that at this point.
Alex Barron: Okay, thank you gentlemen.
Bob Schottenstein: Thanks.
Operator: There are no further questions at this time. I will now turn the call over to Mr. Creek for closing remarks.
Phil Creek: Thank you for joining us. Look forward to talking to you next quarter.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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